THE move by the government to ban banks from lending will result in the sprouting of unregulated lending, a situation that will damage public financial health and harm the broader economy, researchers at Inter-Horizon Securities (IH) have warned.
DUMISANI NYONI
Facing headwinds ranging from a battered currency to a surge in inflation, the government announced unprecedented radical monetary policy shifts last Saturday, banning bank lending, tightening the screws on stock market trading and suspending third-party country payments on foreign obligations in a bid to foster market discipline within the foreign payment system, among other measures.
“With the government having suspended lending by banks in its quest to control money supply, net interest income is likely going to face some headwinds,” IH said in its review of the new measures to restore confidence by the government.
“Based on 2021 banking industry financial statements, banks had reverted to the core business of lending after periods of subdued activity within the business line due to currency and inflation challenges.”
“Depending on the length of this lending suspension, there might be chances of unregulated lending sprouting. We are also concerned production might be affected as genuine borrowers are adversely impacted by this measure which is targeting speculative borrowers and arbitrageurs,” IH said.
IH Securities expected the interventions to be a short-term measure, warning that prolonging them will negatively impact on companies using leverage to fund working capital cycles.
“Sadly, there will be adverse consequences within the private sector. There is only one precedence we find for this kind of policy intervention, being Ethiopia in 2021,” IH said.
The researchers observed a clear preference by businesses to use the Zimbabwe dollar leverage to fund expansion or working capital and hold the United States dollar cash or cash-denominated assets to grow or preserve the balance sheet.
“The new measures may compel business to liquidate those United States dollar holdings to fund Zimbabwe dollar working capital requirements potential boon to the interbank market which may work towards supporting the domestic currency.”
“We assume this is informing part of the thought process within the government. With lending being suspended, broad money growth should wane; this may have a direct impact on the parallel market,” said the analysts.
IH Securities also said the stock market will see less activity from speculators and arbitrageurs. However, it said a portion of genuine retail investors may also be swept away.
“The market will revert to traditional pension funds, asset managers, conventional investors. There may be significant short-term selling for those who need to turn back to cash and crystallise returns to cushion against what seems to be a proposed 40% haircut on gains,” it said.
“Traditional investors will likely become more sober on current valuations leading to a potential price correction. Daily liquidity is likely to drop as the market reverts to a more normalised modus operandi. However, there is still elevated inflation and limited asset classes outside equities to protect value, so we believe at the right levels, aggregate demand will return to equities.”
The researchers said in the short term there will be fragile stability within the exchange rate domain as demand for forex decreases.
“A lack of affordable debt from banks may decrease demand for forex that was required for purchase of capital goods during economic expansion. Slowing economic activity will necessitate additional measures perhaps in the form of expansionary policy. This could then be interpreted as an unstable policy environment,” IH said.
IH said the existence of multiple formal exchange rates gives rise to arbitrage opportunities suggesting sustained dispersion between the auction, interbank and parallel rates. Inflation will be a constant threat driven by global increments in tariffs and pricing in energy, IH Securities said.
