adminA price discovery process is a mechanism of determining the price of an asset through the interaction of buyers and sellers on the market.
Since the adoption of the multi-currency system in February 2009, the price discovery process has not been functional on the local economy.
However, the issuance of agro-bills by AMA early this month is anticipated to enhance the price discovery process by providing guidance on the pricing of fixed income securities on the local market.
“Through the convergence of demand and supply units in the $100 million agro-bills auction system, results of the tenders are expected to give a clue to prices of securities on the local money market.
“This should provide a platform for prudential decisions to be made as anticipated cost of capital in an economy is a critical component in the economic decision-making process,” Kingdom Financial Holdings Limited (KFHL) said in a commentary.
As a result of the malfunctioning of a price discovery process, the financial institution said, price distortions on available capital have been rampant on the economy partly due to the liquidity crunch and the skewed distribution of the available liquidity.
“Non-existence of open market operations by the Reserve Bank, which are an effective monetary policy tool utilised by central banks to control short-term interest rates on the economy, has seen short-term interest rates determination being largely influenced by other economic agents’ demand and supply factors.”
KFHL said as a result market watchers would pay greater attention to the $100 million agro-bills tender.
The bank said with the $100 million agro-bills coming on board immediately after the issuance of the $20 million AMA bills for soya beans, an analysis of the results of the two tenders was expected to provide insight into the expectations of demand and supply units on the economy.
The offer for the bills was extended from 9 to 15 December for the $50 million guaranteed by Government and 21 December for the other half guaranteed by CBZ.
Similar to the previous bills issued by AMA, the bills carry a prescribed asset status, a liquid asset status and are tax-exempt.
Meanwhile, KFHL said in the $20 million AMA bills, the issuer managed to raise $4,5 million out of total bids of $17,6 million with allotted bids going at a weighted rate of 10,67 percent.
“The high volume of rejected bids indicates the unwillingness of deficit units to pick up expensive liabilities given that the $4,5 million was allotted at an average weighted rate of 10,67 percent against a highest bid rate of 25 percent and an indicative approximate average bid rate of 16,75 percent,” said the financial institution.
Online Reporter