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Interbank market needs to be saved


THE Zimbabwean dollar (ZWL) continued its downward movement against the greenback, stretching losses to 0,1% up from the 0,003% depreciation recorded on July 2021’s final auction.

August’s opening trade extends 2021 third quarter (Q3)’s depreciation trend to five consecutive weeks and given the seemingly calculated incremental losses recorded in the formal market and growing market liquidity, further losses are expected to carry on over the remaining weeks of the quarter, but at a stable rate.

Bidding parties have had a measure of confidence, when making weekly bids for purposes of importing goods or remitting funds, due to marginal changes in the weighted average rate.

Additionally, at an average allotment volume of US$40 million weekly, bidders enter weekly auctions with relative certainty that their requirements will be satisfied.

In the week under review, 91 came in as the top bid, slightly above the nine-week stagnant mark of 90. Both the lowest and lowest accepted bids have held steady at 82 since the beginning of the year.

Typically, a narrowing range between peak and lowest allotment bids would reflect a stabilising market. However, we see a stable but wide range between the divergent metrics (top and lower bid) as a sign of underlying market imperfection.

The lower bid has remained very stable stretching over four months. The lower bid has also traded at the same level to the lower accepted bid over most of the duration. The top bid has been volatile but for most of the time between May and July, it has been stable. A more open market would see these rates moving back and forth in line with other market dynamics.

A stabilising top auction bid cements the point of predictability, where the bid range appears to be framed, almost to the point of being fixed.

The formal auction’s parallel counterpart has, however, continued to rise, with reported premiums hovering above the 50% mark and showing no signs of declining. The widening variance is a clear sign of an inefficient market and a market, which is moving towards failure.

As the central monetary authority and the economy’s top forex supplier, we believe the Reserve Bank of Zimbabwe (RBZ) has significant influence on the auction system and the path it takes.

Assuming that in successive weekly trades, upper bids remain suppressed and the average weighted exchange rate will remain low, we expect further widening of the gap between the interbank and the parallel market.

These trends are emanating from the fact that the RBZ as the custodian of forex ceded by exporters to the tune of 50%, controls supply of currency and this essentially gives the Bank the muscle to determine price. Controlling the supply and the exchange market, gives the Bank unfettered power to premeditate the auction price.

In a fully market-driven scenario, trades are conducted throughout the day on each and every day of the week. More-so these markets are decentralised and automated making them universally accessible.

The full liberalisation of the Zimbabwean dollar will reduce the prevailing premiums but at the cost of value.

Liberalisation given the given state implies devaluation of the currency at an increased scale, a scenario authorities fear will lead to price spiralling.

The key fundamentals undertaking is to appreciate that markets follow fundamentals. It is not mere speculation that the parallel exchange is trading at a premium of 60%, it reflects on demand. The demand for USD is higher that the supply.

The supply in turn cannot be ascertained only from the standing nostro balances which are now estimated to be above US$1,5 billion from US$1,2 billion a few months back.  The growth in nostros signifies growth in exports but may also highlight low utilisation of these balances by exporters. Since the scrapping of the 60-day moratorium, exporters now have more liberty in terms of managing their funds.

Low utilisation reflects on the environment. The general view will be that exporters are holding back on expenditure that is of capital nature given the long-term consideration at play.

A bullish outlook characterised by increased demand and GDP growth, would have seen exporters scaling up their capacities and drawing down on the nostro positions. In short, given the current and projected economic and particularly currency outlook, exporters consider it better off to hold on to a stronger currency (USD), than the ZWL.

A prudential management of the fiscus and monetary sectors gives only temporary stability. Over time, growth demands investments and this in turn demands liquidity. The colour of the liquidity is however important, it has to be earned or rather sourced from non-inflationary sources.

Since the beginning of the year, base money has been growing exponentially but has been falling within the central bank and MPC’s targeted range.

Unbudgeted injections of money into the economy continue to be a pain point in the pursuit of market stability. A risk related to growing base money faster than growth in an economy’s activity is that inflation may rise or an 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 agricultural sector 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

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