Auction results show stability is now built-in
The feeling of stability of exchange rates was enhanced this week when the system easily retained its stability after the first wholesale auction held since the start of the growth in the value of the Zimbabwe dollar coped with banks bidding for more foreign currency than was in the pool.
This happened on Tuesday in the 14th wholesale auction when 15 banks bid for US$17 076 095,56 with the pool only at US$16 million. So the bottom three bidders, who appear to be smaller banks, were chopped off the list, increasing the lowest bid to $4 515 leaving the surviving 12 to buy US$ 15 969 095,56.
This was the largest single purchase by banks since the wholesale auctions started, overtaking the second auction of just under US$15,44 million, and that was the auction that saw the largest single collapse in the value of the Zimbabwe dollar.
These must have included all the larger banks who bid since some of the bidders must have bid for at least US$1 million and several for more than that. The just over US$1 million the three excluded banks bid for suggests that these three were on the smaller side.
Interestingly, the gap between top and bottom bids continued to narrow. While the figure for the bottom bid rose, at the same time the top bid, which had been at $4 580 for both auctions last week, fell to $4 570. This created a gap of just $55, or 1,2 percent between the top and lowest bids, easily the smallest in the auctions up to that point.
The upshot was a weighted average of $4 542,3710, increasing the average price of a US dollar by 0,56 percent, a remarkable ending considering the modest cut in the pool available, the record value of the bids and the fact that the bottom three bids were cut off as the pool was exhausted.
This passion for stability by the banks was seen in the Thursday auction. Normally after an auction trims the bottom bids there has been a bit of panic among bidders.
Banks did not follow the scenario. The top bid rose by $3 to $4 573, the second lowest seen on the auctions after the Tuesday maximum and lower than the bids seen the previous week when the US dollar reached its record low in auction price.
The bottom accepted bid was $4 535, giving a gap of $38, or just over O,8 percent. However the bottom two bids were rejected by the Reserve Bank of Zimbabwe for being too low leaving 11 of the 13 bidding banks with what they wanted, a total of US$12,498,820.
The total number of bids came to US$13 823 820,00, well under the US$15 million on offer and meaning the cut off was once again an administrative matter regarding the bid sizes.
The weighted average moved up 0,3 percent to 4 556,1616, a tiny movement and one that many might not have expected in the first auction after an auction had seen the bids greater than the size of the pool.
The weekly purchases totalled US$28,47 million, easily breaking all records and taking the total now sold in the 15 auctions to US$144,24 million.
So, in summary, we appear to have reached the point of stability with tiny changes at each auction as well as on the daily interbank rate. This could well be small fluctuations up and down, as we see with other currencies, and in particular the rand.
The rand fluctuates in weekly and fortnightly moves within a fairly wide band, but the general trend is a more expensive US dollar and a weakening in value of the rand when you look at the averages for say a month or a quarter. At the moment the rand is losing value noticeably this week.
While the Zimbabwean authorities should not be tracking the rand exchange rate, they do need to keep it in mind. When we dollarized a lot of our industrial base was wiped out by the problem of the US dollar and rand values.
South Africa is our biggest trading partner and probably the largest source of raw materials for Zimbabwean industry, certainly providing the widest range of such materials. We do manage some manufactured exports, not dramatic but with freer trade coming with AfCTA we can finally penetrate that market on a level playing field.
It will not help if the Zimbabwe dollar is gaining value against the rand, or not losing value so fast. This makes our exports more expensive and makes imports from South Africa cheaper. If allowed to move too far out of kilter this will see, once again, imported South African products filling the shelves and wiping out the modest exports we already send.
We are far, far away from any emergency treatment, but as we consolidate stability it is something we need to keep our eye on. This is the main reason for having our own currency rather than using someone else’s.
The other factor that is coming into play is the need for banks to start thinking more seriously about buying currency from their account holders, rather than rely on the pools provided by the Ministry of Finance and Economic Development for the Reserve Bank wholesale auctions.
Government policy can help, and the fact that the Finance Ministry wants higher percentages of taxes in local currency is one such intervention, meaning net exporters might need to sell foreign currency.
One major bar to having a better market for starting up such transactions is the huge margins banks want between the bid and ask rates.
The interbank rate creates the weighted average of these and suggests that our banks thing a 10 percent margin between what they pay for a US dollar and what they sell it for is something normal. It does vary slightly from the high eight percents to the low 11 percents, with more of the wider margins these days.
This would mean that a bank would pay an account holder more than five percent below its mid rate when buying export earnings, as well as charging other importer customers the same margin in the other direction.
This is ridiculous. Standard Bank of South Africa, to take a large South African bank, charges a 2 percent margin between its TT buy and sell rates. An exporter will probably baulk at accepting 5 percent bellow the mid-rate, what everyone thinks of as the official rate or, as banks have different rates, something very close to that.
If the bid rate is just one percent below the mid rate most would sigh and accept. Everyone knows banks do nothing without charging and taking their cut, but most people feel that cut or that fee should be rational and reasonable.
A second problem is the authorities. Banks can buy from their customers, but have to sell that currency on within two or three days, which largely would mean that they have to have the seller and buyer both lined up for almost instant transfer.
There were some good reasons when that rule was introduced since it was assumed banks, unlike exporters, would have building up huge stockpiles of foreign currency. In practice is the exporters who have the huge piles.
The second problem identified is that if there are wild swings in the value of the local currency, banks would be caught out if they have large stocks of overpriced foreign currency.
The wholesale auctions have shown both the danger and the solution, that banks need to get better and make sure that their currency dealings do not dominate their core business, so if something goes seriously wrong it is smaller profits, not huge losses.
The banks and the authorities now need to sit down and work out how an easing in that restriction could be done, in phases, and what sort of safeguards should banks have in place, including what limit can be placed on their own holdings of currency, probably as a percentage of their capital.-ebusinessweekly
