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Reginald Sherekete
THE Agricultural Marketing Authority’s (Ama) US$100 million tender of 360-day agro bills to finance the 2011/2012 agricultural season is expected to be undersubscribed in spite of the special features on the bills, market commentators said this week.
The closing date for the tender is today (Friday), and the market will wait to see the level of subscription. But market sentiment on the tender indicates that banks will most likely bid for higher rates since they cannot settle for 10% indicated by Finance minister Tendai Biti in his budget statement.
“Government was engaging the banking sector with a view to ensuring that the special features of the agro bills cascade to farmers to the extent that credit to farmers will be at affordable interest rates of around 10%,” Biti said.
The special features which are meant to entice interest in the banking sector and the investing public include prescribed asset status, liquid asset status and tax exemption status.
Thus the latest bills on offer have been crafted so that they can attract subscription, given that the last Ama bills to finance soya beans failed to raise the required amount.
The money market, which has for a long time lacked tradeable financial instruments necessary to unlock funding to cover deficit positions, now has an opportunity to take advantage of the Ama bills since government has for the first time since dollarisation granted the bills’ special features.
Liquid asset status means holders of the bills especially banks, can seek overnight accommodation from the central bank to cover their positions so that they can meet their obligations. The prescribed assets status allows pension funds and insurance companies to invest in government portfolios.
Since the bills are tax-exempted, holders of the bills will receive their money in full on maturity without paying any taxes. These are the first bills to be granted special features since dollarisation in February 2009.
The combination of the fact that the local money market currently lacks tradeable financial assets and that features of the Ama bills were an improvement on the cotton bills were expected to generate interest, but the market is rooted in the current liquidity constraints and is not prepared to invest for longer durations.
The current political and economic environment prevailing in the country has caused the markets to trade cautiously and an investment horizon of 360 days can be considered to be very long term.
“Markets take positions ahead and with our scenario of possible elections next year, investors usually shun long-term investment horizons,” said a trader with a local bank.
The current nature of short term deposits creates assets and liabilities mismatches which often lead to a financial crisis in a bank. Thus financial institutions will always balance out the liquidity risk with return on the investment.
Treasury bills are usually perceived to be risk free since they are government-backed assets, but the same status in Ama bills is being overshadowed by the fact that the bills are attracting low rates for the long holding period.
Last month Ama floated another tender to raise US$20 million in agro bills to finance soya beans farming but only US$4,5 million was allotted from total bids of US$17,6 million, as bidders sought high interest rates on the bills.
Bids received indicated rates as high as 25% with the lowest bid rate at 8,5%. But given the level of response, the market still has appetite for paper but only at a commercial rate which takes into account the market forces currently prevailing in the money market.
Given the announcement that the central bank will be capitalised to the tune of US$100 million, there is need for banks to hold Ama bills since they can at some point in future be able to benefit from accessing overnight accommodation.
At the launch of the Ama bills this week, it was indicated that farmers can access the necessary inputs, which they will pay for through a stop order facility after harvesting. Finer details are yet to be announced.
But out of the US$100 million to be raised, US$56,2 million will support farmers’ input requirements, while the remainder will be used to clear liabilities from last season.
Government plans to direct US$21 million to the Grain Marketing Board to settle its arrears with farmers for maize deliveries made last season. Another US$18,6 million will go towards clearing liabilities to seed and fertiliser firms that were not paid for supplies under government-backed schemes.
A total of US$4,5 million will be given to seed and fertiliser companies to start supplies of inputs required for grain production this season.
CBZ Bank is the financial advisor to the transaction and the bank will subscribed to the shortfall amount if the allotment fails to raise the required amount.
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