By Respect Gwenzi
This week’s auction saw the exchange rate move closer to the psychological 1:100 mark as the Zimdollar shed 1,87% against the US dollar. the local unit continues on a record downward spiral which has seen it pare 12% against the greenback over the latest five trading weeks.
The rate of currency depreciation on the auction market is the worst since August 2020. The period between June and July 2021 marked significant volatility as the market reorganised following adjustments to trading mechanics.
Between August 2020 and June 2021, the auction market enjoyed relative stability which was widely hailed by industry and business in general.
The fragile stability was rattled by huge movements in the parallel market, particularly in September.
The parallel market premium at one point neared 100% to the auction rate. We viewed this as symptomatic of an ailing underlying auction market and not as problem by itself, a view we expand later in this weekly review.
The chart shows movement in different bids on the market, a reflection of behaviour. The top bid having moved above the 100 point mark a fortnight ago, swelled further to settle at 120, in the week under review. The movement between 100 and 120 over a two-week period, is the widest in absolute terms since June 2020.
The lowest bid, at 96 was a point ahead of the prior week, while the lowest accepted bid at 95, was five points up on the prior week.
The resulting narrow margin between the lower bid and lower accepted bid, meant the net outcome in terms of allocation would have to reflect higher allocation satisfaction rates. Based on the latest four-week trend, we expect the lowest accepted rate to move quicker than the lowest rate in the next session.
The growing margin between the average rate and the top bid is worrying. It reflects on-going strong demand for the US$ at even higher asking levels. In isolation the trend shows the direction the market is taking, which is southwards.
The result given a 100% bids satisfaction rate, may however show that the larger pool of bids was concentrated on the lower end of the market (lowest bids), hence dampening the average rate.
Overall, at the rate the average rate is moving, inflation outlook is worrying bleak. Producer prices in the rate of exchange of 120, will soon move up higher to about 140 and at these levels, huge inflation gallops will be experienced.
Already inflation outturn has worsened since the September sharp fall in parallel rates, given that a section of the market reference the parallel rate for pricing of products.
Given that over 50% of the food requirements are now satisfied by local industry, with access to interbank funds, bigger jumps on the auction market will result in rampant inflation. We anticipate that inflation will jump at higher rates for the remainder of the year.
On the relative chart above, the rate of parallel market premiums is declining as auction rate moves lower. The RBZ targets a short-term premium of about 50%, from the present 70%. This is achievable given the rate at which the auction rate is declining, but rising US$ demand going into the end of the year may impact that goal.
At the 50% premium levels, the market will still have arbitrage gaps, which promotes serious rent seeking as a trade in the economy. The formal market exchange rate depreciation shows that the rate of interbank loss has widened over the last five weeks. The quicker rate movement is equally a response by the Bank to wider gaps to the parallel market.
Our view is that the economy is in an imbalance. The restructuring exercise pursued by government is not sustainable and therefore cannot support currency stability. There is pressure on government’s cost base, given the nature of budgetary rebalance pursued, which focused on wages suppression and not reformation of entities reliant on government budget. The growth in exports and remittances is largely a function of exogenous factors, which has ability to change without the consent of local authorities.
What is important is to build a sustainable macro framework characterised by lean and efficient structures, equity release, spinoff and disposals. On currency, confidence is very low, while base money growth is ahead of sustainable levels, given the GDP growth target.
- Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — firstname.lastname@example.org