AFTER weeks of maintaining tight liquidity and a relatively stable exchange rate, growing pressure to settle Zimbabwe dollar obligations is now expected to force local firms to borrow under the currently high interest rates, resulting in another plunge of the domestic currency in the long term, analysts have predicted.
BERNARD MPOFU
Over the past three months, the authorities embarked on aggressive contractionary policies from the central bank against a backdrop of exchange rate depreciation, currency volatility and build up in inflation expectations.
Monetary authorities raised interest rates to 200% to discourage speculative borrowing and promised to review the rates as inflation recedes. Experts say the high interest rates are now backfiring and may affect economic growth projections.
The government has projected domestic economic growth of 4.6% in the current year, a downward revision from an initial projection of 5.5% growth this year. The World Bank and International Monetary Fund have forecast lower growth of 3.7% and 3.5%, respectively.
Official figures show that aggregate banking sector loans and advances increased by 264%, largely attributed to the translation of foreign currency-denominated loans. As at 30 June 2022, foreign currency-denominated loans constituted 65.87% of total banking sector loans, an increase from 36.87% reported as at 31 December 2021.
IH Securities says as appetite for Zimdollar loans improves, loan books will come under pressure.
“With the cost of borrowing increasing, we believe loan books may come under some pressure as corporates adjust to higher costs of debt funding potentially translating to subdued interest income in the short term,” IH says in its post-Monetary Policy Statement research note.
“Appetite for loans in the devaluing domestic currency would be preferable. However, the numbers suggest banks are gravitating towards loans in the more stable currency to protect balance sheet value. Given the need to repay US dollar loans, some borrowers may need to change their business models to ensure they earn more foreign currency.”
This, IH further states, will partly support further dollarisation in the formal sector.
Market watchers say non-performing loans (NPLs) are of concern. As at 30 June 2022 the average NPL-to-loans ratio for the banking sector was 1.5% from a December 2021 position of 0.94%.
“The increase may be a reflection of increased lending activities. We also believe the transitory nature of deposits will continue to deter banks from lending long term, further affecting loan book and interest income growth,” IH predicts.
“We expect revaluations gains to continue on an upward trend on the back of the current inflationary environment. The devaluing of the Zimbabwe dollar against the US dollar has made the minimum capital requirement a moving target, negatively impacting dividend yield in the sector.”
Figures obtained from the apex bank indicate that excess reserves (RTGS balances at the central bank) declined from 55.06% in June 2021 to 0.34% in June 2022, largely reflecting tighter liquidity conditions as a result of mopping up operations and issuance of non-negotiable certificates of deposits.
RTGS liquidity constraints have largely starved the parallel market, resulting in some stability on the alternative market rate in recent weeks, with the rate hovering between US$1:ZW$750 to US$1:ZW$830. Relative stability of the alternative market rate and the weekly depreciation of the official auction rate has resulted in a reduction of the exchange rate premium from circa 140% to about 60%.
Morgan & Co says the tight liquidity situation characterised by high interest rates is not sustainable.
“We note that the central bank continues on its drive to withdraw Zimdollar liquidity in circulation and curb depreciation of the local currency,” Morgan & Co says.
“However, we maintain that the effectiveness of these measures will be short-lived given that business will soon be forced to pay its dues for services rendered and products supplied by suppliers and contractors in Zimdollar which, in turn, will likely further result in the depreciation of the currency in the longer term.”
FBC Securities says the government should immediately consider lowering high interest rates, saying the obtaining situation is choking economic activity.
“While maintaining a tight monetary stance may be key in achieving inflation and exchange rate stability, tight monetary policies are likely to restrict economic growth as liquidity is essential in driving growth and investment spending. Inflation targeting and exchange rate stability are the primary economic objectives, but achieving these and favourable GDP growth target is mutually exclusive,” the brokerage firm contends.
“Should inflation remain elevated, interest rates are likely to be reviewed upwards to curb speculative activity and tame money supply. Increasing the cost of borrowing will likely weigh down aggregate investment, further limiting desired growth projections. Whilst this will anchor inflationary pressures, it is inversely related to investment spending, limiting desirable economic growth.
“While the market’s performance has been subdued as a result of policy interventions, confidence deficits and liquidity constraints, the underlying fundamentals previously driving investment on the stock exchange remain in place.”
