Uncertainty reigns in Zimbabwe as it awaits confirmation of its new government’s policies, which will affect access to much-needed international lines of credit. Shannon Manders reports from Harare. 


GTR set off for Zimbabwe in July with a view to scratching below the surface of the country’s poorly-rated economic environment and unearthing a selection of local companies with varying degrees of access to trade financing.

Whether or not these funding needs were being met, what these businesses had in common was a feeling of hope for an improved socio-economic and political structure in the weeks leading up to the country’s July 31 election.

As one local banker commented at the time: “If we have good elections and the results are accepted by everybody, then Zimbabwe will return to the international community, which will unlock credit lines.”

With the election then fast-approaching, the country ticked all the boxes for a pre-change scenario, and GTR heard reports that a number of international banks and investors were keeping an eye on the country, with the view to moving back into the Zimbabwean syndication market.

Fast forward two weeks to President Robert Mugabe’s landslide victory, leaving his party Zanu-PF with a clear majority in parliament and the possibility of amending the constitution at will, and these prospects may very well have been diminished.

No right turn

Zimbabwe has been struggling to access meaningful foreign investment and the situation is unlikely to change: in late August the newly-appointed president reportedly threatened to take punitive actions against foreign-owned firms doing business in the country.

Local companies too are facing a roadblock: an increase in political risk will hike up premiums and the overall cost of finance and will most certainly feed the scepticism of new financiers to the country.

“Whether the new government likes it or not, there will have to be a significant policy shift in order to attract foreign direct investment (FDI), which the Reserve Bank governor recently acknowledged we need in order to deal with the current liquidity crisis,” Omen Muza, managing director of TFC Capital told GTR in a post-election catch-up in mid-August.

“If there is no policy shift, political risk will continue to be an issue, standing in the way of access to debt and capital.”
The new government’s policies have yet to be issued, and until they are, businesses are adopting a wait-and-see approach.

“Most of our funding is from offshore banks. We have yet to see… if there is going to be a change in their perception of country risk,” says Felistus Ndawi, finance director of SeedCo Zimbabwe, a local company which develops and markets certified crop seeds.

It is expected that clarity on these policies will only be provided once a new cabinet is in place – a move which had been delayed by opposition leader Morgan Tsvangirai’s application to nullify the election result and his demands for fresh polls. Tsvangirai has since withdrawn his legal challenge, and President Mugabe is set to be sworn in as this publication goes to press.

Economic experts warn that the immediate slump in the Zimbabwe Stock Exchange (ZSE) is the clearest sign yet of just how jittery the business environment is about the Zanu-PF win: stocks lost more than US$650mn in value in its first trade following the announcement of election results. The ZSE is valued at approximately US$6bn and has largely been driven by foreign investor participation.

At the centre of the mooted Zanu-PF policy framework, and possibly the greatest threat to foreign investors, are the indigenisation and empowerment regulations, which compel all foreign-owned companies to surrender at least 51% shareholding to Zimbabwean locals.

The policy may have already been in full force for companies for over two years, but it is feared that banks could be next.
“I imagine that foreign-owned banks would still be expected to comply with the laws of the land,” says Muza. “How it will be done is key. The transition from rhetoric to reality will be critical.”

Thank you for smoking

Zimbabwean tobacco company Boostafrica Traders currently complies with the 51% indigenisation requirement and finance and operations manager Colin Mckibbin tells GTR that while the company’s local financiers do not see its indigenisation as a risk factor, he imagines an international bank wanting to finance the business directly “may have a different view”.

“We just have to go about business as we have in the past and await new policies and adapt if necessary. I believe we can continue to grow within the lines of credit that we have access to and I will be meeting with other banks within the next couple weeks so can get a better understanding of their perceptions on setting up new facilities post elections.”

The tobacco industry is one of the largest in Zimbabwe, but still companies such as Boostafrica struggle to access local financing and at a price they can afford.

“The majority of banks are expensive – especially if you’re starting out with them,” says Mckibbin. “We’ve managed to work with Standard Chartered of Zimbabwe; we’re constantly aiming to reduce our interest margins in order to be more competitive.”

Boostafrica’s saving grace came in 2011, when it entered into an offtake agreement with international firm Premium Tobacco to supply them with their Zimbabwean tobacco requirements. The partnership has afforded the local company access to international financing through Premium Tobacco’s revolving partly-committed multi-country facility that FBN Bank (UK) finances.

The partnership is instrumental in shoring-up Boostafrica’s cashflow; Premium Tobacco draws from the FBN facility and effectively prepays Boostafrica for the tobacco it then exports to them.

The US$30mn Zimbabwe portion of the facility is in its third year, and looks set to be increased to US$40mn for the next season.

Mckibbin believes that those banks that strive to understand Zimbabwe, its risks and business environment, such as FBN, are key to changing – at least their own – perception of the country, though he concedes that new financiers to the country “will be a lot more sceptical”.

GTR met with another tobacco company in Harare – one further along the supply chain. Savanna Tobacco is a producer of tobacco products – the second largest in Sub-Saharan Africa.

In January this year Savanna signed a US$20mn facility: a two-year US$10mn revolving working capital from FBN and a four-year US$10mn capex facility from Afreximbank. The company no longer looks to local banks for its financing needs because of the “precarious levels” at which they lend.

Executive chairman Adam Molai blames the price and access to lines of credit for local Zimbabwean companies’ lack of competitiveness. He explains that a lot of local companies have not been able to sort out their fixed asset capitalisation, which has left them burdened with antiquated equipment and little cost efficiency.

With access to longer-term financing remaining low, companies such as Savanna have had to restructure their balance sheets in order to create some breathing room. “Previously, the longest tenor we had on the Zimbabwean market was nine months: all companies had severe mismatches in terms of finance, and were financing fixed assets with working capital financing.”

According to Molai, the financing from FBN and Afrexim has significantly lowered the company’s cost of working capital, which has given Savanna the competitive edge as it can increase the credit that it can provide to the market: the company distributes it brands through several channels, including retail chains, independent retail and wholesale on credit.

“Whoever gives credit gets the volume,” reasons Molai. Savanna is an exemplary model of a pioneering Zimbabwean company: it revolutionised the traditional methods of cigarette packaging, and was the first company in the world to design and patent packs of twos, aimed specifically at the low-end target markets.

The company is on a drive to consolidate and expand its market, and of the Zimbabweans that GTR spoke to, Molai’s is a lone optimistic voice when it comes to how the recent political turmoil will affect his business: “All indications, after the elections, and pronouncements made by our president on the eve of our elections reflect a desire to see a thawing of relations with western governments who still have sanctions of some form on the government and or members of government.

“If this does happen, then this will be a boon for our businesses as it will result in greater lines of credit, increased investment and economic activity.”

No entry

Zimbabwean companies are in agreement that the local banking sector is constrained and cannot lend long-term, largely due to the short-term nature of its deposits.

“It’s the nature of the market. The deposits that we have at the moment are transitional in nature,” says George Guvamatanga, managing director of Barclays in Zimbabwe. This has much to do with the fact that the country only started using dollars in 2009. “It’s still growing, but it’s shallow,” he says. “It’s the absence of an appropriate funding structure that is contributing to the challenges some of the local companies are facing.”

All lenders to the country are already impeded by various elements. Strained relations with the mineral-rich country have either prohibited or dissuaded international banks from engaging in financial transactions. Local banks are willing to lend, but the cost of financing – reportedly as high as 30% – and the mismatched financing structures have deterred take-up of their facilities. Even development banks, long considered a lifeline to local companies and capable of putting facilities in place, have typically onerous conditions when it comes to drawing down.

“In terms of what clients are asking for, and what we are providing, there is certainly a gap,” Barclays’ Guvamatanga admitted back in July.

This breach in support has widened over the course of the past two decades, since the start of the controversial Mugabe-led land reform programme, which led to the deterioration of the country’s economy.

Before this period of downturn, companies seeking finance were able to access the structures that they needed at terms that were more agreeable than today.

“Around 20 years ago, we had all these trade finance structures in place, such as three and six-month letters of credit, which used to give breathing space to the economy. The structures disappeared because of the negative country risk rating. That has been the challenge. It’s about time we created those kinds of structures in the economy again,” says Lawrence Nyazema, commercial director of Barclays in Zimbabwe.

SeedCo’s Ndawi agrees: “From an industry perspective, there are still a lot of gaps that need intervention in terms of funding. We have had to fund our growers, providing them with inputs, because they don’t have the capacity to go to a bank and get a facility.”

The company is keen on accessing longer-term financing to meet its requirements. “18 months would be a game-changer,” says Ndawi.

SeedCo is in the business of seed multiplication: they source seeds from farmers, the company multiplies it and then distributes it to the market for growing into wheat, maize and soya production. Globally, the seed business is worth US$30bn: in Africa it’s still at the US$1bn mark, with plenty of room for growth.

The company recently concluded a US$5mn facility with FBN, but also looks to Standard Bank of South Africa, Ecobank, Standard Chartered and Rabobank for its funding needs – though these are usually secured through their regional business units.

Like other companies, SeedCo is looking to bring other banks into its financing structure. “We need to be aggressive in terms of looking for local funding; our requirements are such that there’s no single local bank that can give us everything we need,” Ndawi explains.

Speed bump ahead

Even when a facility is successfully put in place, the conditions of drawdown are often tedious.

The high rate of non-performing loans in Zimbabwe has meant that when they do lend, international lenders are likely to be more diligent, and to put in place structures that ring-fence the particular risk they are taking, so that they do not end up among the statistics.

But local companies can be devastated by delays of any kind. When GTR met with the Cotton Company of Zimbabwe (CottCo) in Harare, it was two weeks into the peak of the cotton-buying business, and the company had yet to draw down on its annual syndicated facility which it uses to source the crop it later gins and sells to offtakers.

The problem, it seemed, was with the international lender to the syndicate, which had yet to disclose its full involvement in the facility.

“The finance delay has been a real nightmare,” says Dacyl-Ray Rambanepasi, CottCo’s head of finance. “When the season starts it’s like a race [to purchase cotton]. The competition uses it as an advantage, and we lose both volume and market share.”

As with other commodities, like tobacco, when the farmers begin selling their cotton, there’s a massive appetite for cash, and they’ll sell their first pickings to whoever has the available cash.

“Not having cash available from the outset is disastrous,” explains Rambanepasi. With the season only last 90-odd days and with a smaller-than-expected crop output this year, the company’s frustration is understood.

GTR understands that the first drawdown on the facility took place shortly after the meeting with SeedCo in early July, and the company expects to drawdown again in the coming weeks.

The current situation of uncertainty in Zimbabwe is unlikely to ease the trepidation of potential investors abroad. And to ensure that companies like the ones that GTR visited continue to access the financing they need to function and flourish, the country will have to manage perceptions of political risk and restore confidence in the financial markets.

Without the necessary shifts in policy, the economy might well end up mirroring Zimbabwean society, divided between the haves (at 1%) and the have-nots (99%), says TFC’s Muza. “The economy has always been divided into those who leverage on different kinds of synergies to access capital in spite of the sovereign risk. Such companies would of course be expected to do well, while the rest wallow in a pool of dwindling liquidity.”