Treasury to offer inflation-indexed fixed assets

Treasury says it will soon be able to offer inflation-indexed fixed assets, as well as United States dollar denominated ones, to give institutional investors improved assets to invest in.

Fixed income assets typically include: treasury bonds and bills, municipal bonds, corporate bonds, and certificates of deposit (CDs).

While in the past it has been impractical for the Government to offer inflation – indexed paper, for example, due to high inflation, the recent decline in inflation makes the availability of such assets on the local market feasible.

For instance, during the first quarter of this year, real interest rates were negative given the high annual inflation rate at the time, which closed the quarter at 240,6 percent against nominal interest that was below 20 percent.

At the same time, the savings deposit rates registered declines in the quarter from a range of 1,68 percent – 4,69 percent as at December 31, 2020 to between 1,57 percent – 4,04 percent as at the close of the first quarter.

Zimbabwe’s pension funds in particular, currently hold extensive property and equity portfolios.

Addressing an engagement with players in the insurance and pensions industry, Finance and Economic Development Minister Mthuli Ncube said Zimbabwe’s macro-economic climate was getting to a point where such products can be availed.

“One thing is clear, whenever you have inflation, investors are always wary of investing in fixed income products whose yield is negative in real terms.

“I’m aware of that, and suspect that (the pensions industry)’s appetite for fixed income assets will improve as inflation comes down to the 10s, then we can offer a yield that is positive in real terms, and that should improve the situation,” he said.

“We are also looking at issuing a fixed income in hard currency.”

From a peak annual inflation rate of 837 percent in July 2020, the country’s inflation has declined to slowed to 106,64 percent in June 2021, as both fiscal and monetary initiatives to contain inflation continue to yield positive results.

Meanwhile, Minister Mthuli Ncube said the Government will not back down on prescribed assets requirements, but will continue to be innovative around the scope of prescribed assets.

“Even though the sector has not complied with prescribed assets requirements, I think we need to increase the supply of prescribed asset choices in the first place. I’m listening intently to the idea of launching an infrastructure bond,” he said.

Compliance levels to prescribed assets requirements have, however, remained low in the insurance and pensions industry.

With regards to specific sub-sectors, the Insurance and Pensions Commission (IPEC), in its first quarter 2021 reports, highlighted that all funeral assurers were non-compliant with the minimum prescribed asset ratio of 10 percent as stipulated by Statutory Instrument 206 of 2019.

“Prescribed asset investments were insignificant as they accounted for only 0,11 percent of the total asset portfolio. The total amount invested in prescribed assets investments was $1,82 million against a minimum amount of $172,17 million for the sector to comply with the 10 percent minimum prescribed asset threshold,” said the regulator.

Of the eight short-term re-insurers, three were compliant with the minimum prescribed asset ratio of 10 percent as at March 31, 2021. Nonetheless, the statistics showed that short-term insurers’ investments in prescribed assets by short-term re-insurers increased by 13,89 percent from $1,08 billion at the close of 2020 $1,23 billion as at the end of the first quarter.

The pension funds sector’s compliance levels to prescribed assets remains low despite an increase in prescribed assets holdings over the period, with the latest numbers showing that the value of prescribed assets increased in nominal terms by 135,81 percent to $5,40 billion from $2,29 billion in the prior comparable period.

Pension funds’ compliance stood at 3,05 percent against the regulatory minimum of 20 percent for the period under review.

For the life assurance industry, IPEC reported an average prescribed assets compliance ratio for life assurers and life re-assurers of 0,31 percent and 9,06 percent respectively against the required minimum prescribed asset ratio of 15 percent.

During the first quarter, the regulator said all direct life assurance companies and three out of four life reassurance companies were not compliant with the minimum prescribed asset ratio of 15 percent.-ebusinessweekly.cl.zw