Source: Treasury Bills rollover triggers market panic – The Zimbabwe Independent November 30, 2018
FINANCE minister Mthuli Ncube’s engagement with market players to explore options for restructuring the Treasury Bills (TBs) to longer tenure — effectively rollovers of maturities — and surging inflationary pressures will leave banks exposed as this raises the spectre of defaulting and increases the risk profile of government’s short-term investment paper.
By Chris Muronzi
Ncube announced in his budget statement last week that government would be engaging banks to increase the tenure of TBs to delay maturities to control money supply growth, one of the issues, together with the fiscal deficit and current account deficit, as well as inflation, which he said needed to be tackled to ensure macro-economic stability before currency reforms.
Ncube’s budget was basically about advancing his Transitional Stabilisation Programme to stabilise the economy by targeting the fiscal and current account deficits which have become major sources of overall economic vulnerabilities, including inflation surge, sharp rise in indebtedness, accumulation of arrears and foreign currency shortages.
“The continued issuance of government securities has resulted in the flooding of government securities into the market, posing risks to macro-economic stability as a result of money supply growth,” Ncube said. “In order to manage maturities of the current stock of TBs, Treasury is exploring options for restructuring the TBs to longer tenure in consultations with market players. Going forward, we are moving away from the practice of incurring extra budgetary expenditure on the back of TB issuances. TB issuances will only be confined to the traditional role of mobilising resources to finance the budgeted financing gap, with such issuances triggered by a formal note from the Accountant-General.”
Ncube and his permanent secretary George Guvamatanga this week confirmed to editors during a luncheon in Harare that they were already talking to stakeholders to extend the TBs maturity tenures.
“We are already talking to them,” Guvamatanga said, to which the minister added: “Yes, we are”.
Ncube said there was no risk of default, but extended tenures to manage maturities in view of the US$2,2 billion required to fund the returns next year.
Ncube said last week TB maturities of around US$2 billion next year were not sustainable, a suggestion he would seek to roll over the paper.
“High fiscal deficits became entrenched largely due to expenditures committed outside the budget framework through Treasury Bill issuances. Resultantly, TB maturities in 2019 are estimated at US$2,2 billion, which is unsustainable in one year,” Ncube said. “In order to manage the maturities, Treasury is exploring options for restructuring this commitment, in consultations with market players.”
Over the years, banks piled billions of dollars onto their books in government paper to meet regulations that compel them to have around 30% of their assets in liquid assets in the face of a credit crisis in the economy that saw the central bank creating a special purpose vehicle to mop up close to a billion dollars in non-performing loans, Zimbabwe Asset Management Corporation (Zamco). Ncube said he will now stop Zamco operations.
As at June, a total US$4 billion TBs were taken by the country’s 17 financial institutions. CBZ Holdings, the country’s biggest bank by deposits and assets, accounted for the bulk of the paper in the market.
Government securities and cash are classified as liquid assets.
Zimbabwe’s annual inflation rate jumped to 20,85% in the month of October 2018 from 5,39% in September, while the return TBs is below 10%.
Fixed-income securities often fail to outperform inflation because the interest rate on the investment is often locked.
Ncube said inflation will come down once the budget deficit, current deficit and money supply growth are contained.
A senior banker said Ncube’s move changes TBs’ yield curve and spreads.
“The move by Treasury to extend the maturity tenure of TBs basically means forced rollovers. It also suggests defaulting, while it changes the TBs’ yield curve, spreads and risk profile,” the banker said. “In financial terms we simply call this defaulting. Because markets work on perception and confidence, Treasury’s action has caused some great deal of panic in the market. Banks will be exposed; they now have to find new depositors to cover the positions. On top of that they will now demand more in interest as the risk profile has changed.”
A TBs broking firm said Treasury’s action has shaken market confidence.
“TBs’ biggest advantage over other types of investments is safety. They carry almost zero default risk. For that reason they attract relatively low returns compared with other debt instruments,” the broker said. “Remember the finance world mantra: less risk, less reward. However, when the spectre of default is raised their risk profile changes and interest rates on them go up.”
Another banker said: “Banks will now start looking for non-core assets, which will be inflationary. As a bank treasurer I would not want to invest depositors’ funds in assets in which you are not sure of getting the returns when they are due.
“The standard practice is that as a lender in the TBs market, you can take all your original money together with the interest. You can continue with the investment (roll over the principal) and take your interest; or roll over both the principal and interest, but in this case it’s a forced rollover or extension of tenure, and that’s where the problem is. It leaves banks exposed, depositors at risk and wreaks havoc in the market.”