Some bankers getting it wrong
The major pricking of the exchange rate bubble this week was largely driven by the banks which seem to have near bare cupboards when it comes to foreign currency, or who stocked up too much with more expensive money recently and are now facing a hit.
The auction for importers on Tuesday did show a fall, but of the 23 bids, all accepted and all allotted, the highest for US $1 was still $7 261,58 and the lowest was only $6 620.
Those 23 only wanted US$797 323,57 of the US$5 million available, and they all got their full bid.
It has been the two wholesale auctions for banks stocking up which has seen the major retreat in exchange rates, both on Tuesday and the special addition auction yesterday.
The Tuesday auction saw only US$10,107 million sold, out of a minimum of US$25 million on offer, although it could have been a little over US$29 million if the unsold auction money was thrown in. But the major slide in rates came from at least some of the 12 banks that put in bids.
While the top banker’s bid was $7 155, not as bad that has been seen but still above the interbank mid rate, the bottom bid was $5 500 and under the rules this was accepted, along with all the other bids. All bids are generally accepted when the total bids are less than the amount on offer.
Yesterday a second wholesale auction was held for the banks, the second time this has happened so it was rare but not that special.
The Ministry of Finance and Economic Development allocated $20 million for the bidding, basically what was left over from the auctions on Tuesday.
Eight banks bid for just US$3,592 million, again showing that either the banks do not need much more for their importing customers or neither they nor their customers have the local currency to stock up.
The banks were pushing the rate down hard. The top bid was $6 000, this time below the interbank rate for yesterday morning, while the bottom allotted bid was $5 263. Here came the first change to the whole upgraded and improved auction system.
Four of the eight bids were not allotted. The explanation given was that: “The cut-off rate was guided by the need to conform to international best practice on spreads within the financial sector.”
In other words the Reserve Bank of Zimbabwe did not need to have the rates offered by each bank to vary that much, although the variation at the moment is very large.
Over two auctions in three days the variation was huge with different banks paying between $5 263 and $7 155, a variation of 36 percent.
This must already be causing some bad temper in some banks, although the modest purchases on the wholesale auctions, could modify the damage.
Banking is a competitive business and when one bank is offering its customers foreign currency at say a 30 percent discount to a competitor, guess where those business with two bank accounts will run, let alone drift.
Fortunately bank profits have been so high recently that a bit of level pegging in some banking corridors will not cause strains impossible to deal with, but among the heads of bank trading floors there are obviously some people getting very high marks from their bosses and some who need to keep out of the way of the CEO.
While the single interbank mid rate is the official exchange rate, the actual bid (what we buy at) and ask (what we sell at) rates vary between banks, some being above the interbank rate and some below.
Once again we are dealing with weighted averages here, with the bid and ask rates for each bank, and the amount transacted, being recorded to generate the final weighted average on the RBZ website.
This competition among banks is essential to make the new markets set up work efficiently and effectively, especially now that banks have suddenly found out that prices can go down as well as up.
Anyone can make money when they go up all the time, and all it might require is just hang on to stock for a week or two if you paid a bit too much. When exchange rates, that is the prices banks pay, go down as well you can be left with some expensive foreign currency.
While collusion between banks is perhaps technically possible, since collusion is always possible, it is obvious that the Reserve Bank, clutching licences in its right hand, and the Finance Ministry would be extremely unhappy. The problem as the number of people who need to be involved grows, the chance of the news escaping grows exponentially.
With 19 banks, collusion in practical terms appears impossible. You would need every bank to agree to bid in a very narrow range, and it just needs one to make a phone call that it has been approached to detonate a large explosion. But the threat does need to be dismissed as in Zimbabwe a new conspiracy theory is generated every time someone buys a beer.
What has happened this week is the law of supply and demand kicking in, as it has kicked in throughout the reformed Dutch auctions, where it is announced in advance the amount available for the weekly auction of the Reserve Bank of Zimbabwe and the amount available for banks to bid on for the wholesale interbank auction.
The main movement were the changes made largely last month to strongly limit any growth in Zimbabwe dollar money supply. The largest single change was to transfer from the Reserve Bank to the Finance Ministry the job of buying the 25 percent of export earnings exporters are obliged to surrender.
While the Reserve Bank could create, and seems to have created, net new funds when doing this as exports rose and income from auctions fell, with the falling exchange rate hardly helping, the Finance Ministry cannot create or destroy any money, or even borrow except under severe conditions overseen by Parliament for some parts of the capital budget.
What the Finance Ministry can do is use the local currency account of the Consolidated Revenue Fund, where all the tax money ends up, to buy the 25 percent of export earnings, so it ends up in the foreign currency account in the Consolidated Revenue Fund.
Later it can allocate money from that account for sale on the auctions and the wholesale auctions and put the local currency the importers and bankers pay back in the local currency account.
There is still need to watch the banks that they do not create large amounts of local currency through their loan books, and this will require diligence, but the switch to the Government doing the export earnings purchases and the Reserve Bank leaning on banks with interest rates and other measures is what has helped create the present balance in the economy.
No one disagrees that the local currency was grossly overvalued early this year, and that since there was not a pure market system in place it was difficult to generate the needed correction. The new auction systems allowed the corrections, which as is typical in most strongly swinging markets went a bit too far.
So we now have an under-valued local currency.
This week we are seeing some major dollops of correction, led by the banking sector who even when they do not get it right, or give too much emphasis to what they hear on the street, at least between them hire a lot of the practical economic talent in the country.
The black market is seeing some severe strains at the moment. By mid week it was almost impossible to find any black-market dealer who could afford to buy foreign bank notes, and by yesterday the dealers were buying US dollar bank notes for less than banks were prepared to pay: a bid rate of $5 500 was active on the streets for note to mobile-money transfer.
That was a lot less than shops were offering, and even significantly less than banks were offering.
The rise in the value of the local currency has been rapid, with by now a good fraction of the needed adjustment already in place although with some more to come.
There will be a little bit of some bumpy rides in some quarters as those who stocked up with foreign currency at too high a price gradually mix in cheaper purchases and get rid of their stocks.
Those in business, luckily for them, rarely have much currency in stockpiles, spending it as they get it, so will just carry on and adjust their local currency prices the other way but using the same systems.
The less honest who were using forward forecasts of exchange rates that are now hopelessly wrong will suffer with either expensive currency or expansive stocks, but that is there own fault.
-ebusinessweekly
