Debt overhang increases cost of capital

via Debt overhang increases cost of capital | The Herald August 4, 2014 by Conrad Mwanawashe

Zimbabwe’s country risk profile is costing banks an additional five percentage points to the cost of capital at a time when the country cannot tap into international funds due to a $9 billion debt overhang.
Bankers Association of Zimbabwe president Mr Sam Malaba said the cost of money is a key component to the problems that are discouraging business in the country.
“We have no currency of our own. We import cash at our own cost, transport it at our own cost and insure it at our own cost,” said Mr Malaba.

“Most of our branches are running on generators. So when you see the bank charges being high, appreciate these challenges we are facing,” he said.
Zimbabwe adopted a multi-currency regime in 2009 and Government has committed to keep the basket until the economy recovers.

Mr Malaba said the loan to deposit ratio of 70-80 percent is too high for banks which are struggling to run huge costs of brining in cash.
Non-Performing Loans are rising as banks continue to roll over the loans. The BAZ chief said between $400-$600 million is held up in NPLs.

“We are saying NPLs are at 16 percent and yet the real figure is closer to 25 percent. We keep on rolling over loan facilities, so what started as a three months facility is now a three year facility. Average lending in an economy is five percent, said Mr Malaba.

Presenting a paper on “Structural barriers for successful implementation of Zim-Asset and how to address them” at the annual CZI congress on Friday, Mr Malaba said until the external debt is extinguished, Zimbabwe cannot access international capital markets like other countries in the region.

He emphasised the importance of dealing with the debt overhang and engaging the Bretton Woods institutions to restructure the debt. “We can’t run away from the International Monetary Fund, the World Bank and the African Development Bank, we won’t survive. Even China will tell you to deal with the multinationals,” said Mr Malaba.