Double jeopardy as imploding risk grows

GOVERNMENT domestic debt peaked at about $12,2 trillion as at September 2, from $2,3 trillion in February, though the government has some $147,5 billion deposited with the central bank coming off from a peak of $552 billion in August.
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A significant portion of this debt is in treasury bills (TBs) with a total of $6,4 trillion outstanding at that date carrying with it a whopping interest component of $4,9 trillion – a 345% jump from $1,1 trillion in February.


The huge amount of outstanding TBs compares to a paltry $769,5 billion in long-dated government stocks with an interest component of only $19,1 billion.The spiraling of the year-on-year inflation rate is set to fuel the domestic debt, with inflation having jumped to 265% y-o- y in the month of August.


However, due to timing differences, the August figure does not include the significant increases in fuel and the recent devaluation of the local currency on the foreign exchange auction.


The inflation outlook does not bode well for the restructuring of the government domestic debt. The on-going attempts by the central bank to mop up excess liquidity from the market through the use of the special TBs might exacerbate the situation, especially the recent issuance of the 31-TB which has been attracting yields of around 260% per annum. There is every reason to fret about the runaway interest bill.


How will this be served given the economic outlook, the shrinking tax base and that the government is technically broke?


The fight against money supply will rage on if money is printed to serve the interest bill. It will be interesting to see how the 31-TBs will be dealt with on maturity – pay them all out!?The money market has been trading largely in deficit as the Reserve Bank of Zimbabwe tries to contain credit expansion and speculative behaviour – by keeping the market in huge deficits.


Short-term investment rates have spiked up and are being quoted in the regions of 170% per annum for 30 days, 180% per annum for 60 days and up to 220% per annum for 91 days.


Minimum lending rates have spiked up to around the 300% levels. The continued slowdown in the economy combined with higher interest rates may give rise to increased loan default rates.Is the currency set to “collapse”?


The Zim dollar has been losing ground against major currencies over the past weeks, both on the auction and the “grey” markets. The local unit is now trading at over $26 000 to the US dollar and appears to be heading towards $40 000 to the US at the auction market.


On the parallel market it is quoted at around $50 000 to the greenback.

The economic slowdown has resulted in the currency crisis the country is facing. The country has witnessed a sharp pullback in production across all sectors of the economy.


In the short-term, the country eagerly awaits the resolution of the loan negotiations from down South. If no external support comes in to shore up the currency in the short to medium-term, the pending balance of payment crisis will further shake the currency and fuel inflation compounded by the firming world oil prices. Trading on the equities market has been mixed, having recorded significant gains during the start of the week before sellers trashed the market towards the end.


The industrial index peaked at an all-time high of 4 744 675,15 points on September 13 before slightly easing back, albeit on thin volumes, as investors sold ahead of the introduction of the 5% withholding tax, on October 1.


Given the inflationary pressures and the muted y-o-y inflation figure for September, this might just be a temporary set-back as inflation is set to push the index to higher levels likely to be fuelled by the fact that investors will now require a higher return due to the increased transaction costs.


As of October, a buy and sell transaction will be about 10%, ie for one to break even, the share price has to go up by 10%. Going forward, huge price jumps might become the norm on the local bourse.


* Any opinions expressed do not necessarily reflect the opinion of Sagit Financial Holdings or any of its subsidiaries and affiliates.

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