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Interbank forex currency market review

IN the latest foreign auction trade on the Interbank Market, the Zimbabwean dollar fell by 0,33%, its widest loss in eight weeks.

Respect Gwenzi Financial ANALYST

Last week’s decline of 0,16% was also seen as worse-off on a five-week scale. The emerging widening losses reflect on growing pressure as possible near term currency volatility.

Over the 12 trading weeks in 2021, the widest weekly loss was seen at 0,84%, a magnitude, which could be beaten at the current rate of currency depreciation.

Cumulatively the Zimdollar has lost -3,4% since the beginning of the year in formal trades. The formal market remains the closest proxy to fair market value estimation given the volume of trades sailing through weekly as opposed to the parallel market. Over a 12-week period from the beginning of the year, the local unit lost value in 10 of the interbank weekly sessions.

The chart shows a historical computation of interbank rates per session since January. It shows the highest bid level per session, the lowest bid and lowest acceptable bid level. The lowest acceptable bid level is the threshold considered for purposes of allocation.

The chart, more importantly shows the weighted average rate. This refers to the rate arrived at after considering each buying point in relation to volumes of trades.

From the chart, the level of top bids continue to show stability at around 87, now running for the sixth week. The average rate however shows a widening loss in magnitude, particularly over the latest two auctions.

The lower bid and the lower accepted bid have moved in synchrony over the last seven weeks. Synchronisation of the lower bid and the lower accepted bid reflect on how all bids posted are being satisfied (matched) through allocation.

This is further demonstrated by the rate at which total bids receive allocation. Since the beginning of the year, only two trading sessions saw allocations lagging demand (bids). What is significant to read from the stagnancy is the demand levels being matched by supply. Since the total bids represent all the funds requiring forex allocation, a 100% supply essentially cushions the currency from drastic losses.

Further review of the data shows that cumulatively, the auction system has supplied US$424,8 million since the beginning of the year. This deduces to an average weekly allocation of US$35,4 million per seven-day week and a daily average of about US$5 million. Assuming a five-day trading week, the allocation would deduce to US$7 million weekly allocation. For 2019, RBZ reported that daily allocations for a five-day week, averaged US$2 million.

This means average supply (trade) levels on the interbank have improved by 300% between 2019 and 2021. 2019 is significant in that, it is the year the government undertook currency reforms which consequently ushered in the Zimdollar. Following that, a forex market was officially unveiled, but with significant manipulation by the RBZ, the market did not attract sufficient trades; hence the low trading activity levels.

In turn, the low flows hurt industry as companies failed to import critical raw materials and capital goods. The net results reflected in a GDP decline of -10%, further compounded by drought conditions and austerity.

Last week, Zimstat released external trade data for the January 2021 and the data showed some worrying trends. Exports, which are a major source of forex, tumbled by 42,1% to US$282,9 million, the lowest level since April 2020.

The export level was 61% of total imports which came in at US$460,3 million. The total import level (as seen through an export lens) suggests that imports were only able to cover 61% of exports, whereas these imports averaged US$20,9 million a day assuming a five-day week.

Going by the interbank data, it would show that the interbank was able to finance 35% of total imports for January. A higher export figure says the December figure of US$488,3 million would have given a more favourable interbank market import financing level of above 50%.

While the variance is partially offset by some exporters importing own goods, the level of variance between the exports and the interbank weekly flows reflect on underlying challenges not readily visible in mere interbank data analysis.

So who is funding the gap? Since data on own imports by exporters is not readily available, a look at Zimplats’ financials (the biggest exporter), gives an indication which can be construed as close to average.

In 2020, Zimplats’ costs of materials, assuming 100% imports were seen at 15,3% of sales (exports). Capex would add another 15% to give a total of circa 30% of total sales.

Given that minerals account for over 65% of total exports and that Zimplats is the major contributor, these statistics could give us a reliable estimate.

So if exporters’ value of imports is about 30% of their sales it would follow that in January 2021 this would give an estimate figure of US$4 million a day on a five-day week, throughout January. Adding that to the US$7 million in interbank average daily flows would give a total of US$11 million a week. This would result in a variance of US$ 10 million. Now the last line of defence would be remittances, which in 2020 raked in about US$1 billion, the highest figure to date. This total deduces to about US$4 million a week, thereby reducing the variance from US$10 million to about US$6 million.

While some off market have been going on, we believe this remaining variance is by and large satisfied by the parallel market, at least to the tune of 50%, which is about US$3 million a week.

The growing parallel market premium now seen at a close to 50% is a very worrying phenomenon. The gap was at its lowest in October (25%) before rising in November as shown on the chart above.

The parallel market mid-rate is now seen at ZW$120 to the US dollar. This would imply there is growing demand for forex outside of the formal market. The question will be why.

Some of the imports are not priority in nature and hence the chances of getting allocation may be slim. This is true of most informal traders in the economy.

Given an economy tilted in favour of the informal market you would expect an allocation of at least 50% and 60% going towards the informal sector given that the sector’s contribution to GDP is seen at those levels.

The allocation list by the RBZ shows that SMEs are getting less than 15% of total allocation flows. Another challenge is the government’s hand in the process of allocation. Given that the RBZ is the biggest supplier through the surrender portion, the bank can determine the market rate. This essentially means it can suppress the rate and crowd out other players, resulting in low supply levels.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net

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