Interbank weekly review

By Respect Gwenzi

On the interbank market, the Zimbabwe dollar fell by 0,1% to settle at 85,5 to the USD. The decline, although mild, completes 11 straight weeks of losses over which the local unit has shed 1,2%.

The Zimdollar has pared by 4,4% since the beginning of the year and is widely quoted as being stable. This deduction is debatable and depending on the angle one analyse it from, differing perspectives emerge.

A majority of companies, especially those involved in the production of goods, have had access to the interbank market and thus deduce that the currency is stable based on the allocation they have secured through the market.

Moreso, the amounts transacted on the market have been significantly improving and now averaging over US$40 million a week. This is a significant upsurge compared to historical averages as well as averages required for importation, using historical benchmarks.

It is a fact that the interbank market has been pushing more volumes and thus its performance can be used as a proxy for stability.

In the week under review the top bid came in at a stable level of 90, which is the 6th week running. Likewise the lower and lower acceptable bid came in at a stable level of 82,  where it has been since January. A narrowing range which is the difference between the top and lower bid, reflect on a possible stabilising market.

A stable but wide range between the lower and top bid, may point towards possible market manipulations and imperfections.

We believe that in a market where forex is still scarce, the top and lower bid should tactically move to reflect positioning ahead of allocations.

We therefore do not see the stable lower and top bid outturn as a good indicator. High predictability on the availability of flows is one big factor which could cause inaction on the two bids.

We previously highlighted that in a market where some players have insider information on the level of supply, lower bids can potentially be sticky at a certain level.

Now with a stabilising top bid, it may also point to an increase in the level of insider information dissemination, or more bluntly market fixing.

These points are important to highlight because of the gap level between the interbank and the parallel market, which is causing serious concerns in the market.

The parallel market rate is now reflecting a premium of above 50% to the interbank market. Some have argued that the interbank rate needs to be freely floated to close the gap and perhaps restore congruency.

Our view is that manipulation of the exchange rate is happening but at a more sophisticated level.

We believe that the RBZ controls the exchange market given positioning as the top supplier of forex.

The Bank accounts for the majority of funds exchanged on the weekly auction system, having amassed same through the surrender portion.

As in any market, a player with the biggest market share, can influence price and so does the RBZ. Having amassed funds at suboptimal price levels, the bank tactically uses same to suppress rates and offer lower, thus burning those with higher bids.

This means that in successive trades, upper bids will remain suppressed and the average weighted exchange rate will remain lower.

The challenge with this is that the highly informalised Zimbabwe economy, uses the parallel rate as a proxy for pricing products.

Now why is the parallel rate moving. It is moving because it is not subjected to controls as is the formal rate. It is also highly responsive to money supply dynamics in the economy.

Since the beginning of the year, base money has been growing exponentially although falling within the RBZ and MPC targets. We see the injection of close to ZWL$5 billion as out of sync with economic growth.

We see growth at 3% and not at 7% which the government projects. The danger of growing base money faster than the growth in economic activity, is that inflation may rise or the exchange rate may weaken.

The government has tripled its expenditure target for the year and the key drivers are wages and vaccines as well as agric support. These expenditures will likely push costs up and destabilise price stability.

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