THE emergence of a multi-tier exchange rate on the back of foreign currency shortages has a distorting effect on the country’s monetary policy evidenced by the mismatch between hard currency and unbacked RTGS dollars.
This is contained in a recent banking sector equity research report, which was conducted by IH Securities for the year ended June 2018. According to the study, the distortions in the financial services sector are partly to blame for the rise in inflation, as the country remains a net importer of several finished products.
“The ‘foreign exchange market’ appears to have been segmented into a multi-tier exchange rate system where RTGS dollars to USD trade on a 1-1 basis through the formal banking system with allocations focused mostly on ‘priority 1’ importers of essential goods, whilst outside the banking system, there are various tiers trading at multiple premiums,” said IH Securities.
“Bond notes are traded at a market-driven premium on the parallel market, RTGS dollars are similarly traded at a higher market driven premium,” it added.
The report revealed that premiums also vary depending on the size and cleanliness of bills and on whether the recipient is purchasing hard cash in hand or receiving an off-shore transfer of hard currency. Consequently, this has created a dilemma for foreign investors looking to invest in the country.
Reads the report: “We have observed that portfolio investors have been using fungible stock Old Mutual as a proxy for a perceived exchange rate by measuring the premium to which Old Mutual’s Zimbabwe listing trades in relation to its counterpart listings in South Africa and the UK”.
It added: “Whilst theoretically these investors fall under Priority 1 and should be able to eventually repatriate both profits and dividends on a 1-1 basis in hard currency, we have observed that such payments (portfolio) have been stuck in the queue for repatriation in some instances for as long as 18-24 months”.
According to the report, the Old Mutual Implied Rate is often used as a proxy to track the real exchange rate between Zimbabwe electronic dollars and the US dollar and ultimately to ascertain a ‘real’ value on their portfolios.
IH Securities also observed a surge in foreign investors switching out of the 4th quarter of 2017 repatriation queue to acquire Old Mutual (OML) shares before disposing of those shares in South Africa or London as a way of indirectly repatriating funds.
“Interestingly the sellers of OML were predominantly local retail investors speculating on the premium earned when doing the reverse trade; acquiring OML shares on the JSE or LSE to dispose of on the ZSE,” said the report.