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published-Tue 01 Aug 2006

Monetary Review Policy Highlights

Keep your eye on the ball!

Currency Reviews

The Central bank has announced the slashing of three zeros from the current bearer’s cheques and introduced a new family of bearer’s cheques. It was also announced that modalities of introducing a new currency are already underway and will be announced at short notice. A grace period of 21 days has been announced during which the old bearer will be phased out effective tomorrow. Maximum threshold for daily deposits has been pegged at $100 million for individuals and $5 billion for corporates with amounts above this inviting proof of source and tax clearance. In the meantime, such excesses will be deposited in anti money laundering two year zero coupon bond. When proof of ownership is latter provided, the funds will be redeemed at the prevailing TB rates. The central bank will not replace any old bearer cheques not deposited after the deadline.

The business implication is that effective tomorrow all prices will be rebased by a factor of 1000.This is expected to bring convenience to the public.  However, as indicated by the Governor, this is not conclusive solution to the economic problem at hand. The daily withdrawal limit has been pegged at $100,000.00 of the new currency

Exchange Rate Policy

The volume based exchange rate system has been replaced by a ‘fixed’ exchange rate framework that will be set from time to time by the Exchange Rate Impact Board .The US$ rate has been pegged at $250,000 old or new $250 from about $100 000.We are likely to see prices increasing in line with the ‘devaluation’. Of cause, many asset prices had already repriced in sympathy with the parallel market. However, a second round of adjustment cannot be ruled out. We do not believe that parallel market dealings will be curbed by the devaluation nor will foreign currency inflows increase since there is still a margin between the two markets. However, we expect the parallel market to stabilise in the short term.

Gold producers can now retain 75% in their FCAs for an indefinite period and sell the balance to the RBZ at the ruling exchange rate. This was done to ensure viability in the sector and curb smuggling of gold. The gold support price has therefore been removed .Similarly all exporters including horticulture now retain 75% of export proceeds. Individuals with free funds in FCAs can also hold such funds for an indefinite period. However, the governor previously assured FCA holders that the RBZ will not have recourse to the funds, but latter compulsorily bought some of the FCA balances.  As a result, there are no assurances that this will not repeat in future. 

We expect these measures to boost export revenues for exporters and an increase in demand for export-oriented stocks on the ZSE. We also expect a revaluation of asset prices in line with the new exchange levels ; both on the stock market , commodity markets and other real assets that will be cheap in US dollar terms. We also anticipate an increase in inflation given that the other immediate impact of the ‘devaluation’ is a reciprocal increase in foreign debt balances, an increase in import bill for electricity and fuel among other things.

Bank minimum capital requirements have automatically increased by 1.5 times since they are pegged in US dollars. However, the September deadline uses an exchange rate of $100 000. Banks are required to meet the incremental capital requirement by December 2006.We expect banks to capitalise reserves while others will choose the rights issue option. Mergers for the small players may also be seen.

Interest Rate Policy

The Central bank has announced a low interest rate policy, a radical shift from a high interest rate regime that prevailed a few weeks ago. High interest rates had become highly unsustainable and causing ballooning of domestic debt. In essence, the bank has abandoned the strategy to peg interest rates in line with inflation. Accommodation rates for secured lending is now 300% (down from (800%) while unsecured is at 350% (from 900%). The Central bank expects minimum lending rates to be revised accordingly. This measure will give reprieve to the banking sector that has been struggling to survive the strictly tight accommodation policy.

Statutory reserve ratios  have also been revised to 40% (from 50% ) for demand deposits and 30% for time deposits .The funds unlocked through the reduction in  statutory reserves are expected to be channeled  to the productive sector. In line with this, loans under the productive sector facility will be rolled over for a year .The RBZ announced that if banks do not lend funds to the productive sector they may introduce a Directed lending policy. Banks are adopting a restrictive lending policy due to high levels of default risk in the credit markets and have opted to invest in treasury paper.

Given these new policy measures, we expect deposit rates to remain very low in the medium term. The 91-day Treasury bill rate is at about 250% and banks are likely to quote rates as low as 50% to 100% on the short end, depending on prevailing market conditions. Low activity in the money market will attract investors to the stock market, further propelling a bull market already underway. We therefore advise investors to be overweight in equities 

Outlook

The central bank envisages inflation to trend down and an improvement in the overall economy. However, we are not convinced with the forecasts and believe that much needs to be done for us to achieve double or even three-digit inflation. Capacity utilisations are still very low while foreign currency inflows remain at critical levels. The supplementary budget announced by the Finance minister is also obviously inflationary. We are yet to see the impact of some of the inbound investment initiatives announced for the mining and energy sector.


This article is published for general investment advice and it must be noted that the price of equities and the income derived from them can rise as well as fall. Neither First Mutual Life nor the author shall be held liable for any losses as a result of the investment advice contained in this article. It is important that specific investment advice is sought as each investor’s investment will be dependent on their circumstances.

If you have any comments or queries arising from this report, please contact Rashid Mudala, Herbert Chibika or Edwin Potsiwa on Harare 886000-39. You can also email us on the following addresses. rmudala@fmlzim.com, hchibika@fmlzim.com or epotsiwa@fmlzim.com. You are free to distribute this report to any of your clients.