Average trade per week gone down
It took the auction market just four sessions to move from 400 to 500, that is in terms of the exchange of a single US dollar to the ZWL.
This is the second fastest pace of depreciation between a range of 100 points so far this year.
The Zimdollar extended losses easing by 5% to settle at 521,3 against the USD, this week on the auction market.
Cumulatively the Zimdollar has pared 20% month to date widening its year to date loss to 80%.
This is now the worst performance in any year, by the Zimdollar since 2019. The pace of depreciation has picked up in recent months in response to market changes such as the interbank rate referencing, which is now used to inform the successive auction rate.
The interbank rate has a degree of independence, given that it is derived from trades between private players and banks.
However as highlighted last week, the interbank still has limitations which deter effective price discovery and these include the relatively small value of transactions, which in turn is informed by caps put in place by the RBZ.
A total of 595 bids were received on the auction market and of these 21 were rejected.
The total value of US dollars transacted on the auction totalled US$18,1 million, which was a 9% improvement from the prior week.
It is worth noting that the average trades per week has significantly gone down over the recent months. In 2021, the average trades per week came in at US$40 million which compares to an average of US$28,3 million, year to date. The weekly average has even gone down below the US$20 million mark, having averaged US$18,9 million per week over the last four weeks. The decline in average values traded is a reflection of entrenching dollarisation in the economy, which is now very visible everywhere but on paper ( law).
According to the RBZ a total of US$3,78 billion in foreign payments have been made as at June. This translates to an average of US$630 million per month. This implies that the auction is accounting for only 19% of total foreign payments in the country.
The remainder of almost 80% is directly funded by either exporters or local companies generating forex through foreign currency sales. This dynamic explains the sharp decline in foreign exchange values through the auction by almost 50% between 2021 and 2022.
While it has historically been the case that direct forex receipts account for a significant portion of imports and foreign payments, the level of tilt has gone to the extreme end and in favour of direct payments. This trend is informed by an expanding dollarisation and growth in exports and remittances allowing for direct importation.
We estimate that the economy is at least 60% dollarised and that the level of dollarisation will increase up to 80% by year end. Government, which is the biggest consumer in the economy, is recalibrating its settlement model to contractors and has already begun making payments in USD for select contracts previously payable in local currency. The pressure is however likely to mount going forward as civil servants demand full salaries in foreign currency.
While the government does not appear to be changing tact soon, there are chances that this could be a possibility ahead of a crucial election in 2023.
Since their launch a month ago, gold coins have attracted significant demand. It is now believed that a total of 6000, 1oz gold coins have been issued and sold since July. These would effectively mop up about ZWL$4 billion assuming 80% of sales were in ZWL. A major challenge remains that the coins are sellable after 6 months, a phenomena which may limit their demand going forward, coupled with the need to retain highly liquid assets given the short-term nature of local deposits. If at a date not so distant, demand is outstripped by supply (recurring sales lag demand) the net is that the gap emerging will have to be satisfied through new money.
The resultant scenario is equivalent to a pyramid scheme scenario. These stress test can only be done at the point where first batches of the coins are sellable and that in about five months’ time. Likewise, a determination on the stability of the currency can be fully made over a sustained period of at least six months from now. That is when the full impact of gold coins and other liquidity mop-up efforts can be established.
This point is particularly true because of the movements being witnessed on the parallel market. The parallel market has failed to breach the 800 mark since late June and its average is trending lower in the region of 720 to 750 per USD. This means the ZWL has managed to hold its own on the parallel market, which is a truer measure of its value compared to the auction. Most prices in the highly informalised economy are pegged against a parallel market USD equivalent and hence its movement is critical. The stability prevailing on the parallel market and the dearth in demand on the respective market coupled with a higher level of USD liquidity undemanded for on the auction reflects shifting fundamentals.
We have only questioned the sustainability of the methods used in stabilising the currency and accept that at present there is a semblance of stability, which we are however worried may not be sustained into the future.