Hyperinflationary economy raises risks for rated Zimbabwean Financial Institutions, GCR
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.
GCR believes the implementation of IAS 29 could significantly increase market wide balance sheet and income statement volatility. As a result, it may see significant movements in capitalization across the sector.
The impact faced by the individual entities will depend on the balance sheet structure, ie monetary versus non-monetary assets and the current levels of capitalization. However, GCR do expect the financial results for the 2 nd 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 that already have or may switch to non-monetary assets, in order to maintain capitalization, will likely become less liquid.
GCR believes that 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 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.