The Treasury Bills conundrum

For some time now, public sentiment that Treasury Bills (TBs) are potentially a source of market instability has refused to go away.
Accordingly, this week’s instalment of the Financial Sector Spotlight (FSS) focuses on some key aspects of these Treasury securities on which there has been considerable debate in recent times. To put things into perspective, the table below gives information on the four categories of TBs worth $2,1 billion issued by Government to date.

Financial Spotlight: Omen Muza

Potential failure to honour TBs on maturity

There are fears that banks that have a significant exposure to TBs could run into liquidity problems if government fails to honour the TBs on maturity. Financial institutions with significant holdings of TBs include CBZ Bank which in its latest annual results reported that it was exposed to tune of $760 million; ZB Bank whose exposure was $117 million while FBC held about $75 million worth of TBs.
“This situation is of great concern, the market is discounting TBs by 30 to 40%, if the banks wrote down their stocks of TBs most indigenous banks would be insolvent. There is simply no way the Ministry of Finance or the RBZ can redeem this paper or meet interest bills and they will simply have to roll them over and carry forward the interest liability,” economist and legislator Eddie Cross said.
Another economist, Brains Muchemwa, concurs and said: “Those who hold these TBs are at risk because their only way out is to sell to someone prepared to take the risk at a discount.”

FBC Holdings Group CEO John Mushayavanhu, however, disagrees and recently came out in support of the government, saying that the argument dominating the market on government’s inability to pay off the Treasury Bills (TBs) on maturity did not hold water. He argued that the government did not have to pay off all the $2,1 billion worth of TBs issued to date. Regarding the $549 million in Treasury Bills issued for NPLs taken over by the Zimbabwe Asset Management Company in order to rehabilitate companies, he said that by the time those securities matured and repayment became due, the companies would have recuperated and would be in a position to pay.

Mushayavanhu further said the $300 million TBs that were issued for the capitalisation of parastatals and State enterprises also didn’t pose a threat to the government since those entities; if they turnaround their operations, could make a profit and declare dividends which would then be used to pay off the TBs without putting a strain on Treasury. The FBC chief said the TBs issued as budgetary support were the ones that could strain the government as it had the obligation to pay upon maturity. While he was being suitably optimistic, Mushayavanhu appeared to be making the simplistic assumption that the private companies and parastatals will definitely turnaround their fortunes, while the reality is that the worsening macroeconomic operating environment suggest otherwise. The government could still end up having to pick up the tab for these TBs, the same way it took over the RBZ debt.

Lack of transparency

Lack of transparency in the issuance of TBs has limited the development of a deep enough secondary market for this asset class. The mixed sentiments in the market mean that some risk averse financial institutions have desisted from having significant exposure to TBs. Investment analysts believe it is prudent for players to have less exposure to TBs, given their illiquid nature, in order to have the capacity to easily deploy their funds wherever good investment opportunities may arise.

Appearing before the Parliamentary Portfolio Committee on Finance to speak on the Monetary Policy Statement, Bankers’ Association of Zimbabwe president Charity Jinya called for greater transparency in respect of the issuance of Treasury Bills. The bankers suggest that there must be a system that allows financial sector players to constantly monitor the issuance of the securities and their quantum in the market.

Money supply growth exacerbates foreign currency crisis.

Analysts argue that the primary cause of the currency crisis remains the conversion of United States dollars into non-negotiable paper money. Exotix Partners, a leading investment firm for frontier and illiquid assets, says there is a strong co-relation between the time government started injecting TBs into the market in 2012 and the depletion of the stock of hard cash in the market.

“As a percentage of deposits, government securities have increased from zero percent in 2009 to 28% in April 2016. Banks first began putting these securities on their balance sheets in 2012, which was the same year the ratio of ‘hard cash’ to deposits fell below 20% for the first time. This was, therefore, the first year the government of Zimbabwe started printing money,” Exotix said in a report which further argued that government had been riding on the issuance of debt to “print” money.

Exotix further argues that since the principal and interest payments on these government securities are settled on the RTGS, it is clear that the government has been using the issuance of this debt to effectively print money, which is then placed on the RTGS platform, helping to keep the RBZ liquid in local US dollars. Analysts, however, contend that this continued issuance of TBs to finance consumptive expenditure has had a huge impact on money supply growth, whose unsustainable growth threatens the parity between bond notes and the US dollar.

Discounting of Treasury Bills

By September 2016, market reports suggested that stockbrokers, struggling to deal with negative sentiment on the Zimbabwe Stock Exchange, were trading TBs, with those maturing in 2017 being discounted at 11 to 14%, as paper maturing in 2018 was discounted at between 29- 30%, while the 2019 and 2020 paper was reportedly being traded at 39 to 40%.

Valuation concerns

Another disconcerting aspect of TBs is that there are valuation concerns about the securities. The fact that there is no agreed valuation formula has created problems in the market. Accordingly, there have been calls for the return to the auction system which guarantees a discernible yield gap, assuring all investors of similar returns. This, it is argued, is opposed to the current scenario pertaining to private placements where individual investors get different rates depending on relative negotiating power.

Omen N. Muza edits the MFSB. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8 or initiate contact on [email protected].