eBusiness Weekly
Business Writer
Leading rating agency in Africa, GCR Ratings (GCR), has reviewed downwards Zimbabwe’s Financial Institutions Sector Risk Score to “0.75” from “1.0” amid weaker regulatory and volatile monetary policies.
The Financial Institutions sector risk score (ranging from 0 to 15) is a key factor in the operating environment component score.
The latest ranking; comes at a time there is financial turmoil in the economy where runaway inflation and massive currency depreciation forced government to put in place drastic measures including the suspension of bank lending.
According to GCR Ratings, which has established itself as Africa’s top rating agency accounting for the majority of all ratings issued on the African continent, the lowered score follows “failure by regulatory and monetary authorities to address regulatory, governance and policy uncertainties” in the country.
Zimbabwe’s regulation is viewed as relatively weaker than the regional average while the monetary and fiscal policy is considered very volatile, GCR said.
This comes at a time economic agents have been accused of abusing bank loans to destabilise the exchange rate and create a bubble in the stock market.
The lending ban has since been lifted except for entities that are under investigation by the FIU for abusing loan facilities to the detriment of the economy.
GCR pointed out latest measures to suspend bank lending as one of the indicators “undermining governance and policy certainty, dampening indicators of perceived stability during the first half of 2020 to 2021 period”.
In supporting the move to suspend lending, Central Bank governor, Dr John Mangudya, said this was meant to protect the local currency from continued depreciation as well as tame inflation.
“We know this is a painful, but necessary, measure. It was necessary because of the increase in inflation. Some entities were now using funds from banks to purchase foreign currency,” Mangudya said in an interview with ZBC.
However, the ratings agency added that the cascading effects of these measures are going to be significantly detrimental to the economy and financial institutions.
Apart from weaker regulations and volatile policies, GCR said Zimbabwe’s lower 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.”
On a positive note, the ratings agency said, the country’s banking sector asset quality has “been good” despite the adverse operating environment with gross non-performing loans lower than 1.5 percent 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.”
However, going forward, GCR said the positive trend is under threat in the short to medium term.
“We expect that banks’ operations may face additional challenges with credit extension.”
GCR said the lower score also considers the somewhat fragmented sector, although the banks in the top tier are generally profitable and adequately capitalised.
Failure by Government to honour obligations in foreign currency in a timely manner will see GCR continue to reflect a default event, for both foreign and local currency obligations, for the international issuer and issue scale ratings of Zimbabwean entities.
Old Mutual gets positive rating
Meanwhile, one of the leading players in the country’s financial services sector, Old Mutual Insurance Company (OMICO), has been granted a top-class rating for its effective performance by GCR.
GCR affirmed the OMICO’s national scale financial strength rating of AA(ZW) and considered it to be having a firm and stable outlook after three solid years of improvement.
According to GCR, OMICO’s rating upgrade “reflects the strengthening in the insurer’s financial profile, coupled with an entrenched market position that has supported the business profile over the past three turbulent years”.
“Furthermore, the rating derives uplift from Old Mutual Zimbabwe Limited, OMICO’s parent company, given brand alignment, operational and risk management framework integration.”
“We expect the insurer to maintain liquidity metrics within the current range over the rating horizon,” GCR said.
