Hyperinflationary economy raises risks for rated Zimbabwean Financial Institutions.
Johannesburg, 28th November 2019,
Effective July 1, 2019, Zimbabwean entities are now required to apply International Accounting Standard 29 (“IAS 29”), ‘Financial Reporting in Hyperinflationary Economies’, in their financial reporting.
We believe the implementation of IAS 29, could significantly increase market wide balance sheet and income statement volatility. As a result, we may see significant movements in capitalisation across the sector. The impact faced by the individual entities will depend on the balance sheet structure, i.e. monetary versus non-monetary assets and the current levels of capitalisation. However, we do expect that the financial results for the 2nd half of the year, ending 31 December 2019, will differ drastically from the results published in the first half of the year, after financial institutions enjoyed inflated income growth. Furthermore, those entities which already have or may switch to non-monetary assets, in order to maintain capitalisation, will likely become less liquid.
In our opinion, credit growth will remain subdued. Upwards revision of interest rates to mitigate the devaluing local currency may result in increased rates of default and asset quality deterioration coupled with the operational and viability complications that Zimbabwean corporates are exposed to.
The lack of guidance from the Regulator, PAAB and the Institute of Chartered Accountants Zimbabwe (“ICAZ”) is viewed negatively exacerbating risk associated with the lack of Regulation, governance & policy certainty. The PAAB is expected to issue further guidance, this has prompted entities to delay publication of 30 September 2019 interim results. However, the decision by the PAAB comes at a time the Zimbabwe National Statistics Agency (“ZIMSTAT”) is no longer publishing annual CPI data and there is no clear index. GCR Ratings will closely monitor the situation and developments.
CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.