TBs Stir Widespread Market Anxiety

FAILURE by government to honour its Treasury Bills (TBs) as the fiscus increasingly becomes dependent on the debt instruments to finance public spending could have far-reaching implications on the fragile banking sector and the economy.

After TBs breached the US$2 billion mark, experts say Treasury’s dependence on the paper will crowd out the private sector and slow down economic growth.

Experts further say what remains clear is the potentially catastrophic impact on the market in terms of liquidity, confidence and health of the banking sector.

As reported by the Zimbabwe Independent earlier this month, government’s stock of TBs has reached a whopping US$2,079 billion over the last two years amid concerns that this could crowd out private sector lending and force the central bank to adopt desperate measures as Treasury battles to meet its financial obligations at a time recurrent expenditure gobbles up 97% of the US$4 billion cash budget.

Reserve Bank of Zimbabwe (RBZ) governor John Mangudya defended the issuance of TBs which he said took into account the need to strike a balance between the desire to bridge the gap between revenue collection and expenditure, and the need to ensure that the maturity profile is sustainable.

“It is against this backdrop that government has issued TBs under four categories. The first category are long-dated TBs of US$549 million issued to banks for the acquisition of non-performing loans by the Zimbabwe Asset Management Corporation (Zamco),” Mangudya said in an interview with the Independent earlier this month.

“The second category are long-dated TBs amounting to US$300 million issued for the capitalisation of institutions that include the Reserve Bank, Agribank, IDBZ, ZB, Cottco and CAPS. The third category are medium to long-dated TBs amounting to US$780 million issued under the Reserve Bank Debt Assumption Act for the central bank debt taken over by government. The fourth category is short to medium-dated TBs in an amount of US$450 million issued to finance the gap between expenditure and revenue collection by government.

“In the case of Zimbabwe, it is important to note that the first two categories of TBs are held to maturity, whilst the other two sets of TBs can be traded in the market and/or used by the recipient to expunge their obligations at banks and other obligations without any physical cash movement.”

Two years ago, President Robert Mugabe signed into law the RBZ Debt Assumption Bill amid outrage that the central bank was protecting beneficiaries of quasi-fiscal activities.

The Act paved the way for the government to assume liability for an estimated US$1,4 billion debts incurred by the RBZ before December 31 2008.

Economists argue the issuance of TBs is unsustainable and spells doom to the economy which is already imploding.

Economist Eddie Cross said the stock of TBs in the market could be much higher than US$2 billion, worsening the economy’s exposure.

“My own estimate of TBs and other forms of paper money issued by the Reserve Bank is much higher. (Former finance minister Tendai) Biti thinks TBs are at US$4,1 billion and I think this is feasible given that the budget deficit since 2013 is over US$3 billion and must have been funded. The Reserve Bank debts are US$1,7 billion and the non-performing debts taken over by the RBZ is now over US$700 million,” he said.

“The interest on this paper in the market is US$285 million this year – at 5% per annum this suggests over US$5 billion. This is totally unsustainable and the main driver is the budget deficit. A sustainable deficit would be under 5%,” said Cross.

Cross said banks that have a huge exposure to TBs could run into insolvency if government fails to honour the TBs on maturity.

This comes after the country’s largest financial services group by deposits and assets, CBZ Bank, reported in its latest annual results that it is exposed to the cash-strapped government through TBs to the tune of US$760 million.

ZB Bank is also exposed to the tune of US$117 million while FBC holds about US$75 million worth of TBs.

“This situation is of great concern, the market is discounting TBs by 30 to 40%, if the banks wrote down their stocks of TBs most indigenous banks would be insolvent. There is simply no way the Ministry of Finance or the RBZ can redeem this paper or meet interest bills and they will simply have to roll them over and carry forward the interest liability,” Cross said.

Cross said the TBs are to some extent also worsening the liquidity crisis.

The primary cause of the cash crisis, Cross said, however remains the conversion of US dollars into non-negotiable paper money.

“As a consequence, the RTGS balances in the banks is already devalued — experts suggest by a third. By mid-year this will be over 50% and will lead to inflation in prices and a decline in spending power. The foreign exchange crisis can only get worse,” added Cross.

Economist Brains Muchemwa said expansionary consumptive fiscal policy cannot be justified in this market, more so when considering the country’s history that has shown in the past how such policies have a disruptive impact on the economy.

“Continued issuance of TBs to finance consumptive expenditure has huge impact on money supply growth, whose unsustainable growth has so far been threatening the parity between bond notes and US$,” Muchemwa said.

“Considering the existing huge gap between RTGS balances and the existing cash that has triggered the current cash crunch, the last thing that the policymakers need is to further stoke unproductive broad money supply that will worsen the situation,” Muchemwa added.

Another economist John Robertson said growing issuance of TBs posed a threat to the health of the banking sector.

“This is a very dangerous idea, adding risk to the banking security,” Robertson said.

Robertson said the issuance of TBs is tantamount to duplication of money.

“It’s duplication of money because the bank gets TBs and government uses the money it gets to spend. The money comes out of long-term savings and enters into purchasing imports so the country now has less liquidity, but the bank holds on to a piece of paper with the hope that they will be repaid on maturity,” Robertson said.

He said the TBs also distorted money supply.

“We have got a distorted picture of the money supply. The large portion of money supply is actually not money,” Robertson said. He argued players who are holding the paper will suffer huge losses.

“Those who hold these TBs are at risk because their only way out is to sell to someone prepared to take the risk at a discount,” he said.

Going forward, Zimbabwe needs to resuscitate its productive sectors to avert further implosion.

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