-Republished with authors permission
…What happened?
August 13 marked the seventeenth time that the Bank of Zambia, on behalf of the central government, came to the primary market sale Treasury bills this year. Against government appetite of ZMW 1.3 billion, a total of ZMW 1.45 billion (at cost) was bid and wholly mopped up by government leading to a subscription rate of 113% and 13 percentage points above target. Notwithstanding, the slicing of yields came to a squeaking halt with yield rates on all tenors on offer remaining flat. Better as this may seem compared to the preceding auctions’ under subscription of 78.4%, we have noticed demand for short term government paper going somber in recent auctions. Since a record high of 3.5 around mid-June, the bid-to-cover ratio has plummeted 62% to 1.3 recorded during the latest issue.
… why is demand momentum subsiding?
First of all, we have noted a contemporaneous tightening of money market liquidity in recent weeks at the time that the government was also issuing the COVID-19 bond and one would not downplay the role that this outturn is playing on auction floors. Second, and prior to the demand slowdown we have just observed, there was a rushed chase for Treasury bills by the market players fueled by aggressive money market liquidity injections from the central bank at the time that the private sector was short of economically sound investment opportunities. Operating with internal regulatory frameworks, we are meant to believe that most of these players have already sniffed the limits of their lending exposure to government and are therefore slowly retreating.
Third, the prior competition gave room to the government to embark on a serious journey of chopping yields thereby significantly decimating real returns on Treasury bills given an overly high inflation figure (nearly twice above target range at 15.8% in July) with the number for the 91-day bill currently underwater. This has rendered these short term government papers less appealing and recent demand fold up also implies that investors may be deeming these real rates as trailing the sovereign credit risk (remember that COVID19 has been dwarfing revenue collections but public spend momentum is not relenting).
… what happened during the rush?
In the thicket of these developments running into the close of H1 2020, private sector players were the obvious losers while the government was winning (crowding-out effect) as far as credit extension by commercial banks was concerned. In particular, commercial bank’s credit growth to government jumped to 17.3% in Q2 from a paltry 1.3% in Q1 2020 while that to the private sector tumbled to -4.3% from 10% in the comparable periods. In short, the central bank was expanding its balance sheet merely to feed a yawning government treasury.
… what is the picture in H2 2020?
For starters, the picture in the foregoing paragraph is not likely to change any time soon. In fact, a complete mop-up of the total bid amount in the latest auction suggests that the recent rally in T-bill prices may have come to an end. In cementing this case, we do not expect the recent downtrend in short term treasuries demand to reverse this year owing to the factors we earlier highlighted.
As a result, the government may struggle to finance its expenditure during the remainder of the year. To top it all, the suppressed level of the O/N cost of liquidity on the interbank as well as fear of fueling inflation in view of elevated money supply growth is likely to limit BoZ’s scope to continue injecting money into the economy via OMO if we assume shrewdness in monetary policy execution. The O/N interbank has been sitting below the policy rate since mid-July and is now almost testing the lower limit of the 8.25-11.25% policy corridor.
About the Authors
Gerald and Patrick are economists at ZANACO, Zambia’s biggest indigenous bank. However, the comments, the opinions, and conclusions reached are solely those of the researchers and do not represent the opinion of ZANACO, its employees, or the Board.