· Debt capital continues to be restricted by tight monetary policy.
· Retained earnings prospects to be stunted by the global slowdown.
· A growing case for the listing of more companies.
HARARE- The three major sources of corporate financing are retained earnings, debt capital, and equity capital. Debt capital has been restricted by the tight monetary policy environment which continues to strangle the amount of capital flowing to businesses in ZWL dollar terms, thereby making borrowing less viable for companies. Borrowing in USD is not viable for the majority of companies that earn in ZWL dollars, because they in turn do not have the means to reliably service the debt.
Financing is also generally threatened by the global slowdown, which means that it is unlikely that companies will be able to generate enough capital from their general activities to ensure they maintain adequate capital levels. The ability to raise capital from retained earnings will therefore also be undermined.
With the domestic and global dynamics which have caused prices of raw materials to increase, the demand for capital has been rising. As companies look to access sources of finance, there remains a case for equity financing.
The capital market is a market for raising long-term capital which is critical for fuelling the productive sectors of the economy. Listing on the Zimbabwe Stock Exchange (ZSE), or the Victoria Falls Stock Exchange (VFEX), may be strategically viable as a long-term source of finance. Although liquidity on the ZSE is significantly greater than that of the VFEX, there is still room for financing on both.
An increase in the number of listed companies will increase the liquidity available on the stock market. As a proportion to the number of private companies that meet the listing requirements set out by the ZSE, Zimbabwean financial markets are made up of a few listed companies. The move to list will not only benefit the company in terms of financing but will also increase the public’s ability to participate in the dealings of these listed companies.
In addition, listing on the bourse will increase the transparency of company information. Timely and accurate information is paramount to financial markets’ success in allocating capital efficiently in the market, and stock exchange requirements include the publishing of company information. This will ensure that these companies stay up to date with the publishing of company documents, which in turn should increase investor confidence.
The sentiment is captured in a quote from Protea Capital Management’s CEO saying “It is a pity that a delisting of Steinhoff, which will probably happen this year, will decrease the transparency and make it more difficult to follow what is going on”. This all comes as the once mighty Steinhoff International faces a credit default and possible liquidation after its shareholders voted against a crucial restructuring plan, which will raise the prospect of liquidation and leave equity investors with nothing.
Investors make buying or selling decisions based on the information they receive, primarily sourced from the company itself. Both the timing and the quality of this information are useful for stakeholders to make sound decisions. When a company is de-listed from a stock exchange, the timeliness and the quality of reports tend to be undermined.
Despite the opportunity presented to raise capital by listing on a stock exchange, the data0 seems to suggest that the incentive of ownership outweighs the incentive of sourcing finance through listing on the ZSE or the VFEX. -Equity Axis
