As the half-year reporting season progresses, the developments in the banking sector together with comments from various economic players have created sustained, interesting debate around treasury bills (TBs) and Government spending pattern. 

Financial Matters with Tinashe Kaduwo

With fear of excess regurgitation I repeat my prior week quote from the RBZ governor in context. In his Mid-Year Monetary Policy Review he said, and I quote “The root cause of excess demand for forex, on the other hand, is emanating mainly from increases in money supply as a result of greater spending by Government, money creation – loans and overdrafts – by banks”. This quote was the centre of my arguments a few weeks ago and I have decide to revisit the issue. On Government spending, the RBZ Governor was spot on. Government’s overrun expenditures have created serious concerns in the market especially in the banking sector. FBCH CE John Mushayavanhu likewise gave interesting insights on the breakdown of treasury bills in the economy in his FBCH mid year results presentation to analysts a few days ago. Of the $2.5 billion treasury bills in the market, $568.3 million, 4% up from the $549 million as at December 2016, are long dated treasury bills issued on acquisition of non-performing loans by ZAMCO. Mushayavanhu argued that this portion of TBs are of no concern as the companies that have gone under ZAMCO will be able to repay the date upon maturity since they will be on a better position in terms of performance. This to some extent might be true as there has been notable resuscitation progress in some companies whose debts were sold to ZAMCO such as Rio Zim.

Starafrica Corporation for example registered improved performance through ZAMCO debt restructuring initiative which helped drive the working capital position and reduce debt levels. If a good number of firms that have gone the ZAMCO way replicate such performances, ZAMCO related TBs will not have minimal negative impact to Government’s repayment capacity. However, it is worth noting that performance of a company is a function of broader aspects not limited to debt only. An adverse macroeconomic environment and other unforeseen shocks may result in continued underperformances. Moral hazard and dependency syndrome, a common bug among some of the companies that have gone under ZAMCO may take precedence resulting in continued underperformances. To therefore broadly say that these companies will entirely be able to repay the debt may not be entirely true. The Government will remain responsible for the debt and these TBs are of concern to the market.

Another long-dated $262.7 million worth of TBs were issued for recapitalisation of Government related institutions. POSB, Agribank and ZB are among institutions in the banking sector that were issued TBs for capitalisation by the Government. There has been remarkable performance progress in all these institutions with POSB and Agribank declaring dividends to the Government. This is encouraging and the Government should continue to monitor these entities to ensure fruitful returns to the investment. $826.8 million which is 6% up from the December 2016 position of medium to long dated TBs were issued under RBZ Debt Assumption. The move was intended to equip the central bank to fully execute its roles which is positive for the economy and to ensure banking sector stability.

The most worrying portion of the TBs is the $843.2 million issued for Government budgetary support. This is an 87% increase from the $450 million as at December 2016 and implies that the Government has borrowed closer to $400 million through TBs in the first 6 months of the year. Of concern  is the record level of recurrent expenditure which constitute around 90% of Government expenditures, suggesting that most of these TBs were for consumptive purposes and little for investment projects. Government budgetary support TBs are also short-to-medium-dated which means that they have an immediate impact to Government repayment capacity. Pressures of election financing with some sources estimating it at around $250 million and populist spending as the norm towards elections, entails that the Government may continue to issue these budgetary support TBs. This is a source of concern as the economy is almost in a similar quagmire as in the hyperinflation era where fiscal indiscipline led to record level money printing which subsequently led to record level inflation and eventually the demise of the local currency. The market is keeping a close watch to the aggregate with most economic players preferring to hold real assets such as properties and equities.