16 January 2013

Zimbabwe: Appetite for Money Remains Weak

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Zimbabwe financial institutions continue to tread cautiously on the money market as banks stay closer to their cash due to liquidity challenges facing the economy and the differences in interest rate views between investors and the authorities.

As a result, just like the previously issued Treasury Bills, the recent effort by the Infrastructure Development Bank of Zimbabwe (IDBZ) to raise US$30 million for Zimbabwe Electricity Transmission and Distribution Company (ZETDC) was met with limited success.

The three-year bond, with a 10 percent fixed rate, had a total subscription performance rate of 59,41 percent. Only 53 applicants worth US$17 824 were received for the bond. The bond issue was in line with the IDBZ's core statutory mandate of mobilising long-term capital from both domestic and external sectors to support infrastructure projects. The funds are earmarked for the purchase of electricity prepaid meters. It had a principal repayment period of three installments at the end of each year.

Historically, bonds have played a significant role in financing Zimbabwe's infrastructure projects. The construction of the Kariba Power Station in 1950's was financed through the issuance of bonds, the Kariba Bonds.

Low yields

Lending is one of the core business of almost all banks thus where returns are attractive, hefty investments are injected. While a 10 percent coupon might look attractive especially when viewed in comparison with the bleak stock market performance and the prevailing inflation rate, there are better rates elsewhere especially the money market. The current negotiations between banks and the central bank on interest rates and bank charges at the behest of Tendai Biti, the Minister of Finance may see the money market slowly becoming unattractive. Government's attempt to raise money through the issuance of Treasury Bills suffered the same fate as the central bank has been pushing for lower rates by rejecting aggressive bids. While the tenor of the Treasury Bills (91 days) was eye-catching given nature of deposit, the success of the issue was fairly guaranteed.

However, after the rejection of most bids in first auction, we expect bidding to be fairly conservative in the proceeding tenders.

Liquidity squeeze

Since the introduction of the multiple currency system in 2009, the financial sector has faced liquidity challenges with transitory deposits making the bulk of bank deposits as the banking public wants to stay close to their money due to confidence factors. As a result, countable banking institutions are extending credit facilities going beyond one year. The majority of banks in the financial sector are advancing loan facilities that mature within a year.

This has been largely attributed to the short-dated nature of the liabilities that are financing the credit facilities. More than 90 percent of the total deposits in the banking sector are short-term in nature, a situation that makes it risky for banks to finance long-term assets using transitory liabilities.

This explains why banks have been unable to extend meaningful credit beyond 90 days as they have to be matched with deposits. As a result, investors prefer short-term investments with high interest rates. The long-term paper will continue to receive lukewarm response from investors as long as the liquidity situation does not improve.

With the prevailing liquidity challenges in our economy it will be difficult for the bonds to be fully subscribed. For such financial instruments one would say we are semi-ready, given that only 10 percent of all bank deposits are long-term. A huge proportion of deposits are short-term in nature. However, the nearly 60 percent subscription rate on the IDBZ bond is a good sign that our capital market is slowly coming back!

Meanwhile, statistics from the Reserve Bank of Zimbabwe (RBZ) show that total bank deposits increased marginally by 0,26 percent in November 2012 to US$3,82 billion up from US$3,81 billion in October. On an annual basis, this represents growth rates of 23,8 percent for deposits and 31,8 percent for loans and advances compared to the annual inflation rate of 2,99 percent for the same period.

Lending to the private sector increased by 3,4 percent from US$3,37 billion in October to US$3,49 billion in November 2012.

According to the RBZ private sector loans and advances were mainly utilised for inventory build-up (37,6 percent) as well as recurrent expenditures (32,9 percent). Loans and advances utilised for fixed investment activity have remained low, accounting for four percent, while pre and post shipment financing accounted for 2,4 percent of total loans and advances.

Lending by banks has largely been short-term in nature and towards the financing of recurrent expenditures. This explains why banks have been trying to access lines of credit from regional financial institutions like PTA Bank and African Import and Export Bank as the funds are relatively long-term and cheaper.

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