Bond notes can trigger panic withdrawals

Source: Bond notes can trigger panic withdrawals – Sunday News May 8, 2016

Roberta Katunga, Senior Business Reporter
THE two month time lapse between the Reserve Bank of Zimbabwe’s announcement and expected release of bond notes into the market is likely to create panic withdrawals among the banking public while companies are likely to transfer their money to other markets such as property to hedge against uncertainties, officials have said.

RBZ governor Dr John Mangudya on Wednesday announced a raft of measures to curb illicit cash outflows and the introduction of bond notes in denominations of $2, $5, $10 and $20 — which are an extension of bond coins already in circulation as part of the measures. He indicated that the notes were likely to be released in two months.

Confederation of Zimbabwe Industries president Mr Busisa Moyo said as industry they were concerned about the period between the announcement and issuance of the actual bond notes as it could create panic in the banking and transacting public.

“There is a possibility that this time lapse can create unintended consequences in the end. There are several likely reactions that could be problematic considering our recent economic history and the general lack of confidence in locally engineered instruments,” said Mr Moyo.

Mr Moyo said some possible situations included companies and individuals moving their US dollars out of the formal system, reverting to “under the pillow” banking which would negatively affect bank deposits as well as corporates moving money into assets using the local RTGS system to hedge cash risk by investing in properties, raw materials and commodities.

“People will queue daily to utilise the $1 000 maximum withdrawals and not rest until all their US dollar balances are at zero. This again could be a negative consequence which will create further cash shortages,” he said.

Mr Moyo, however, said the reactions were likely to change, with perception easing as with the coins once reassurances from the governor, business community and the Nostro guarantor are made. He said the main challenge was of confidence and trust in local institutions.

“Memories tend to be long and vivid, likewise fear can override logic and good interventions,” said Mr Moyo.

The Bankers Association of Zimbabwe (BAZ) could, however, not shed any light on the issue with chief executive officer Mr Sij Biyam saying there was still confusion in the public domain on the governor’s statement on bond notes.

“Until clarified by him (governor), we will find it difficult to respond to questions as per hereunder,” said Mr Biyam.

Meanwhile, the local stock market has not reacted to the introduction of bond notes issue with market researchers saying the local bourse on Friday recorded its 12th consecutive day surge in trade.

“There has been no reaction on the market despite concerns over the announcement by the RBZ governor. It is business as usual as the ongoing trend continues,” Lynton Edwards research analyst Mr Kudzanai Sharara said.

Economists say the bond notes were a positive step meant to eradicate a number of challenges, including addressing the critical shortage of cash for transactions asserting that their introduction should make life easier and cheaper for the broader generality of Zimbabweans.

“If, like the bond coins, the notes are pegged directly on a one to one basis against the United States dollar, and are supported by the US$200 million bond facility negotiated by the Reserve Bank of Zimbabwe with an international bank, this would effectively mean the notes are ‘bonded’ or ‘guaranteed’ to be purchased back, in United States

Currency by the Reserve Bank of Zimbabwe. The notes will therefore represent a stable value and a very useful medium of exchange,” said an economist with a local banking institution.