Auction trading system outperforms expectations

FOLLOWING the recent introduction of the foreign exchange trading system on June 23, 2020, the market sentiment was mixed. We predicted that the authorities had adopted the correct approach and that this system would bring some order into the market. We argued that stability would result from the predictability of the local currency exchange rate.

There is an apparent new variable on the Zimbabwean economic scene which is negative expectations.

While the introduction of the auction system was the correct route, it was met with negative expectations that resulted in a discernable resistance bordering on cynicism even from some large corporate organisations.

The system was launched amid great doubts from some players with some showing clear signs of resistance to it and kept on pricing goods at the parallel rate.

This has been most prevalent in the retail sector.

It was argued that the system would prove unsustainable and these sentiments arose from the country’s previous experiences during the era before dollarisation in 2004.

However, to date, the new system has performed superbly and it is important for the market to accept the reality that other economists had anticipated.

The authorities must be applauded for constantly improving the quality of information released after each auction.

At the onset some important data such as the number of applications received, applications rejected, and the reasons for such rejections was not published.

As the system develops, such information is being added onto the weekly bulletins.

This is a commendable move as it eliminates doubts through making the system very transparent.

As per expectations, while the highest bid prices were very high — close to the parallel rate of 105 at the first auction, that rate has gradually fallen over the last four auctions and by July 14, the highest bid rate converged with the parallel market.

It means the highest bids were now at the same level as the parallel market rates, which itself was coming down.

On the bottom end, the lowest bid rate moved from the official pegged rate of 25 at the beginning and nudged up following the weighted average auction rate.

A convergence is apparent as illustrated by the narrowing gap in the table above which should be exciting news for both the market and the authorities.

The market is responding well. Socially we expect this benefit to start filtering through by way of stable consumer prices.

The dream for low inflation is not too far-fetched after all, provided the authorities maintain steady the current conditions.

The authorities are encouraged to hold steady with supportive actions.

The auction has mopped up about $3,6 billion liquidity from the market and when this is considered in conjunction with current reserve money of about $12 billion together with the fact that the country’s expected foreign currency earnings from exports are above US$6 billion, our projection is that these rates should converge and tapper off around the 70s range before possibly falling to the 60s range as a unified rate.

Odds are now in favour of the Zimbabwe dollar. However, this can once more be wiped off if the authorities lose sight of the money supply.

For now its thumbs up to the authorities. It has been good work so far. ◆ Misheck is a former expatriate banker once based in several SADC countries and currently works as a corporate advisory services consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society. He can be contacted on ( 263) 777052004/ 712808140/ misheckugaro@hotmail.com /Linkedin: https://www.linkedin.com/in/ misheckugaro /Twitter: @twitcagan. com