Widening rates variance a cause for great concern
In the latest foreign auction trades on the interbank market, the Zimbabwean dollar fell by a very negligible magnitude against the United States dollar.
The marginal weekly decline was the most conservative in a series of five consecutive weekly losses. Despite successive losses, the magnitude of value losses are very low and within acceptable range, by any standards.
Over the four weeks period to date, the Zimdollar lost a conservative 0,73% on the interbank market. In the first five weeks of trading on the interbank (June 20), the Zimdollar lost a cumulative -28,15% and maintained sharp losses in the 15th week, before stabilising.
Since January 2021 to date, the Zimdollar has lost -2,6%, an acceptable depreciation rate. Supporting these conservative losses, in improved supply of forex on the interbank.
Likewise the lower bid and lower accepted rate have also stabilised at 82. From a technical perspective these collective trends shows a market moving towards a more sustainable stable exchange rate.
A narrowing range between the top and lower rate and a convergence of the lower to lower acceptable all point towards an entrenched stability.
However, these trends cannot be looked at in isolation, two fundamental aspects of the market will have to be analysed to give us a more solid perspective on currency stability.
These fundamental factors include the parallel market rate and the level of trades on the interbank. Looking at the computed data, the levels of trades on the interbank shows sustained volumes averaging US$34 million between January 2021 and March 2021.
In the latest auction, total allocations came in at US$35,3 million. The data shows that daily average forex outflows through the interbank are at about US$7 million. Total average imports value per day, according to 2020 data were at US$19,8 million, which is a variance of about US$12,8 million from the current interbank trade levels.
The variance is partially offset with direct imports by exporters and remittances, which were estimated at about US$1 billion in 2020. Our view is that the external trade position remains precarious and pose a significant risk to currency stability.
This drift brings to the fore the aspect of demand and supply which is reflected in volumes traded and the average weighted currency level. While the level of US dollar liquidity has improved significantly on the interbank, the levels of demand have also escalated, hence the negative price movement in disfavour of the local unit.
Whereas exports have the propensity of improving given a projected economic rebound and firming commodity prices, thus driving export receipts up, we see a downside risk of increased fuel demand and lower earnings from gold given a projected retreat as the world gets past Covid-19.
Gold is the largest export earning product for Zimbabwe while fuels combined are the largest import products by value. the price of crude oil has equally been rising on global markets, which is yet another deterrent to net flows.
On the short end we believe that the current forex liquidity levels cannot match the pressure emanating from new money and liquidity created out of economic recovery.
The Reserve Bank of Zimbabwe has been more prudent and conservative with money supply in recent periods, but pressure is mounting and this pose further risk to currency stability.
A worrying factor is the divergence between the formal exchange rate and the parallel market. The parallel exchange premium has since risen since the lifting of lockdown from about 43% to about 49%. These high premium levels are above the acceptable thresholds of between 15% and 20%.
We may see the premium narrowing as we go past the lean agricultural period and the beginning of the tobacco selling season, but these factors will not bring down the premiums to envisaged levels of about 20%.
The implication of retaining such high levels is that it drives inflation up, while encouraging rent seeking behaviour among the privileged entities accessing forex via the interbank. There are already fears that some players are already accessing the cheaper forex on the interbank and channelling it towards the black market in a process commonly known as ‘money burning”.
Given a fragile confidence position, these wider variances drives expectations of further inflation and currency depreciation. Authorities would need to further review the market mechanics, conduct and rules to foster increased transparency and a more definitive exchange rate.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net