Auction market weekly review
THE Reserve Bank of Zimbabwe, together with the Monetary Policy Committee, signalled that it is giving up the fight to control the exchange rate and inflation.
In its latest sitting the MPC said the adverse inflation and exchange rate performances being experienced in Zimbabwe are as a result of perception by risk averse Zimbabweans still traumatised by yesteryear experiences.
It further said most of the inflationary pressure is stemming from global developments, particularly, the Russia-Ukraine war. The two countries are major suppliers of a number of agro-products as well as energy products, to the rest of the world.
The rate of inflation is now seen going back to the three-digit levels above the 100% mark, positing hyperinflation risks. The currency is also at the risk of collapse, barely three years after it was re-launched, on the pretext of sound fundamentals.
This week the local unit lost 4,17% on the auction market. This is the widest weekly loss since November 2021. On average the Zimbabwean dollar (Zimdollar) has lost 2,7% per week on the formal market since the beginning of the year.
Cumulatively it has pared 43% over the same period. The cumulative depreciation is a record, considering that over the 12 months between January 2021 and December 2021, the Zimdollar fell by under 30%.
Zimbabwe is thus witnessing one of the darkest economic times in recent times. The rate of currency depreciation is very steep and reflects weak underlying fundamentals, despite the Reserve Bank of Zimbabwe’s (RBZ) and government’s denial.
In this piece we explore what is at play in the market and what could possibly be causing the rate to run, risking a collapse of the Zimdollar and the economy with it.
The forex market in Zimbabwe has been unstable since its consummation earlier in 2019 and even through subsequent reconfigurations along the way.
The market has largely experienced volatility going through both periods of relative stability and gross fluctuations. Typically, stability followed periods of interventions, which came through some form of enhanced liberalisation of the market.
In all this, the market remained semiautonomous, largely controlled by the RBZ, which remains the biggest player on the supply side. Volatility at its worst has been ushered through higher liquidity levels in the economy (ZWL), weak underlying fundamentals, inflationary expectations and huge premiums to the parallel market.
Before the current volatility, the last notable volatility kicked in mid-to-late first half of 2020, before the June intervention. At the auction market’s worst, inflation levels climaxed at about 830% in July 2020.
Our view is that the weak performance of the currency is a manifestation of a weaker underlying economy. Our assumptions are that an economy, which although is projected to grow, is doing so at a disproportionate rate to the rate of growth in money supply, is weak.
In fact, the key drivers of broad money supply in the economy are the government's rising appetite for debt. Broad money supply has risen largely driven by budgetary imbalances, which are forcing the government to borrow on the open market.
These borrowings are in the form of Treasury Bills. Data by the RBZ shows that the volume of TBs issued swelled by over 300% between January 2021 and January 2022, while broad money supply grew by over 100%.
The ambitious ongoing infrastructure projects are demanding huge settlements of contractors, who in turn periodically glut the market with Zimdollars, while chasing US dollars.
This has become a huge source of instability. More so, these pressures are mounting, driven by volatility itself. Government’s expenditure to revenue projections is likely to be unmatching, given the difficulties around inflation projections in the subsisting environment.
It is, therefore, no longer true that Zimbabwe still enjoys a budgetary balance, given the huge debt that the government is accruing through TBs, reminiscent of yesteryear behaviour.
We now risk going back to 2018 levels, when TBs stimulated inflationary pressures and put a nail on the multicurrency regime. The BOP balance, touted by RBZ, is anchored largely on remittances expansion and exports growth based on firm global prices.
These variables are largely outside of Zimbabwe’s administration control. In fact the largest component of the BOP, which is external trade, continues to show a sustained net trade deficit position.
Although this position improved significantly in 2020, the 2021 levels were adverse and in line with the dollarisation levels. Imports are likely to pose the biggest challenge of the year.
We are likely to see the largest import bill the country has ever incurred since independence, driven by the sharp surge in the price of fuel, while between 2020 and 2021, hovered at historical low prices.
Further the price of imported food products, such as, wheat and maize are already at multi-year high due to the war in Ukraine, This again poses a huge challenge to the external trade. Imports of soya, wheat, maize and rice account for a significant portion of the import bill, while energy imports are the largest single imports for the country.
We are, therefore, poised for the worst external trade position in a very long time.
Remittances are likely to keep on a growth path given their adverse relationship with the state of the economy. Exports are also going to be anchored by risk aversion in light of global geopolitical dynamics at play.
PGMs are one of the biggest benefactors and hence driving export receipts for Zimbabwe-based producers. We, however, see the sharper surge in imports, countering the impact of growth in exports and remittances to drive the BOP into an adverse position.
This scenario dampens prospects for currency recovery. The RBZ is of the view that the higher levels of FCA balances are consequential to currency stability but this is not the case.
The growth in FCA indeed reflects strengthening underlying businesses or production for select players in the economy, which is positive.
However, once these funds are earned the discretion of utilisation is between the generators of funds and the banks housing the deposits.
Banks are holding on to these deposits for whatever reasons, but a rational mind will deduce that the goal of banks as profit maximises is prime and the only thing to hold back banks from utilising the funds through lending is the environmental risks.
It is too early for banks to assume the risk given that the market is still very volatile. The level of FCAs balances is thus of minimal consequence, rather the fact that they are growing is a positive indicator, but not an end in itself.
The levels of abuse of the auction market by both the government and the private sector is gross and it is thus inconceivable that the market will ever reach equilibrium.
It is even more frightening as we head towards elections and the farming season, which are highly funded by the government.
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