DEBT CRISIS LOOMING

The dollarisation of the Zimbabwean economy eroded many other economy-wide risks that haunted corporates for almost a decade, from price controls to the inaccessibility foreign currency. With the much celebrated stability, a new crop of risk has emerged, and that relates to the debt crisis at both the national and private household level.

A decade of high inflation made borrowing a lucrative pass-time Zimbabwe. ZW$ asset prices kept rising whilst the real cost of debt diminished rapidly as the central government kept printing more money to cover the fiscal deficits. The subsequent inflation impoverished not only the government, but the households and corporates and the increasing despair was met by economy-wide subsidies which ignited more inflation. Indeed borrowers were the biggest beneficiaries of inflation. By 2008, s/he who borrowed the equivalent of $1 on 01 January 2008 had to pay back $0.01 by 31 December 2008 to the bank in settling the whole debt! The borrowers, including the central government, were the biggest winners whilst the consumers and the economy at large edged towards bankruptcy.

In May of 2007, the government borrowings were about 18% of bank balance sheets, and by December 2008, that had evaporated to almost nothing! Only fiscal moralists wouldn’t marvel at these great works of inflation in reversing the debt burden on the central government. And indeed the death of the ZW$ sealed the fate of banks, pension funds and insurance companies that held the bulk of government debt and today our government is better off with only $8 billion debt overhang. The moral opinion that the government created inflation and was among the major beneficiaries is therefore very hard to dismiss. With winners equally come the losers and as the borrowers, including the government, benefited from inflation, the banks and ordinary consumer lost their capital positions in real sense. Real wage rates plummeted, and indeed, the banks were left clutching to capital in the form of largely investment properties and equipment.

The tables have turned. A new crisis is lurking in the shadows of the optimism. And that relates to burdening real and expensive debt that may, if corporates are not careful, infect balance sheets and define a new chapter of corporate bankruptcy. In a bid to revitalize weak balance sheet and inject working capital, corporates in Zimbabwe have plunged into fresh debt arrangements. Physical capital formation had almost ceased for over 7 years in Zimbabwe, and considering the pace of global technological developments that swept across the past decade, most production processes are now outdated and, more importantly, inefficient. The domestic unit costs of production are therefore not competitive when compared to the rapid advancements and competition from low cost producers such as China and equally competitive producers like SA.

Inasmuch as the Zimbabwean corporates could have enjoyed the borrowing binge of the past 4 years, the exchange control regulations and the associated scarcity of foreign currency meant that the cheap credit could only do but very little for the borrowers in terms of enhancing capital goods, hence key components of balance sheets remained weak. Today’s new race for debt, thanks to the reluctance by banks to lend, has been influenced by the notion, misplaced at times, that the existing operational structures are still profitable and corporates can easily turn to producing profitably if they get working capital. Unfortunately most corporates are finding the going tough, and the recent results coming out of some of the listed companies are revealing how septic corporates balance sheets are getting by the day. With credit so pricey due to the current liquidity crunch, interest cost is proving to be a huge operational burden for many companies, and, unfortunately, the debt heaping on the balance sheets is increasing at a rate that will soon compromise the solvency of many companies.

On the other hand, the rising wage levels are adding to the woes on the cost functions, implying therefore that worker productivity will be taking a more important role in corporate planning going forward. In the past only $100 could pay all wages, water and electricity for a medium-sized company as the magical ‘burning’ of foreign currency immensely benefited owners of capital. Now the times have changed and all these costs are real on companies’ operation structures, and hyper-inflation, then ‘father miracles’, is no more to do the ‘Christmas tricks’. Just as the miraculous hyper-inflation Christmas tree dried, so has the subsidy mentality where BACOSSI and ASPEF created artificially low operating cost structures at the nationwide expense of even more inflation. Interrogating the debt markets to revitalize operations has become one last option for companies stuck with rising real operational costs and the need to restart operations that had been stopped for years. And it is indeed the way out, but equally with landmines.

Loans to the private sector stand at 30% of GDP in Zimbabwe today, and considering the shallow depth of the financial market and indeed the liquidity crunch, Zimbabwe’s private sector is highly geared compared to Zambia with only $1.6 billion in loans, about 8% of GDP and Tanzania with loans at 15% of GDP. However, upon factoring in the relative potential of Zimbabwe’s GDP considering very low capacity utilization below 45% in industry as well comparing with the debt-addicted South Africa where private sector debt is 90% of GDP, the temptation to encourage gearing remains very high in Zimbabwe. This temptation may prove to be rewarding for those that will be able to restructure operations and processes to embrace the dynamism and indeed thin-margin environment that is shaping out for sectors such as banking, manufacturing, retail, hospitality, insurance and of course those other sectors competing directly with low-cost global producers. And contracting debt in such sectors, more so expensive debt obtaining in Zimbabwe, the survival chances narrow with each extra day it stays on the balance sheet. For the central government, the fate has been decided already.

The government debt overhang, better at about $8 billion than otherwise had inflation not done its major miracles on the domestic debt, is stagnating economic growth already, and indeed, some corporates are falling into the same trap as the central government. The recent pounce on RBZ assets by numerous creditors bear testimony to real debt challenges facing the government where its assets are being stripped, and without a doubt, in the same fashion, more foreclosures will be tapping on corporate doorsteps. Shunning debt completely is not a viable option for Zimbabwean corporates considering the poor capital structures after a decade of inflation and the need to carry on but, equally, contracting debt blindly is not the answer in restructuring of balance sheets.

A fine balance would have to be struck, and in the process, some will likely lose the balance completely and plunge into bankruptcy. The intoxication, and resultant addiction that comes with debt is so hard to fight, and the recent global financial crisis tells the complete story. And for the banks that are going to lose money in foreclosures, learning from South African banks, ABSA and Standard Bank, that had impairment charges of $1.2 billion and $1.6 billion respectively in 2009 could provide the valuable lessons. The lessons will, unfortunately, result in more stringent lending and in the process constrict the credit flowing into the economy as is the case currently, compounding further the bankruptcy fears. These are the difficult times, tossing a coin with both heads and tails winning.