Announcements Research

GCR Reviews Financial Institutions Sector Risk Score for Zimbabwe

Summary

Johannesburg, 11 May 2022 – GCR Ratings (“GCR”) has reviewed the Financial Institutions Sector Risk Score for Zimbabwe. As a result, we have decreased the Zimbabwean Financial Institutions Sector Risk Score to ‘0.75’ from ‘1.0’.

The Financial Institutions Sector Risk Scores are available for download at https://gcrratings.com/risk-scores/, and relevant sector research pieces are available at: http://gcrresearch.com/reports/house/industry-reports/.

The GCR Financial Institutions Sector Risk Assessment

The Financial Institutions sector risk score (ranging from 0 to 15) is a key factor in the operating environment component score. The core of the GCR Ratings Framework is based on GCR’s opinion that an entity’s operating environment largely frames its creditworthiness. As a result, the operating environment analysis anchors the underlying risk score for the GCR rating methodology. GCR combines elements of the country risk and sectoral risk analysis, blended across countries for entities operating across multiple jurisdictions, to anchor an insurer to its current operating conditions. For more details on the above, please read the related criteria and research listed below.

GCR will periodically publish updated “Financial Institution Sector Risk Scores”, which will supersede previous publications. The publication titled “GCR Financial Institutions Sector Risk Scores, 11 May 2022”, available at https://gcrratings.com/risk-scores/, supersedes the article published on 7 December 2021.

Financial Institutions sector risk scores

Republic of Zimbabwe, Sector Risk Score 0.75. Country Risk Score 0*, Mapping Table 0.0 to 1.0

The Zimbabwe financial institution sector risk score has been reviewed downwards from ‘1.0’ to ‘0.75’ following the failure by regulatory and monetary authorities to address regulatory, governance and policy uncertainties. The score is also restrained by the effects of the COVID-19 pandemic, hyperinflation, exchange rate disparity, and a deteriorating exchange rate, posing major risks to the banking industry’s operations and performance. Regulation is viewed relatively weaker than the regional average. Monetary and fiscal policy is considered very volatile. The President of Zimbabwe, Dr. Emerson D. Mnangagwa’s announcement on ‘Measures to Restore Confidence, Preserve Value and Restore Macroeconomic Stability‘ on the 7th of May 2022 and the RBZ directive to financial institutions dated 9 May 2022 are key indicators undermining governance and policy certainty, dampening indicators of perceived stability during the 1H2020 to 2021 period. Furthermore, the directive by the central bank, even after engagement with representatives of the financial sector was in line with the Presidential measures, highlighting possible lack of independence between the government and monetary policy authorities.

Some of the measures introduced include:

  • Suspension of lending by banking institutions, building societies, development finance institutions, deposit-taking and credit-only microfinance institutions to the Government and private sector.
  • No new credit facilities should be issued as the suspension covers new loans, undrawn portions of agreed facilities, overdrafts and other forms of borrowing instruments, by whatever name they are called.
  • With respect to pipeline transactions, where all the facility terms and conditions have been met before the above pronouncement, institutions may approach the Reserve Bank for consideration, on a case-by-case basis.
  • Lastly, the central bank will monitor compliance with the above directive and will take appropriate supervisory action against any non-compliant institutions.

Unfortunately, it appears there is no legal ground for the measures introduced by the President and the fact that the same approach has been taken by the central bank may further highlight lack of independence and poor governance. GCR is of the view that it is highly unlikely most of these measures will remain in place considering Zimbabwe is an import reliant economy, winter cropping season is imminent and working capital is required to drive economic growth. Further cementing the volatile monetary policy assessment if a new directive is issued within the short-medium term. That said, the cascading effects of these measures is going to be significantly detrimental to the economy and financial institutions. Furthermore, the lack of clear directives on how these measures will be implemented will fuel speculation to the detriment of the consumer and wider economic players.

Banking sector asset quality has been good despite the adverse operating environment with gross non-performing loans lower than 1.5% for most players. While the financial system is presently credit risk averse, credit extension was increasing primarily on the foreign currency loans resulting in a notable increase in interest income from 2020-2021 levels. This trend is under threat in the short to medium-term, we expect that banks’ operations may face additional challenges with credit extension. The score also considers the somewhat fragmented sector, but the banks in the top tier are generally profitable and adequately capitalized. Funding is largely deposit based, spread between corporate and retail deposits. However, the Zimbabwean government and her agents continue to fail to honour obligations in foreign currency in a timely manner. As a result, GCR will continue to reflect a default event, for both foreign and local currency obligations, for the international issuer and issue scale ratings of Zimbabwean entities.

In our opinion due to severe foreign currency shortages, hyperinflation, and significant monetary and exchange control policy changes over the last 12-18 months, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment. See the latest Jurisdictional Supplement for Criteria, published September 2021, available at https://gcrratings.com/criteria/

*Country Risk scores as at date of publication.

Analytical contacts

Primary Analyst Vimbai Mandebvu Senior Financial Institutions Analyst
Johannesburg, South Africa VimbaiM@GCRratings.com +27 11 784 1771
Primary Analyst Matthew Pirnie Group Head of Ratings
Johannesburg, South Africa MatthewP@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, January 2022
Criteria for Rating Financial Institutions, December 2021
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, December 2021
Jurisdictional Supplement for Criteria, September 2021


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