adminTHE recent monetary policy statement (MPS) by the Reserve Bank of Zimbabwe (RBZ) offered some glimpses of their plan to ease the liquidity challenges being faced by the financial sector of the economy. In this document were some welcome developments, most importantly, the banning of future insider loans and the regulation of existing loans with the intent of not continuing to roll them over.
The statement further went on to state its plan to recapitalize the RBZ, but offered no real certainty for where the funding would come from.
There is currently the Afreximbank facility for US$100 million dollars, which is going towards attempting to resuscitate the interbank market.
However, it is important to remember that Afreximbank is simply offering a line of credit to the interbank market and using the RBZ as its vehicle. There is no plan yet of injecting equity into the Central Bank. Funding for the recapitalisation aside, the RBZ proposes to start performing its lender of last resort function and at the same time, try to bring down interest rates through their indicative yield curve based on treasury bill yields. Most of what was said in the MPS was very good policy in theory but in our opinion will be extremely difficult to implement.
For example, the RBZ proposes to lend to banks overnight to meet liquidity requirements, allowing banks to reduce their risk of not being able to meet their short-term obligations to depositors.
In this case, the bank proposes the use of an overnight highly collateralized liquid loan. As I alluded to earlier, this is great in theory but implementation will be challenging.
This is because of the following: Firstly there is only US$100 million available and this isn’t very exciting considering there are over US$4,7billion in deposits. Secondly, according to the MPS, the only collateral that will be accepted as adequate collateral will be a Treasury Bill (TB).
Is there any incentive to lend to government at the proposed interest rate structure, drain liquidity further by lending this money, all in order to get access to the US$100 million in funding? What rate is the RBZ going to charge? This information is said to be coming out by the end of March. This brings me to the proposed indicative yield curve.
The yield curve proposes a 6,6 percent interest rate on a three month Treasury Bill, a 7.7 percent interest rate on a 6 month TB, a 7,8 percent interest rate on 9 months TB and finally an 8 percent interest rate on a one year TB. These are well below what the banks are currently paying for term funding.
So what incentive do the banks have to buy any government debt, if it is yielding less than its cost of term funding? Certainly it will be attractive for certain banks to get access to the RBZ window but this is not going to have any meaningful effect on interest rates at the phrase indicative yield curve suggests. Another policy that was recommended was to allow the securitisation of mortgages and their resale to a secondary market.
This will improve liquidity and allow for more mortgage origination and a decreased cost of mortgage funding.
This article was written by Zimnat Asset Management for FinX
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