Zimbabwean banks have increased their uptake of Treasury Bills (TBs) as the short-dated securities offer better returns and are as good as money.
BY NDAMU SANDU
Treasury Bills are used by government when borrowing from the domestic market and are issued by the central bank on behalf of government.
Recent financial results of banks show a marked increase in the uptake of TBs with most banks reporting healthy returns.
NMB Holdings Limited said investment securities (TBs and bonds) increased by 274% to $92 245 425 in the full year 2017 from $24 744 752 in 2016. Barclays ended the year with TBs at $110,95 million from $33,20 million in 2016.
In its analysis of Barclays financials, research firm IH Securities said the bank remained cautious on its lending while increasing exposure to TBs.
This saw the loan book retreating by 20,2% in 2017 to $112,04 million. In 2016, the loan book was $140, 33 million.
The country’s biggest bank by deposits, CBZ Bank, saw its TBs holding rising to $882 558 352 last year from $751 645 905 in 2016.
Stanbic recorded a 17% growth in net interest income to $55,1 million last year from $47,2 million in 2016 bolstered by the additional short-term investments which were acquired during the year.
The bank said its short-term investments in the form of TBs, AFTRADE bonds and placements with other banks grew to $312,5 million last year from $141, 1 million in 2016.
The rise in TBs uptake comes at a time banks have cut back on lending to reduce the default rate in the deteriorating economic environment.
This also comes as banks are working to reduce their levels of non-performing loans (NPLs) to an industry target of 5%.
Government finances its budget deficit by borrowing from the market through the issuance of TBs.
The stock of TBs and bonds was $5,2 billion at the end of last year from $3,2 billion in 2016.
In his monetary policy statement, Reserve Bank of Zimbabwe governor John Mangudya said net credit to government rose by 70,45% to $6,27 billion in the 11 months to November last year from the comparable period in 2016, which he said reflected government’s reliance on the banking sector to finance its deficit.
Bank lending to economic agents grew by 44, 31% to $10,637 billion in the period under review from $7,554 billion in the comparable period in 2016.
Of that, credit to the private sector rose by 6,97% to $3,705 billion.
He said financing of the budget deficit under dollarisation should ideally be from foreign sources to mitigate the “domestic creation of money which is not matched by foreign exchange”.
Zimbabwe has been incurring fiscal deficits, with expenditure outstripping the revenue raised. The deficit is projected at $672 million this year. The projected deficit for 2017 was $1,7 billion.
Financial analyst Persistence Gwanyanya said the increase in the uptake of TBs was de-risking as banks preferred to invest in government paper which offered better returns to lending to individuals and companies.
“Government does not default and banks prefer to hold government paper and earn interest to carrying the risk of giving business and lose money in the process because of the economic environment,” he said.
Gwanyanya said the move would crowd out private sector investment which is the engine for economic growth. Government has been borrowing from the domestic market to fund its rising expenditure. The borrowing, Gwanyanya said, was inflationary and crowded out the private sector.
“This reduces economic growth and kills the economy’s ability to create jobs. It’s not a healthy position for government to continue issuing out TBs,” he said.
Gwanyanya described the transmission mechanism of increased government borrowing as a precarious position in all respects and “should be tamed as a matter of urgency”.
Stockbrokers’ Association of Zimbabwe vice-chairman Arnold Dhlamini, however, said TBs would not crowd out any sectors as “the market is awash with liquidity”.
“It’s the quality of borrowers that is of concern to banks,” he said when told that banks had cut back on lending.
Dhlamini said TBs were as good as money and the ability of government to honour its obligation had improved their value.
He said TBs were now sought-after in the market with demand outstripping supply.
But investment analyst Ranga Makwata said the increase of TBs at the expense of private sector lending would ordinarily be a cause for concern as it meant that government borrowing would be crowding out the productive sector which drives economic growth.
He said there were a few deserving private entities and individuals who were failing to get loans from banks when they applied for them.
“In fact, the more stable and deserving companies and individuals are largely cash-rich at the moment and their problem is deploying it and not borrowing,” he said.
“Anyone outside that group becomes risky for the banks and given the non-performing loans nightmare they faced, culminating in the establishment of Zimbabwe Asset Management Company (Zamco) to provide them with relief, banks are now more careful with their lending.”
Zamco was established to buy secured NPLs and free the balance sheets of banks to be able to lend again. This came after the default rate had reached 20,45%.
“Given that background, it makes business sense for banks to lend to government through TBs because it reduces NPLs and the returns of at least 6% are also very attractive,” Makwata said.
“Besides that, TBs can be used as security in the interbank market, which makes it easier and cheaper for banks to borrow from each other to bridge short-term liquidity shortfalls.”
He said industry required largely foreign currency loans to import raw materials and other critical supplies and the banking sector was lending out real-time gross settlement balances.
“Banks incur costs on the deposits they hold and they always try to lend part of them to generate some income,” Makwata said.
“Right now it is less prudent to give the money to private sector borrowers, leaving government as the next best option.”