Zim lending rates to ease

Harare – Lending rates in Zimbabwe, presently hovering between 10 percent and 18 percent, are expected to ease significantly following the resumption of the Reserve Bank of Zimbabwe’s lender of the last resort function. Over the near term, analysts say a brighter outlook for the economy has increased the prospects for rate stability. RBZ was last week capitalised to the tune of US$7 million to revive its lender of last resort function and as this becomes functional, rates are expected to slow down. The central bank last played this function before the introduction of the multiple currency trading system in February last year. “We have not realised anything yet, but I am sure when these funds become operational we are going to see rates coming off because there would be a lender of last resort, a factor that will bring in confidence into the market,” said a Harare based analyst. Stability of rates and the effectiveness of the lender of last resort should also bring back long term paper as well as treasury bills. Bankers Association of Zimbabwe president Mr John Mushayavanhu was upbeat that the banking sector was headed for brighter times now that the central bank was liquid again. The lender of last resort status means that banks now have a fall back position when their books fail to balance because they can now access overnight lending. Such insurance induces confidence in the sector between banks and depositors and between banks themselves. The interbank market had become non-existent but now banks can do business with each other with the confidence that any resultant mismatches will be fixed by the central banking. Furthermore, banks could now lend more to individuals and corporates, increasing the loans to depot ratio from 62 percent in June to 70 percent. Deposits, currently at US$2 billion, are also expected to rise significantly over the next few months as banks consolidate their positions.  “Its now possible for us to lend more than we have been doing,” said Mr Mushayavanhu. This is set to induce greater economic activity in an economic that has largely been starved of funding. The money market will continue providing better returns than the equities market, at least in the short term as liquidity constraints prevail. Although it has been largely anticipated that liquidity could significantly improve after the sale of Chiadzwa diamonds, money supply has remained low and the situation would remain favorable for money market investors. Since the beginning of the year, the money market has outperformed the returns from equities market. Indications are that annual risk adjusted returns for available local money market securities for this year should be above 23 percent. Local rates are above those being offered on regional and international markets. Money market rates are currently hovering between 10 percent and 18 percent thereby offering better returns to the stock market. South Africa, Botswana, Mozambique and Zambia are trading at below eight percent while the US, UK and Japan are below four percent. “The comparison makes the local money market one of the most competitive in terms of returns and comparing it with equities market, the money market is the best option for investors. “But for long term investors, the ZSE is the best option. Our market is a buy because the stocks are so cheap,” said another analyst. While additional liquidity is expected in view of some lines of credit being availed and sales from Chiadzwa diamonds. “There is huge demand for funding on the economy that is highly capable of sustaining interest rates on the higher side, despite some improvement of liquidity on the economy. “Another indication that clearly shows that liquidity will remain tight is a statement by the Finance Minister (Tendai Biti) that the country would stick to a cash budget.” The money market is the most favorable as it allows investors to unwind their positions in the shortest possible period while preserving their capital invested. “In the short term, the money market will continue to offer better returns owing to the tight liquidity situation obtaining which leads to higher returns from financial institutions. “In comparison, depression will continue owing to a host of uncertainties.”

November 2010
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