The Herald (Harare)
Bright Madera
6 November 2009
Harare — THE introduction of the multi-currency system has seen a reasonable increase in liquidity in the money market giving impetus for the revival of long-term debt capital.
However, most of the deposits have been demand and time deposits of less than 60 days.
On the back of improved liquidity, analysts and players on the money market said there is a need for such capital expenditures as retooling, plant and machinery refurbishment, expansion and general infrastructure financing.
Money market investors have been restricting their investments to the short end of the market due to prevailing fixed interest rates at a time when they can not project the medium to long run curve with certainty.
Financial institutions remain incapacitated to play their intermediary role on the economy, resulting in depressed activity on the money market.
Analysts said the debt capital market has remained dormant at a time when it is key to mobilising the much needed medium to long term finance.
"There is a need for floating rate instruments, which would allow investors to get returns (payoffs) in line with prevailing returns in future".
Such instruments may be bonds, bills or structured notes whose pay offs are with reference to a generally agreed interest rate, which reflects changes in conditions.
A reference rate is a rate that determines pay-offs in a financial contract and it is outside the control of the parties to a contract.
It is usually an average borrowing rate determined through some bankers association, where member banks submit their preferred interbank borrowing rates and an average is compiled.
Member banks will be guided by the agreed operational modalities of the association.
Rates submitted by banks will be based on their perception of the cost of funds in the interbank market, cost structures, policy rates, and projections of the future yield curve and other variables.
Across the world, various reference rates are used for example London Interbank Offer Rate (Libor) in London.
The Libor is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale market.
The Libor is calculated by Thompson Reuters and published by the British Bankers Association.
In the case of Zimbabwe, the Bankers Association of Zimbabwe can take up such a stance if the country is going to see the revival of the debt markets.
Inadequate foreign currency inflows to rejuvenate the economy has negatively impacted on the money market, whose supply side has been deflated by the liquidity challenges persisting against a huge demand for funding from Government and industry.
On the other hand industry's appetite for funding is strong, crying for medium to long term funds for capital expenditure.
Meanwhile, rates on the local money market remain exorbitant, relative to those prevailing on regional and international markets due to the protracted liquidity constraint that continues to afflict the economy.
Local bankers' acceptances with 30 - 90 day tenor are being quoted in the range of nine percent to 15 percent.
This is in contrast to the near zero libor rates prevailing on the international markets, which reflect the suppressed lending rates that exist in international markets.
The high lending rates on the domestic economy translate into high cost of capital for the local industry that is in dire need of recapitalisation following the transition to the multi-currency environment.
Be the first to Write a Comment!
Copyright © 2009 The Herald. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com).
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
