Zimdollar skidding to unsustainable levels

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A MAJOR highlight of this week’s auction is the record value of forex transacted at US$49,1 million. This is the single largest weekly allocation since the interbank exchange was launched in 2019.

The level of forex exchanged is a game changing phenomena as it highlights the depth of demand and highlights possible implications to monetary stability.

Predictably the Zimbabwean dollar (Zimdollar) lost ground against the greenback, taking its losing tally to 15 straight weeks. The weekly depreciation rate has become very predictable and in the week under review the local unit lost 0,09% to settle at ZW$85,83 per dollar. The weekly decline despite coming in mild, was the worst in four weeks. The week’s loss brings the cumulative year to date loss to about 5%. This static looks compelling at face value given the relative losses of yester year, but a closer analysis of the market shows a market in distress. Here we look at some of the technical variables performance before giving a more comprehensive review of the market.

The chart depicts the varying bid levels on the interbank market. An understanding of these variables helps anticipate market direction.

The top bid rate came in at 91 down from 92 in the prior week. The low and lower acceptable bids moved in tandem closing the week at 83 a point up from last week’s 82.

The movement in the three variables shows a tightening range, which would typically posit the market as moving more and more closer to equilibrium and stability.

The narrow range of eight points is not the best the market has achieved in recent weeks and therefore, does not in view, show that the currency is stabilising.

Typically, a higher bid is unfavourable since it has positive impact on the exchange rate. Possibly, a surge in top bids represents a growing exchange rate. On the other side, lower bid maintains a constant trend at 82 since January 26, 2021.

The worrying question becomes that of how and when can stability be said to have been achieved. This question has been posited since the second half of 2020.

Since the revamp of the interbank market in June 2020, the margin of depreciation in formal trades narrowed significantly and by year-end the depreciation per week was contained below the 1% threshold.

The general interpretation of this performance would be that the currency had stabilised. This view is informed by the fact that a significant portion of businesses, particularly those in the formal space, accessed forex via the interbank and therefore would transfer these stable forex prices into their own produce and final product in the shops.

In our view, the face value interpretation of the currency dynamic based on its interbank performance is devoid of broader perspective. The two key variables which make the Zimdollar unique are that the currency allocation, although done through a Dutch auction, are largely controlled by the RBZ.

The RBZ accounts for about 30 to 40% of total supply earned through surrender requirements from exporters.

These surrender funds are acquired using a prior market rates, which in turn would cyclically have been informed by the central bank, given its supply muscle.

So critically, funds acquired by the central bank are “market based” in principle but in practice are premeditated. For the RBZ to maintain stability in the market, it would express same at discretionary levels and thus influence how the rest of the market acts. This phenomenon is rampant in the trading of equities.

Someone would argue that, if the RBZ cannot match 100% of the required demand, it would follow that other suppliers would raise their prices to levels that they feel fully compensate their forex value.

This intuition is not as practical in markets, particularly in a market where there is one dominant player. To clearly prove this, earnings released by exporting companies have repeatedly highlighted that there has been a loss in terms of forex surrendered and the magnitude of loss is anything between 10% and 20%.

To calculate the levels of loss, exporters would simply estimate the variance between the market rate and the parallel rate and use that to calculate the earnings lost.

If these exporters were agreeable to the prevailing rate at which they cede their forex or sell (because the rates are almost the same), they wouldnot account them as losses on earnings.

This phenomenon explains why the Central Bank has introduced a 5% incentive, a clear replication of the 10% export incentive, characterised by the bond notes of 2016.

That is there is market manipulation can therefore no longer be an argument given this background. Why would the RBZ manipulate the market?

This has been partially addressed above, in that the manipulation is done in order to cushion the value of the local unit, which if let to devalue in line with pure market forces would lead to a crush.

The RBZ, as does the government, argues that the economy has long been stable and fundamentals in shape. Herein lies the problem.

Fiscal stability is difficult to measure if the downsides on the short term counteract and cause some economic damage elsewhere. There has been growing pressure for the government to address the social services sectors, particularly in health and education.

These sectors together with many others, have led to a decline in aggregate demand and thus sharp contraction in the national cake. Consequently fiscal resources have narrowed in real terms. Despite the Zimbabwe Revenue Authority (Zimra)’s numbers showing growth in nominal terms, in real terms current income levels are grossly below, dollarisation levels.

The widening variance between the interbank and the parallel market shows an economy in serious trouble. The current margin of over 80% is worrying and therefore a ticking time bomb.

Given the skew of Zimbabwe’s economy towards informal sector, it is likely that most goods and services are adjusting for these price variances in currency.

This means inflationary pressure is still with us. Further the growth in reserve money is coming so fast and so high and the current week’s surge is at levels not seen ever before. This means pressure on forex will remain very high.

  • Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net