×
NewsDay

AMH is an independent media house free from political ties or outside influence. We have four newspapers: The Zimbabwe Independent, a business weekly published every Friday, The Standard, a weekly published every Sunday, and Southern and NewsDay, our daily newspapers. Each has an online edition.

‘Businesses seek offshore long-term financing’

News
MOST lucrative businesses are seeking debt offshore as local banks are offering expensive short-term loans.

MOST lucrative businesses are seeking debt offshore as local banks are offering expensive short-term loans, but the move was worsening the risk profile of firms banks can lend to, an equities research firm has said.

CHIEF BUSINESS REPORTER

In a latest report, Banking Sector Note: Facing Reality, IH Securities said the maturities have been short-term and therefore prohibitive for businesses looking to invest in long-term projects.

“The inability to lend to the most lucrative and arguably lowest risk businesses in the country significantly worsens the risk profile of the firms that local banks can lend to,” it said.

IH said the mining sector has contributed to 16% of economic expansion in the country since dollarisation, yet the banking sector had given them an average 8,6% of total loans to that sector.

“The same applies to the transport and communication sector, which has also contributed 16% of the growth in the local economy following dollarisation, but has only taken up 7,5% of the loans in the local banking sector,” it said.

IH said while it was difficult to assess the true extent of this problem, “we would argue that this problem will also be visible at the intra-sector level, with the most lucrative firms within sectors looking to access funds externally, rather than borrow locally”.

IH said the high analysis into the level of debt held by local firms suggests a domestic and external debt stock of $4,7 billion in the private sector, excluding households. It estimated that the formal private sector currently generates a $1,6 billion earnings before interest and taxation and that interest costs faced by the formal sector totalled $460 million.

The interest coverage ratio for the entire formal private sector was consequently estimated at 3,5 times the interest cost.

“That level of interest coverage suggests that the country’s private enterprises are currently holding less debt than they have the capacity to service, given current income generation,” IH said.

It said this was in part a supply issue, with many firms citing limited access to financing on both the international and local markets.

“Perhaps more difficult for banks to address, however, is that it is also a demand issue, with those firms that are in a position to access financing shying away from doing so given short- to medium-term uncertainties in the economy,” IH said.