Rumbidzayi Zinyuke Syndication Writer
For years, Zimbabwean capital markets have been starved of liquidity to enable financial authorities to fund long-term projects.
While there was hope that after dollarisation in 2009, the country would attract more long term funding to help rejuvenate the economy, the situation has not changed much for local businesses.
If anything, after seven years, most of these companies are struggling with the pain of carrying huge debt levels that have accrued on their balance sheets.
And most are opting out.
They really have no choice, because there have been little opportunities to get equity financing compared to debt financing.
The equity market has seen some rights issues which have not attracted much interest due to the market liquidity crunch.
It is not only the local financiers that have flooded the market with debt, but the international investors as well.
According to Finance and Economic Development Minister Patrick Chinamasa, some foreign investors have been using borrowed funds to finance investments in Zimbabwe.
“Real investors bring equity into the country. The investors we are seeing come into the country then borrow from outside — and that is debt to the country,” the Minister said in December.
He said this has inflated the country’s debt as Government acts as guarantor for some foreign investors’ loans for key national projects.
What has made things worse is that these loans come at significantly higher than global market rates.
“I went to some investment firm, I will not mention it, where I was being told that the loan was at 18 percent. And this was a loan from Europe, I know Europe has very low interest rates,” he said.
Analysts believe the high interest rates are because Zimbabwe does not have a sovereign credit rating, so the country risk premium would also need to be priced into the cost.
Zimbabwe needs more equity investments than debt financing if it is to turn around the economy.
“If it is all debt, I do not think it is a very good state of affairs, there is need for that balance between equity and debt,” Minister Chinamasa said.
Companies definitely need to get more private equity finance, where investors provide funding in return for shares in the business.
A case in point is the deal signed between Sociètè Industrielle Lesaffre (Lesaffre), a global leader in the manufacture of yeast and fermentation products, and the country’s sole manufacturer of the product, Anchor Yeast, in 2015.
Lesaffre brought in the capital required to revive the company and acquired 60 percent stake for their funds which effectively cleared Anchor Yeast’s debts and created employment at the same time.
While there have been several such equity deals signed between local companies and foreign investors in the past few years, there is still need for more.
Unlike debt financiers, private equity investors do not have legal rights to interest and capital repayment. The only way they can get their money back is through a capital gain if the business succeeds.
As a result, they are more likely to be hands on in the business and bring useful expertise which usually lacks in most local businesses.
President Mugabe in April provided the much needed clarification to the interpretation of the indigenisation law and stated that laws are not cast in stone, making them subject to change from time to time.
Critics had attributed the seemingly resistance by external investors in taking up equity stakes in local companies to the Indigenisation Act which gives locals majority control of local business units.
They believed that the law made most foreigners wary of losing their investments to locals should they acquire more shareholding through equity finance.
But President Mugabe’s clarification of the particular law should have settled the investors’ nerves.
The Confederation of Zimbabwe Industries president Mr Busisa Moyo says while industry is happy with the clarifications provided by the President, government needs to move to harmonise these with the Act.
“Investors prefer loans because there is still some pending clarifications as far as indigenisation is concerned,” he said at a Post Budget meeting held in Harare last month. “We need to highlight this as a deterrent to equity investment at the moment.
“His Excellency has made certain clarifications and those need to be harmonised with the Act and that’s an important step. As private sector we believe that clarity is needed to allow investment to go forward. But we cannot blame Zimbabwe’s indigenisation policy only for the few equity investments.”
The level of equity investment in Africa as a whole has remained low and this might also explain why Zimbabwe is still lagging behind.
Despite being a popular destination for business investment, only about one percent of global private equity goes to Africa.
So, the continent, in general and Zimbabwe in particular, needs more capital — equity capital to be precise.