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Stability, a stretch away: Currency market review

To prove that the RBZ is understating demand and overstating supply, participants on the market have observed a shift in settlement timelines.

IT is now 13 sessions since the Reserve Bank of Zimbabwe (RBZ) and the Ministry of Finance and Investment Promotion intervened to save the formal currency market in June.

However, the number of cumulative formal sessions since the beginning of the year now sits at 40. A total of US$646 million has been traded on the formal market either as auction or wholesale funds since the beginning of the year.

This deduces to an average of US$16,15 million per session.

Following the interventions by government highlighted above, sessions conducted per week sometimes increased to two from the primary one session a week, for a period of eight weeks before reversion to one session a week.

The implication of this is to give a collated higher weekly average value traded of US$18,1 million on a year-to-date scale. The aggregate value of funds utilised from the formal market against the total foreign outflows will show a significant decline from the prior year.

The divergence is due to increased utilisation of own funds in settlement of external obligations of purchase of imports. The formal market, however, remains very important as a price discovery mechanism and its failure/success in this regard has far reaching impact to the disposition of the broader economy.

Last week, the actual demand on the market was now too high ahead of the published positions by RBZ. We have estimated from information gathered from industry, that weekly formal market demand is now in the range of US$50 million, which is more than twice what the RBZ has displayed as its offer.

The US$20 million displayed, in our view is only for psychological purposes. It is meant to show the market that government has sufficient funds, especially considering that the displayed levels of total bids is always coming short of the US$20 million, presumably supplied.

To prove that the RBZ is understating demand and overstating supply, participants on the market have observed a shift in settlement timelines.

The RBZ is now taking an indefinite time to settle traded funds, a challenge it has repetitively promised to solve. One of the largest participants on the auction has also highlighted that their weekly allocations have been reduced by 75% since June, which means their demand is no longer being fully met via the formal market.

All these developments are reflected not through the rate performance on the formal market but the parallel market. The parallel market has a direct relationship with the formal market and normally exposes the weaknesses of the formal market, which weakness the authorities controlling the formal market would be working hard to conceal.

The parallel, because of its independence, exposes these underlying challenges. Unmet demand from the auction and interbank, typically gravitates towards the parallel market and the result is worsening rates and wider variance between the two markets’ rates.

In the week under review, the Zimbabwe dollar eased by 4,5% on the formal market, maintaining sharp losses from the prior week.

Last week the unit lost 6% and put together with the current week’s performance, the level of losses is three times worse off compared to the prior seven weeks combined.

Likewise the parallel market has exhibited instability with the rate moving above the US$1:ZW$7 000 mark, driving the premium up. There are two things worth noting from the current trends in the currency market, first is that the formal market is not as free from government manipulation as we were made to believe.

The government has an incessant obsession with controlling the exchange rate for its own selfish reasons, which are otherwise not in the best interest of the economy.

Secondly, the emerging demand as in the past, is basically a culmination of rising local liquidity supply. Last week, government began settling past dues to suppliers after a temporary suspension weeks ahead of elections.

The suspension was mainly to control the exchange rate, which had dithered in a bloodbath.

The challenge which Zimbabwe faces is that of little fiscus breathing space. There is basically not as much funds to satiate all of the expenses government would wish to absorb.

The undertaking of infrastructure projects using short term debt and basic money printing is an old-fashioned way of speeding up inflationary pressure in the short term.

In the absence of long term cheap external funding, government is cornered as to how it can stimulate economic growth and deliver the developmental agenda.

The inward looking “vene” policies, crowds out investment and reduces competitiveness.

History has shown that short term funding, such as Treasury Bills, cannot be effectively relied on to stimulate growth and aid the budget, especially when the currency is not stable and is in less favour with the populace.

On the horizon, we are, therefore, gazing in a worse off storm, which does not appear to have an aversion solution as yet. The prevailing volatility is a new normal, which we have to brace for over the next five years.

In such an environment, diversification tends to cushion businesses and portfolios.

Hard currency generating businesses tend to fare better off and businesses with shorter product cycles also tend to outperform, while paying attention to balance sheet structure becomes paramount to avoid stockouts, working capital challenges, punitive interest rates, value erosion and a general insolvency.

  • Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net


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