The Sunday Mail
Howdy folks.
There are several risks associated with investing in a country, often called country risk. These vary from country to country and indices such as the Euromoney hint at which countries have a lower risk and which ones hold higher risk.
It is important for businesses to understand potential risks facing them and how to deal with them. A few of such risks will be discussed here.
Foreign exchange risk is one of the major risks affecting many in Zimbabwe.
Due to low domestic demand, and given that exports are Zimbabwe’s top revenue source, many companies find themselves having to sell their goods out of the country.
This is also propelled by the need to increase capacity utilisation and accrue economies of scale, and to deal with the country’s unsustainable trade deficit.
However, there is a risk that exporting companies will lose money if the current exchange rate between the US dollar and that of another country being traded with changes negatively during the transaction. That may result in a reduction in the real value of earnings as currencies of export markets depreciate.
There are, however, several ways to deal with foreign exchange rate risk.
Companies that are in the export business can consider using a foreign exchange contract. Such a contract spells out the current exchange rate as the rate for the date of a future transaction.
Although this may result in the exporter losing out in the event of the US dollar depreciating, it certainly guarantees them consistent returns on their exports.
Exporters can also avoid losing out to foreign exchange asymmetries by pricing their products in the same currency used to produce them.
Most products are produced using the US dollar in Zimbabwe.
It is, therefore, prudent to avoid losses by requiring importing countries of our products to pay for them in the US dollar, so that the exchange rate factor is removed.
Widening our export markets will ensure that Zimbabwe dilutes exchange rate risks to the minimum.
The majority of our exports are concentrated in Southern Africa in general and South Africa in particular. We thus lose out each time the rand slides.
However, if we engage in export diversification, the losses from one market can be covered by the gains in another.
Realising how volatile some of the currencies in the export markets we deal with are, it is wise for local exporters to require prompt payments.
Currencies do not usually move on a regular basis and Zimbabwean companies should negotiate contracts that have short payment terms to limit the amount of time they are exposed to currency market fluctuations.
Studying the currency fluctuations in the export market all the time is necessary as it helps exporters to determine patterns they can use to extrapolate pricing mechanisms and export decisions.
In Zimbabwe, many companies stock large piles of raw materials to avoid production hiccups related to supply asymmetries and transport delays especially, at borders.
They also stock finished goods that will go to the market after some time because of different reasons; for instance, there may be no demand at the present time.
There are, however, a number of risks related to such stocks as they are prone to damage and pilferage during the stock-holding period.
There is also a possibility of price changes, which will cause the value of the stock to decrease.
To avoid inventory losses through theft, it is always advisable that companies implement security measures such as installing CCTV cameras and hiring professional guards. Again, to avoid damages, firms should ensure inventory control policies are in place and also make sure they have insured against unforeseen circumstances such as fire.
Entering into long term supply contracts with customers can also avert the risk of reduction in prices of substitute goods while yours are still in stock. Some customers can switch to other products when their prices fall; but they may not be able to do so if there is a contract.
Competition, whether from imports or domestic peers, is a practical risk that should be planned for by companies that want to sustainably and profitably operate.
Imports usually come cheaper and cause headaches for local companies that contend with high production costs.
Local companies tend to end up experiencing low demand for their products, the only sustainable way of dealing with competition is continuous investment in new technologies and innovations, while also embarking on research and development to find new competitive ways of doing things.
Interest rate risk is another risk of particular concern in Zimbabwe.
It exists in risk bearing assets such as bonds or loans, and affects fair value or future cash flows if there are changes in interest rates.
The result is that companies with loans might end up paying high interest costs resulting in them having reduced earnings.
Again, if a business is not quite certain about its future interest earnings or interest payments, it can never come up with a meaningful cash flow.
To avert this type of risk, it is always advisable to negotiate fixed rates, if available, as opposed to variable interest rates.
Companies can also try to negotiate for lower interest rates on loans and try to accelerate repayment of their long-term loans.
Non-concessionary long-term loans with usurious interest rates should be avoided, and companies should strive to borrow from financial markets that offer reasonably low rates of interest.
Many Zimbabwean companies export to countries in the region that are prone to economic and political instability.
Policy changes in these markets can affect the operations of these companies, from exchange and interest rates, inflation and other key macroeconomic issues.
Political instability can also result in uncertainty.
Businesses operate according to forecasts, and uncertainties may affect decision-making processes and strategic financial decisions.
Political risk can be dealt with by diversifying into more stable markets with attractive offerings and understanding the policies of different countries.
Credit risk is another type of risk that should be always be carefully understood and planned for by companies operating in Zimbabwe.
This is the risk of default on a debt that arises from a borrower failing to make payments.
Many banks, for instance, are suffering from high loan defaults and that reduces their profits and cash flows. Some people with pending debts have lost their jobs, which were their only source of income, while others have had their salaries cut.
This reduces their ability to honour their debt obligations.
Dealing with credit risk is always incomplete without thoroughly checking on new customers’ credit records to ensure they are credit worthy.
For banks and other companies that sell on credit, the operationalisation of the Credit Reference Bureau is going to help reduce the risk of losing out to clients who have no capacity to pay.
It is also a good practice to put a credit limit for different customers, depending on their past repayment behavior or by looking at their bank reports.
You can also ask for the company’s audited financial statements, to assess its cash flow, profitability and business liquidity.
For debts that have already been defaulted, factoring arrangements can be considered.
Operating a business while in cloud cuckoo land can only lead to adverse consequences; which is why every business must be quite alive to the potential risks facing them and have concrete measures in place to deal with them.
Later folks!
