Treasury Bills for price discovery: Guvamatanga

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The $80 million Treasury Bills issued out by Government this week are only for price discovery purposes and not for funding expenditure, according to Secretary for Finance and Economic Development George Guvamatanga.

Treasury Bills (TBs) are part of open market operations (OMOs) normally issued by central banks in order to expand or contract the amount of money in the banking system.

Securities’ purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy.

They can also be used to borrow from the market to fund various public projects, such as the construction of schools and highways. When an investor purchases a T-Bill, the Government is effectively writing an IOU to the investor. T-bills are considered a safe and conservative investment since the Government backs them.

On Tuesday, treasury offered TBs for 91-days at 16,5 percent coupon rate, 182-days at 19.6 percent and 365-days at 17 percent with a total value of $80 million being offered.

An overall $51 million worth of bids were received with the highest bid rate at 47 percent for the 365 days TBs. The lowest bid rate was 13 percent for the 91 days. The highest weighted average rate was 19,615 percent for the 182 days while the lowest was 16,5 percent for the 91 days TBs.

In an interview with Business Weekly, Guvamatanga said there was nothing amiss with the issuance of Treasury Bills as they were budgeted for in the 2019 National Budget.

He explained that the latest TBs should not be confused with the ones issued in the past few years, which were issued to for recapitalisation of public enterprises, settling Government obligations and RBZ debt assumption.

“There is a huge difference with what was being done in the past when TBs were issued against RTGS balances, whereas the latest issuance will remove existing RTGS balances from the system.

He, however, said the latest ones were not for funding purposes but only to test the market.

“This is a price discovery mechanism, it’s a capital market development, and we have already said this before in our earlier communication with the market.

“We have spoken of a market led economy, and we have then said we want the market to determine the level of the exchange rate, and the level of interest rates.”

In their proper use, TBs can be used to adjust and manipulate the bank rate, which is the rate at which banks borrow reserves from one another.

“This will also allow the reserve bank to intervene wherever they see as necessary. So we don’t want to fund anything, we want to see the general feel of the market around where market interest rates should be,” said Guvamatanga.

This comes as the reserve bank has already increased accommodation rates to 50 percent from 15 percent, which some analysts believe are still below inflation and would not make a significant impact on borrowings and mopping out liquidity.

Guvamatanga, however, said Government will still come to the market to issue treasury bills as already approved by parliament in the 2019 National Budget. Part of the TBs will be used to fund the budgeted deficit.

He, however, said Government will use non-inflationary funding methods to fund the budget deficit which is expected to be above $2 billion.

“Unlike in the previous Government, what this (President Mnangagwa led) government is thriving to do is to build a track record that makes it creditworthy again.”

This, he said, includes recording positive cashflows and budget surpluses which would put Government in good stead with creditors and funders.

According to the 2019 National Budget, Finance Minister Mthuli Ncube, said “all Treasury Bill issuances will be strictly for financing of short term cash-flow mismatches.”

“Further to this, such Treasury Bill issuances will only be triggered by a Treasury Bill Issuances Note by the Accountant General.

“In addition Treasury Bill issuances will be through an auction system, in order to derive a fair market, cost of borrowing by Government, and ensure better price discovery. Such a market based system also promotes transparency and hence, market confidence.”

According to the IMF, in its report for the Staff Monitored Programme, which it has agreed with Government, the financing of the RTGS$2,8 billion fiscal deficit in 2019 relies mainly on issuing debt in the domestic market as the country is not yet eligible for World Bank and IMF funding as it still owes $13,6 billion as at September 2018.

“The programme targets raising 3,5 percent of GDP from commercial banks, which is not expected to crowd out lending to the private sector given banks’ excess liquidity and weak demand for credit from the private sector,” said the IMF in its SMP report.

“Issuance is to be at market interest rates, with auctions of TBs expected to start in the second half of 2019, which will put pressure on the Government interest bill.–ebusienssweeklyc.oz.w

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