8 November 2012

Zimbabwe: Treasury Bill Support War - Banks Caught Between a Rock, Hard Surface

The Reserve Bank of Zimbabwe's US$30 million treasury bills tender failed to attract takers with the Central bank rejecting all bids tendered. The tender received the lowest subscription rate of 28,8 percent as US$8,65 million bids were received. The highest rate tendered was 12 percent whilst the lowest rate was at 8,5 percent. The 91-day treasury bills tender had been expected to get a better response from banks given that it came after the Minister of Finance had just read the riot act to banks threatening to introduce Negotiable Certificate of deposit if the banks continue to shun the paper.

On Saturday (03/11/12) the Finance Minister Tendai Biti gave banks an ultimatum to support the RBZ's Treasury Bills (TBs) or be compelled to do so through negotiable certificates of deposit. The minister made the call after most of the banks snubbed the government paper last month. The lukewarm response to the first three tenders that had attracted subscriptions of just above 50 percent has irked the monetary authorities given that the same market players were lobbying for the issuance of the paper to activate the non-functioning interbank market.

During the Zim dollar era, the RBZ, through a statutory instrument, would force banking institutions with excess funds to participate in TBs tender or place with other banks by committing them into a zero interest rate non-negotiable certificate of deposit (NNCD). Through the statutory instrument, liquid banks were therefore compelled to place their funds with other banking institutions in order to avoid having their excess funds confiscated into the costly NNCD. Crafting a statutory instrument designed to oblige banking institutions not to hold idle funds on their balance sheets can complement other non-cohesive measures to prop up activity on the interbank market.

The directive has left banks that were holding huge cash reserves due to non active interbank market in a fix. In a normal economy, all banks work in unison (inter-bank market), making it possible for the financial system in the country to operate efficiently. Banks with excess liquidity assist those in deficit positions using TBs as security. In addition, the central bank, as lender of last resort, accommodates banks in deficit by offering them overnight funds secured by TBs. In the absence of the interbank market, any bank facing liquidity mismatches had to solve the problem alone as the troubled institution would be unable to approach other players due to the absence of security. This had been compounded by the fact that RBZ does not have adequate funding to play its lender of last resort role.

The TBs are expected to achieve, among others, the following: raise funds to enable Government to smoothen its revenue and expenditure streams under the current cash budgeting system; assist in reactivating the inter-bank market; unlock liquidity trapped in some of the banks due to lack of acceptable collateral security for inter-bank trading; reactivate the money market by reintroducing one of the money market instruments (TBs); benchmark the pricing of other financial securities; assess expectations of the market on inflation and output outlook; and, provide an additional investment instrument.

However, despite these noble objectives, one of the possible downsides of issuing TBs is the temptation by Treasury to engage in excessive borrowing, which is against a strict cash budgeting framework. Another downside is the inability by the Monetary as well as the Fiscal authorities to conclusively attend to RBZ's debt challenges and capitalisation that has attracted an unprecedented credit risk on the institution which points to conditions of future default on issued Treasury bills. Thus raising the possibility of rollovers as was the case with gold bonds which the Apex bank failed to redeem upon maturity. Instead they have rolled the bonds over prompting operational problems for the gold miners.

These bonds were issued to gold mines for unpaid gold deliveries to Fidelity Printers & Refiners, a subsidiary of the RBZ. The Special Tradable Gold-backed Foreign Exchange bonds were issued in January 2009 with a tenor of 12 months and an interest rate of eight percent. Few mining houses managed to sell the bonds to the banks and pension funds to raise liquidity for working capital. Many prospective takers of those bonds on the secondary market shunned them because they were worried about the creditworthiness of the issuer.

Meanwhile, interest rates on the local money market softened significantly following the introduction of all treasury bills by the central bank. The Reserve Bank of Zimbabwe (RBZ) finally accepted bids for the 91-day TB on Friday (26/10/12) at an average coupon (interest) rate of 8,51 percent.

Reflecting this development the 30 to 90 day investment rates retreated to the 10 to 13 percent range from the previous peak levels of between 15-18 percent. Annual lending rates also softened to between 12-15 percent annually from previous averages of between 18-25 percent.

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