High risk of NPLs increase as firms continue borrowing

The Reserve Bank of Zimbabwe (RBZ) has warned of a second wave of Non-Performing Loans (NPLs) in the country’s banking sector if industry continues borrowing in hard currency.

In 2014, with the technical assistance from the International Monetary Fund (MF), the Central Bank established the Zimbabwe Asset Management Company (Zamco) to acquire NPLs from commercial banks’ collaterised loan books to clean up their balance sheets.

The NPLs were accumulated largely due to reckless lending and corruption in the financial services market.
Zamco has since wound up its operations after paying off, last year, $1,2 billion it received from the Government to acquire NPLs.

At the time of its formation, NPLs ratio had risen 20,45 percent against the internationally acceptable threshold of 5 percent.
Responding to questions from the floor at the launch of the 2022 Confederation of Zimbabwe Industries (CZI) annual manufacturing sector results in Harare last week, the RBZ Governor Dr John Mangudya, red flagged the resurgence of second wave of NPLs in the financial services sector.

“If you go to any country today and you tell them that we are going to have the co-existence of the US dollar and their own soft currency, the danger is people will move towards the hard currency. But is this sustainable.
No.

“So, don’t even borrow more in US dollars, borrow more in Zim dollars because if you borrow more in US dollars with the margins shrinking, interests going up, we are going to have Non-Performing Loans, you are going to put a burden to banks because you won’t be able to sustain or remain stable,” he said.

Last year, RBZ raised its bank policy rate from 80 percent to 200 percent to tame speculative borrowing that had become rampant and partly blamed for driving exchange rate volatility and inflation resurgence.

CZI has stressed that increasing interest rates created a shock in the market in terms of price adjustments by companies that had borrowed in Zim dollars, as they needed to pass on the increase to consumers to curb losses.

However, in the 2023 Monetary Policy Statement presented in February, RBZ revised downwards interest rates to 150 percent and dropped again by 10 percent to 140 percent.

But the industry maintains that the lending rates are still on the high side.

It has been observed that NPLs are an albatross to the performance of the banking sector through reduced earnings and loss of capital.

Furthermore, a number of bank failures that Zimbabwe experienced in recent years, among others, were attributable to NPLs.

Saddled with a high NPLs ratio, local banks were no longer keen to lend to the productive sectors of the economy thus adversely impacting job creation and economic growth.

The acquisition of NPLs by Zamco has cleaned up and strengthened the banking industry’s balance sheets and provided them with additional liquidity that has enhanced their financial intermediation role, including pooling savings and channeling them to the productive sectors of the economy.

The asset management company was established in terms of 57A of the RBZ Act with a mandate to wind up operations off its operations within 10 years of establishment but has winded up after achieving its mandate well ahead of the stipulated time frame.

Meanwhile, capacity utilisation in the manufacturing sector in 2022 dipped to 56,1 percent from 56,52 percent the previous year.

In his remarks, CZI president Kurai Macheza at the launch of the survey results indicated that Zimbabwe faces a titanic mission in pursuit to attain an upper middle-income economy society by 2030 as the level of growth in the manufacturing sector sustainably hovers below 10 percent per annum.

Zimbabwe’s industrial representative body argues that the manufacturing sector can only contribute exponentially towards the ambitious vision if growth rates above 10 percent per year are attainable.

“The rate of growth we need for the sector to get to the upper middle-income status is no less than 10 percent per annum. And as an economy for us to achieve that Vision 2030 from where we are right now with the remaining years, we certainly need to be growing no less than 10 percent per annum.

“So, it is a mammoth task that we all must endeavour to deliver,” he said.

Underpinned by the National Development Strategy 1, a five-year economic blue-print which expires in 2025 before being succeeded by a similar policy, NDS 2 to run from 2026 to 2030, the Government is angling for an upper middle-income status.-ebusinessweekly

Effects of inflation, interest rates, money supply on investment performance
14 APR, 2023 – 00:04 0 VIEWS 0 COMMENTS

Effects of inflation, interest rates, money supply on investment performance
The money supply is the aggregate total of all of the currency and other liquid assets in a country’s economy
Introduction

They are various macroeconomic variables that can boost investment and ultimately influence stock market performance.

These variables entail inflation, money supply, interest rates and investor expectations. This article will attempt to elucidate these in detail.

Inflation on investments

A stable low inflation rate stimulates investment in the country because there is price stability and hence investors have confidence leading them to invest on the stock market and improving performance of the stock market.

High GDP per capita implies that the households have more disposable income leading to a higher average propensity to save ratio.

High savings in the economy stimulate investment because investors have an appetite for assets with expected higher returns rather than hoard money in form of cash and bank balances which does not yield returns.

When domestic savings are high it leads to better stock market performance because of the need to earn returns on savings hence increasing investments in equities.

Interest rates on investments

Interest rates also have significant impact on the performance of stock markets. Stock markets are classified as high risk instruments hence the negative relationship with interest rates.

When firms are profitable, their share price increases hence investment in the firms because of investor expectations on dividend and share price growth.

Stock markets and money markets are close substitutes, with the interest rate being the rate of return for money.

When there is a low interest rate investor will move to stock markets in search of higher returns resulting in better stock market performance.

Expectations and sentiments on investments

Investor sentiment and expectations affect stock markets. When investors expect changes in government policy with emphasis on the fiscal and monetary policy, the information is fully reflected in share prices, for example expansionary monetary policy leads to improved stock market performance because of the provision of low interest rates.

Industry performance has a major effect on stock market performance because on portfolio allocation theory it states that investors will tend to invest in profitable sectors where there is a provision of higher dividends.

Industry performance affects stock market performance because firms in the same sector are affected by the same market conditions.

The interest rate and stock markets are the two important macroeconomic variables with a focus on investments and savings in the broader economy.

Through monetary policy, interest rates affect the degree of the economy through investments and savings as transmission mechanisms hence stock markets and money markets.

Money supply on investment

The money supply is the aggregate total of all of the currency and other liquid assets in a country’s economy.

The money supply includes all cash in circulation and all bank deposits that the account holder can easily convert to cash.

Governments issue paper currency and coins through their central banks or treasuries, or a combination of both. In order to keep the economy stable, banking regulators increase or reduce the available money supply through policy changes and regulatory decisions.

An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending.

Businesses respond by ordering more raw materials and increasing production. The resultant of this series of increases spending leads to an increase in equities investments and hence stock market enhancement. Change in the money supply has long been considered to be a key factor in driving economic performance and business cycles.

The quantity theory of money formalises the link relating money supply and stock prices.

When there is an increase in money supply, there will be a surplus in the quantity of money and this will encourage people to demand more shares and thus cause an increase in share prices.

The liquidity hypothesis also suggests a positive relationship between the variables.-ebusinessweekly