Govt warned over RBZ debt

via Govt warned over RBZ debt – DailyNews Live by John Kachembere 9 DECEMBER 2013 

Government’s decision to take over the Reserve Bank of Zimbabwe (RBZ)’s $1,3 billion debt will hamper the country’s economic revival, a local advisory firm has warned.

TFS management company (TFS), a subsidiary of Tetrad Holdings, said the slowdown in the economy reduces government’s sources of revenue thus limiting its ability to service and repay its debt obligations.

“The situation is also worsened by the fact that the government is already in a debt trap hence taking on more debt worsens its already precarious position,” said TFS in its weekly market report.

This comes after Zimbabwe said it will assume the central bank’s domestic debt of $754,3 million to add it to its existing domestic stock of $390 million, to give a total outstanding domestic stock of $1,1billion.

Furthermore, the apex bank’s external debt of $596,02 million will also be taken over to add to the current stock of existing external debt estimated at $7 billion.

Market experts say the significant portion of the RBZ debt was taken mainly from banking institutions.

According to the proposal, the debt would be repaid through the issuance of Treasury Bills (TBs) to banks.

The TBs will have two to five year tenures as reflected in the accounts sitting with the affected banks.

Proposed interest rates for these instruments is between 3,5 percent and five percent per annum and will be granted the prescribed asset and tax exemption status.

Government is also reported to have resolved to settle statutory reserves totalling $83,4million owed to banking institutions by the RBZ.

TFS noted that the rationale towards the takeover of debt by the government was positive as it paves way for the recapitalisation of the central bank.

“We are of the view that the huge debt has over the years incapacitated the RBZ in performing its critical roles necessary for economic development. The major role being the establishment of the interbank lending market especially in a dollarised environment. It is against this background that we are encouraged by the resolution made by the government,” said the advisory firm.

TFS, however, said it was concerned with the way in which the government intended to settle the debt obligation.

“This is so because they have simply transferred the debt from the RBZ to the government which is also a bad debtor. Hence repayment of the debt may take longer than anticipated. We are of the view that the timing may not be correct especially when liquidity is worsening by the day. This will put further strain to banking institutions who are already feeling the heat due to the decline in deposits,” said the company.

Deposits have declined by 11 percent on a year to date from $4,41 billion as at December 31, 2012 to September’s level of $3,91 billion.

TFS indicated that the coupon rate for the TBs of 3,5 percent to five percent  is relatively lower compared to other TBs issuances that have been done earlier.

The last TBs meant to raise $40 million issued in March 2013 to Old Mutual and Nssa were done at a coupon rate of seven percent per annum, the Infrastructure Development Bank of Zimbabwe bond issued in 2011 had a coupon rate of 10 percent per annum.

Without the prescribed asset status, banking institutions would ordinarily not buy these bills as they are not attractive.

“Overall, we believe that the RBZ’s recovery will take longer than anticipated as there appears to be limited sources of funding for the government. However as long as we do not have our own currency, the RBZ’ lender of last resort function will always be incapacitated as they cannot increase money supply through printing,” said TFS.