At The Market with Tetrad – RBZ’s bid to restore trust in financial markets

By Admire Mavolwane

THE Zimbabwe Stock Exchange’s decision to suspend Century, First Mutual and Trust shares from trading on Tuesday this week, although made with good intentions, could have come a little to

o late.


Century Discount House was closed on January 2. First Mutual announced that it was exposed to ENG on January 1, and Trust’s troubles were known in the market well before Christmas. With the stated intention purportedly being that of “protecting investors”, one then wonders why the suspensions were not effected earlier, shareholders having already lost, in addition to the losses incurred last year, 58%, 63% and 35% in the share prices of Century, FML and Trust respectively for the year to Wednesday. A classic case, if you ask me of “closing the stable door when the horse has already bolted”.


The ENG story continues to pose serious questions regarding corporate governance and risk management in the corporate world. How could big corporates deal, to the tune of the billions of dollars being mentioned, with an entity that was, apparently unregistered? Even accepting that dealings with the company were approved, surely low exposure limits should have been in place given the relative “newness” of the company? Without seeking to justify investments that throw risk out of the window, the current hyperinflationary environment no doubt contributed to injudicious investment decisions by both institutions and individuals, many of whom are now caught with their pants down, as they tried to preserve the value of their dollars. Greed, of course, also had a role to play.


Many, who dismissed the new Reserve Bank of Zimbabwe governor’s tone when presenting the new monetary policy as just tough talk, will now be thinking otherwise. The restructuring of top management at Trust Holdings, although announced by the board, appears to have been at the instigation of the central bank. A statement published by the RBZ subsequent to the management changes lends support to the board initiative and assured the public that the RBZ stands ready to augment the board’s efforts by providing liquidity support in order to strengthen confidence in the institution. True to its word, the promise looks to have been fulfilled with Trust being one of the recipients of the accommodation availed to the banking sector on Wednesday that has contributed to the money market moving into a significant liquid position.


Another initiative by the governor, the foreign currency auction floor, commenced operations on Monday, with lukewarm response from the market. Out of US$5 million on offer, bids of just under US$477 558 were received and the whole amount was allotted at an average auction rate of $4 197. The market appears to have adopted a circumspect approach towards this system as it gets to grips with the modalities of it. Using the average auction rate announced, results in a blend rate of $3 347 to US$1 at the new retention ratio of 75:25. This blend rate is roughly in line with the previous blend rate of $3 400, on the presumption of a parallel market rate of $6 000: US$1 and a 50:50 retention ratio.


The beginning of the currency auction coincided with the aforementioned surge in liquidity on the money market with the surplus position reaching unprecedented levels of $423 billion on Tuesday. Market liquidity has been improving since the beginning of the year as central bank support and the rumoured disposal of “speculative assets” have continued. Consequently, interest rates have progressively softened, with inter-bank rates now between 75% and 150% per annum in the liquid section of the banking sector, while ‘short’ institutions are still offering rates as high as 300%. The question now remaining is whether this liquidity support is simply a matter of giving banks a grace period to get their books in order and restore confidence to the banking system before unleashing unfettered market forces again, or whether rates will be allowed to run their course, but with a de facto ceiling at current levels being applied.


The over-sold stock market immediately took a cue from these developments, with investors seemingly beginning to channel funds back into shares. The industrial index gained 2% on Wednesday to close on 320 450 points, the first upward movement this year, suggesting that the market may have bottomed out.


The falling interest rates will no doubt have come as a relief to many companies who over the past three years were relying on what had become a successfully tried and tested formula – borrowing heavily at negative rates to invest in inventories whose pricing moved in line with inflation. Last year’s spike in interest rates, cemented by the governor’s monetary policy statement, thus caught many unawares as evidenced by the number, in particular, of credit retailers who have been offering hitherto unheard of “promotions” and “specials” with as much as 40% discounts on all goods sold!


The fact that this festive season was probably not as busy in terms of sales as in the past cannot have helped, thus placing many businesses in a tight situation as inventories did not move as anticipated. These businesses have thus been hit with a “double whammy”, as both funding and stockholding costs have increased, while revenues have grown at a lower rate. The good news is that for once, the beneficiary is that most neglected of characters over the past couple of years, the consumer. At least he may be able to begin the year with a slight smile on his face!

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