By Admire Mavolwane
THE governor of the Reserve Bank delivered his monetary policy review statement yesterday, which many had waited for with much trepidation, desperately unsure as to whether it would be po
sitive or horribly negative to investment positions held.
These occasions have now assumed watershed status, wherein wealth can be enhanced or decimated in a sentence. The recent fiscal policy review statement, before the compromises on withholding tax and prescribed assets, is a classic example of how things could change at the stroke of a pen. However, stock market punters seemed to have largely ignored or rather discounted the latest monetary policy, showing no jitters whatsoever and even exhibiting a high level of exuberance.
In the past week to Wednesday the industrial index gained 21% to power past the 10 million mark closing at 10 281 004,12 points. Zimbabwe Sugar Refineries, the alphabetic last on the listing of the Zimbabwe Stock Exchange, whose management normally talk about the company with such a sombre tone and deportment that the market regard it as one of the dull lot on the bourse, surprised the market with cautionary advising that the half year results to September 2005 will be significantly above the comparative last year. The counter was rewarded with a 90% re-rating for the week to $5 500.
Many analysts will however have a bone to pick with management, following a decidedly lukewarm trading update at the group’s annual general meeting in early August. Other leading lights were CBZ after the 10 million-share overhang was finally cleared last Friday, a resuscitated PGI and the South African cement giant PPC.
The market seemed to have correctly second guessed the governor this time around. The governor’s pronouncements were good news to many share market investors. Chief among the measures announced was the near liberisation of foreign exchange market with the initial step towards a floating rate having been made. Exporters will now be able to retain 70% of their proceeds in their FCAs, whilst selling the balance to the Reserve Bank at the ruling auction rate as announced by the Reserve Bank from time to time.
Initially the rate will be $26 000 to the US dollar. After a thirty-day window, the exporter would be required to liquidate the FCA balance in the inter-bank market at a “market” determined rate. So, on the exchange rate front, we have gone through a full circle and we once again have a “blend rate”, although the mechanism of evaluation has changed.
Given the recent upsurge in the inflation rate to 369% in September 2005, the target for December 2005 was revised upwards to between 280% and 300%, from the previously highly optimistic 80%. As we highlighted before, the main impetus to the inflation rate resurgence has been the huge expansion in money supply with credit to government the worst culprit. The inflation previous target will now apply for December 2006.
The governor also announced a change in monetary strategy from what he called a “middle of the road” to a more “focused” one which involves the targeting of money supply growth. In this regard, a target of 50% annual growth by December 2006 was announced.
The growth in the M3 money supply aggregate had, in tandem with the inflation rate which it drives, started on an upward trend in the second quarter and risen quite steeply in the third quarter.
Annual growth in credit to government and quasi-government entities of 1 038% and 661% respectively accounted for the bulk of the 250% growth in M3 by August 2005. On the other hand private sector credit grew by a meagre 100%, illustrating vividly a manifestation of the classical economic phenomenon of “private sector crowding out”. In essence, government thirst for expenditure remains insatiable – the official reason given for this voracious hunger was drought mitigation, the need to fund Operation Garikai and the public enterprise reorientation programme.
However in the weeks ahead, the government demand will continue unabated ahead of the senatorial elections whilst private sector will be flush with cash because of lack of success on the forex auction floor and painful memories of its last debt binge. History everywhere has shown that the fight against inflation is never easy in an election year, and this has been proved beyond doubt this year.
Reading from the International Monetary Fund prescription, the governor revised the statutory reserve requirements of the banking institutions downwards in a seemingly contradictory move to the tight monetary policy stance: in traditional economic theory, a hike in statutory reserves is used as a tool of tightening money supply.
A counter argument to reconcile this could be that the level had simply become more restrictive than was necessary. This, together with the upward adjustment on the penal yield applicable to the two special treasury bills from 17% to 120%, should come as a welcome relief to the banking fraternity.
Interest, the nemesis of stock market investors, got the expected little nudge with the accommodation rate being adjusted from 405% to 415% for secured lending. Given the surplus conditions that are prevailing in the market, with an estimated $10 trillion worth of treasury bills maturities in the coming three weeks, the impact of the rate hike is likely to be minimal in the near term.
As alluded to above, government has a near monopoly in the debt market so aggressively increasing investment rates on instruments such as treasury bill would not have made any sense – the governor indicated this when he pointed out that he expects money market yields to track inflation rather than the punitive accommodation rates.
In short, the landscape has not changed and the scales remain heavily tipped for the stock market. In fact the policy statement will further add impetus to the already rampaging bulls. So the march continues.