ON Monday, the government announced major changes in the monetary policy of Zimbabwe, highlighted by the ending of a 10-year multi-currency system.
Further measures announced include the intended sterilisation of $1,2 billion in RTGS funds. These are balances in RTGS dollars held by banks due to foreign creditors and investors, among others. These amounts have accumulated over a three-year period from around 2017 and owing to hard currency challenges, could not be remitted. On introducing the RTGS$ and a partial float exchange rate in February, the central bank promised to settle the dues at 1:1. This means banks will now have to transfer the amounts in RTGS$ whereas the Reserve Bank of Zimbabwe (RBZ) will settle them to external creditors at 1:1.
Implication: The policy measures will have an immediate impact of lowering the quantum of RTGS$ balances in the banking system. The amount of RTGS deposits will thus diminish grossly thereby strengthening the RTGS$ on the forex market, all else being equal. Despite the RBZ promise of 1:1, these deposits were competing for forex on the interbank and some investors were willing to take a shave. The exact amount of transferable deposits is, however, not known in the market. The Treasury and the RBZ have previously said the amount is below RTGS$2 billion.
On the downside, it is evident that sterilisation will result in additional debt for the country and worse still, in foreign currency. The RTGS$ debt to gross domestic product ratio will thus go above 100%, which means our capacity to service to debt will be significantly low. Given the high leverage, the ability to attract lines of credit will equally be low. This is the second time government has assumed private sector debt under 10 years. Payable interest on the due amounts will further burden the fiscus and if fundamentals do not improve at a quicker rate, that may result in further fiscal misalignment.
Adjustment of interest rates from an average of 15% to 50%
Implications: Interest rates relate to the cost of borrowing. A revision of the interest rate is meant to realign the rates in line with inflation. Typically, if banks are lending at below inflation levels, it implies that their net return is negative. There will, therefore, be no incentive to lend. Borrowers, on the other hand, will maximise their return if they borrow at lower rates in an inflationary environment. An adjustment upwards thus reduces the propensity to borrow, while re-aligning lenders’ return.
On a more pertinent note, Zimbabwe’s banking sector has struggled with NPLs in numerous instances. In 2016, the NPL ratio for the average banking sector reached as high as 24%. A mop-up exercise through Zamco, however, helped bring down the ratio to a low of 8% as at December 2018. Even before the new higher interest rates, high NPLs had resurfaced and this will become a serious threat for the sector’s viability, going forward.
To government, it equally means its cost of borrowing will go up. Given the extended monetary latitude, it follows that Treasury will be more active in attempting to stimulate the economy, which is now in a recession. Government expects a trade deficit of about $2,8 billion by year-end, which is at the same level to last year. This projected deficit means government expects to borrow an equivalent amount of circa $2 billion from the market and given the higher revised interest rates in the market, the net impact is a quicker growth in money supply through higher interest payments.
Removal of cap on margins on the interbank rate and administrative limits on the bureau de change
Implication: This is one of the most important measures promulgated by the RBZ. The imposition of caps on margins, which essentially means the limitation of daily interbank rates through imposition of a ceiling, reduced the attractiveness of the interbank. By imposing a rate cap, RBZ was discouraging market forces, but at the same time was attempting to manage a runaway exchange in light of low confidence in the market. The removal of a cap means the exchange rate can now freely move without interference.
Sellers can now offer at any price and if bidders are willing, trades will be recorded without hindrances.
Circuit breakers gave rise to off market trades and inspired the black market, which was now trading at 100% ahead of the official exchange.
Exporters and importers were now matching off the market with the facilitation of banks. Liquidity on the interbank thus remained low, averaging a measly $1,9 million compared to a demand of over $10 million per session. There will, however, be a shock in the official market, with rates initially running to as high as the parallel rate before coming off to levels below 8%, with more downside pressure. Liquidity on the interbank will thus improve from present averages, while the two exchange rates will largely come close to each other.
The RBZ has put a vesting period of 90 days on disposal of dual listed shares purchased by investors on the ZSE. Implications: There are particularly two key stocks traded on the ZSE which are dually listed and these are Old Mutual and PPC. The shares of both counters are also traded on the JSE in South Africa, where they have a primary listing. Due to their dual listing, their shares can move between markets such that a share purchased in Zimbabwe can be sold on the JSE, and vice-versa. Given the forex shortages in Zimbabwe, investors were taking advantage of the fungibility to buy Old Mutual shares in Zimbabwe and then sell them on the JSE as a way of moving funds from Zimbabwe to other countries.
The key challenge with this move is that it gave room to arbitrage and peculation. It also gave rise to the share price due to increased demand and as the share price rose in Zimbabwe, given a stable JSE price, the implied rate (OMIR) kept going up. As a proxy for the exchange rate, the resultant rate would grossly inflate the United States dollar exchange to RTGS$. Increasing the holding period over which one should hold before selling in another market reduces speculation and trading activity in those respective counters, thus lowering the exchange rate, all else being equal.
Increasing the supply of forex on the interbank by ensuring that at least 50% of the surrender portion of foreign currency is sold to the interbank market, supplemented by a letter of credit for essential imports.
Implications: A commitment to increase the supply of forex on the interbank through retained forex from exporters, is welcome. However, there is no mechanism to measure the bank’s sincerity in that respect. It is evident that government has its own demand and as the purse shrinks, priorities will highly compete for resources. The second part which addresses the aspect of letters of credit has dual implications. First, supporting of key imports, which essentially have a high weight on the import basket, frees up interbank funds though reduced demand. This, therefore, implies a firming RTGS$ or Zimdollar to the US dollar.
The downside remains that most LCs lock a forex price and, therefore, if the exchange rate moves upwards, government will lose as it has to pay the difference between the market rate and the locked price. When such a result come, it means government will be sustaining subsidies in some instances. However, given that low volatility will be expected, the level of subsidy will be manageable. Overall prices (inflation) will take time to come down. Prices are generally sticky downwards and in a month and half’s time prices will follow an emerging exchange rate.