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Have you managed to unravel the MPS puzzle?

By Admire Mavolwane

THE much-awaited post-election monetary policy statement was finally delivered last week, with the usual passion accompanied by bouts of cocky humour.



“Verdana, Arial, Helvetica, sans-serif”>A week later, many are still trying to find their way through the maze and work out what it means to their livelihood, their business, their customers and the nation as a whole. It’s no easy job, given the fact that the main document itself is some 187 pages and is accompanied by six supplements.

Reading, comprehending, analysing and then interpreting the policy is at this stage an ongoing exercise.


However, many economic and business consultants are in it for the money, although as yet most of them are not any wiser as so what it all means either. They will be paid huge sums of money by executives trying to understand what the new measures as announced, mean for the economy and their organisations.


By contrast to the ambiguity in certain sections, the policy was crystal clear on interest policy and the governor did not mince his words on his intention to curb speculative activities on the money, forex and stock markets.


The governor’s apparent discomfort with the performance of the stock market since the beginning of the year was evident in the tone and expressions used. Prior to the monetary policy statement, the bench mark industrial index had exhibited an unprecedented level of buoyancy which had seen even the most risk-averse of investors who had vowed never to participate on the bourse taking an interest. Evidently, December 18 2003, the day of Gideon Gono’s maiden monetary policy statement still gives a lot of people goose bumps. But in the four and a half months to May 19, the stock market had gained 186%. Who would not want to earn such a return?


As highlighted in previous columns, the bull-run on the stock market was more a reaction of investors to the reality on the ground regarding inflationary pressures and expectations than speculative exuberance.


Few believed that the inflation rate targets that had been set by the governor were attainable and thus sought to hedge themselves by buying shares. This, we would assume, is a position that any investor would take, especially considering that the whole idea of investing is to at least preserve wealth resources from the ravages of inflation. Secondly, as the parallel market began to move northwards, or is it southwards, share prices became ridiculous in US dollar terms.


As expected, the prices began to re-rate. Incidentally, the official inflation rate forecast was revised upwards to between 50-30% by December from the initial range of between 20-35%.


In order to prick the stock market bubble and to encourage more investment in the money market, the governor hiked the overnight accommodation rate from 95 to 160% for secured lending. A 10-percentage point penalty would apply to unsecured lending, which will be granted only in exceptional cases. To make the pill even more bitter, the bank rate will be compounded daily, which works out to an effective return to the RBZ of 394%.


The adjustment to the bank rate was to take effect immediately, implying that as soon as he had finished reading that section of the document the accommodation rate was 160%. Banks were implicitly commanded to ensure that their minimum lending rates were above 170%.


Stock market investors are a nervous lot indeed. With their thesis that their governor does not take kindly to their activities, which in other books are looked upon with distaste as no more than speculative, having been confirmed, a selling frenzy started the day after the policy announcement. It does not matter whether investment rates have started to respond or not, just sell, seems to be the war cry from some punters. The wiser players and institutions have withdrawn from the market and are watching from the side-lines. Since the selling started the industrial index has declined by 10% and is now below the three million mark.


While it was easy for stock market participants to make out what the policy meant for them, many in other sectors of the economy are still analysing it, although by now some have a fair idea of its implications.


Although not a real surprise, the abolition of the productive sector facility on June 30 has seen executives in banking, commerce and industry furiously punching their calculators and doing a number of scenario permutations.

Initially, it was envisaged that by the time the PSF facility expired, interest rates would have converged and the country would be swimming in low interest waters. The head scratching has been caused by the fact that 50% funds will no longer be available at the same time that interest rates would be close to 200%.


For the banker, the question is what to do with a client who was struggling to repay PSF funds; will he be able to repay the debt at 180%? What about the impact of the hike in rates on profitability, especially for those holding two-year paper at 70,8% per annum and at 17% per annum. What about the automatic repayment or debiting of the banks’ accounts with the Reserve Bank of the outstanding PSF debt, some $1,5 trillion odd, come July 1?

Anyway, it could be a case of the governor taking away what he gave last year in the form of RBZ financial bills.


The other burning issue is that of the 5% money for exporters. Here the question is; how do you define an exporter? Is the definition based on the contribution of exports to total turnover, or is it contribution to profit or margins? Do you compare the ratio of exports to imports, because there are companies that do export but when one compares the two, the companies are net importers?


Also, for how long will the facility remain in place? With the provision that after accessing 5% money, companies cannot pay a dividend without RBZ approval, are shareholders in export companies not likely to have income inflows in the short to medium-term?


On the contentious topic of the exchange rate, the governor was clear and concise; no devaluation, not at least directly, that is.


However, the diaspora support rate was increased by 45% to $9 000 for each greenback. Exporters can now liquidate their FCAs at this new rate and adding in the new FOB export incentive of 25%, previously 15%, gives an effective exchange rate of $11 250 per US dollar.


Throwing in the 5% money, you have a cocktail of measures that might theoretically improve the exporters’ lot. The jury is still out on the impact of the duty rebate on raw material inputs for exports.


However, these new measures present an arbitrage opportunity, theoretically that is. Were it not for supply constraints an exporter could sell all his forex at the effective exchange rate and repurchase it at the auction at $7 355 to the US dollar.


On the whole, the governor remained his generous self, throwing money at this and that scheme. We laud the RBZ’s efforts on both cotton and tobacco although we believe that the subsidy should be through lower inputs at the onset of production.


We are also of the opinion that in terms of information provision, especially on commodities whose prices depend on the international markets, we are not doing our farmers any great favours.


Where the economy goes from here, is anybody’s guess but save to say that the authorities are still optimistic about positive growth of between 2-2,5% down from the initial projection of between 3,5-5%. Watch the next policy statement for further developments!

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