By Admire Mavolwane
MINERALS and other resources like oil and gas can be a source of prosperity. They can, in some instances, also be a source of embarrassment.
Resources are only useful and gen
erally beneficial depending on how they are exploited. For a country that is bawling for the empowerment of indigenous Zimbabweans through a 51% shareholding in mining ventures the goings on in Marange communal lands will make many progressive Zimbabweans hang their heads in shame. In the aftermath of the expiry of Kimberlite Searches Exclusive Prospecting Order (EPO) in March 2006, it appears that it became a free for all in the area.
A conclusion that can be drawn is that the responsible authority had no plan in place to protect the diamond claims once Kimberlite Searches had packed its bags. Further impetus to the random digging was provided when authority was given to the villagers to “mine” the mineral and sell it to the Minerals Marketing Corporation of Zimbabwe. There is money in chaos as the saying goes and that is exactly what we suspect has been happening.
As the ambuyas and their vazukurus were leaving their homesteads in Marange and other parts of Manicaland to join in the diamond rush, in the capital investors were busy switching from shares into the money market. And may be a few took their stock market profits and joined the trek to the new Eldorado to pick up a few gems.
As what happens when the governor of the Reserve Bank of Zimbabwe sneezes the stock market catches a cold. Three policy announcements in one month is surely a heavy sneeze and the cold is proportionally stronger, especially as the measures announced cause an indirect increase in interest rates. So after the handsome returns of 76,45%; 87,53%; and 114,06% chalked up in July, August and September, respectively, October saw the industrial index declining by 11,36% as investors thrice hit the panic button.
It is obvious that the above mentioned heady stock market performance attracted the attention of the monetary authorities who have always frowned upon the amount of wealth being preserved in the stock market. The governor first “struck” on October 9, which blow, although it felled the market, turned out not be the sucker punch. During the period from the 10th to the 17th the industrial index lost 19,73%, before signs of recovery started to emerge half way into the count to ten. A further and much heavier kick to the ribs was then delivered on October 23 in the form of Fine Tuning II.
This time around, certain financial institutions are said to have fallen so much in love with the 5-year Financial Sector Stabilisation Bond that they approached the Reserve Bank cap in hand asking for permission to subscribe for more than their set quota. The central bank duly obliged, increasing the threshold by five percentage points for all the holders of banking licences while that of asset management companies was pushed up by 2,5 percentage points.
Opportunity was also taken to unveil compulsory 7-year Economic Stabilisation Bonds (ESBs) whose features include a coupon in the first year of 550%, which progressively reduces to 10% in the final year after having passed through 350%, 150%, 75%, 50% and 25% in that order.
Commercial banks would be expected to hold 20% of balance sheet size in these assets, merchant banks 17,5%, finance houses, building societies and discount houses had their limits set at 15% while asset management companies had theirs set at 12,5%. The subscription deadline for the 5-year FSSB was October 30 and that for its 7-year cousin is November 17 2006.
This was an act of killing two birds with one stone. The ensuing scramble for deposits as institutions sought to fulfil their quotas saw short-term investment rates firming thus putting a damper on the recovery prospects of the stock market. At the same time, it enabled the central bank to siphon out a lot of liquidity from the market.
Fine Tuning III, whose major highlight was the increase in the threshold for the 5-year FSSB for all participants by a further 10 percentage points was unveiled on the eve of month end. The compliance date was set as November 3 2006, thus the jostling for deposits intensified as the stock market weakened further.
Earnings in the banking sector have not only become seasonal but also fortuitous as a lot now depends on when and how one is positioned when policies changes are announced. The period February to April proved to be very lean and rather perilous following a raft of monetary policy measures which saw some banks tottering on the brink of collapse.
The central bank then intervened by slashing interest rates on 91-treasury bills and administered the kiss of life to out-of-breath banks by way of CPI-linked one-year bonds with a biannual coupon. The tables suddenly turned and some banks started reporting monthly profits in excess of $2 billion. Come October and the central bank upsets the apple cart again.
By implication, commercial banks will now have only 20c from each dollar invested by a depositor to play with. Of the balance, 45c will be locked up in long-term FSSB and ESBs while 35c will in the form of statutory reserves. So in six months the sector has circumnavigated a full circle and is now back to where it was in March 2006 in terms of compromised profitability.
Furthermore, the first coupon on the stabilisation bonds is due around this time next year and who knows what inflation would be then. If the International Monetary Fund is right that the inflation rate will be in the region of 4 278%, then the performing asset status of the bond will be brought into question. The second concern is the amount of mismatch arising from the funding of a long-term asset with a short-term deposit. The interest risk inherent in such a book structure is unimaginable especially given the history of policy u-turns.
Previous policy instruments were easy to unwind should the consequences be unbearable. For instance, the hiking of statutory reserves and increase in interest rates can be corrected by reducing the reserve requirements and paying back the banks. If it turns out to be bad as mostly likely it will, what instrument will the central bank introduce to rectify the situation? The bet for those interested is what name the new instrument would be given.