Yesterday, the 3rd of August, the first foreign currency auction of August and the 7th overall was held. A slightly worrying result was the further depreciation of the Zimbabwean dollar. The weighted average rate (WAVR) was 80.4663 Zimbabwean dollars for a single US dollar, a 4.83% depreciation week on week. Soon after the auction result announcement, we were hit with a press statement introducing and explaining a new auction or auction day for small and medium enterprises which will run on Thursdays.
Rate breaks 80
The weighted average rate settled at 80.4663 and we saw many of the highlights we have become.accustommed to seeing. Once again the lowest accepted bid was the biggest determinant of the rate movement. This week’s lowest accepted bid was once again higher than last week’s weighted average rate. The cause for this is likely privately placed foreign currency with Reserve rates (prices set by the seller) which are above the previous week’s auction rate. If the Reserve Bank hopes to contain the auction-rate they will have to deal with the same devil that has caused all foreign currency and rate problems, the supply side. The current setup is doing very little to address that. We also saw a turnaround in the highest bid rate which had been creeping down week on week from the beginning but turned upwards, another bad omen. We’ve added weekly depreciation (grey line) to the deficit (blue bars) which are read from the secondary (right side) axis and expressed as percentages. While this week’s 4.83% depreciation is worrying it did buck the trend of increasing rates of depreciation. The one positive sign was a reduction in the shortfall which was at just 6.28% this week after two weeks in the 20s. With auction-rate gaining ground on parallel market rates which are believed to be somewhere between 85 and 95 depending on the platform this auction system may need to be tinkered with.
New SME auction set for Thursdays
Just when you thought it was business as usual, the Reserve Bank of Zimbabwe released a press statement announcing an additional auction for SMEs to be conducted Thursdays. This, for now, seems to run the same as the main (I suppose) foreign currency auction with lower thresholds of US$2 500 to US$20 000. If you’ve followed our commentary on the auction system from the start one of the biggest criticisms was how many players it excluded. This will certainly include more players in the auction system. All other rules seem to be the same including the use of the foreign currency priority list.
There’s an interesting statement that says SMEs were being crowded out of the foreign currency auction system by bigger players. How could they be crowded out when they were never invited to play? The minimum for the main auction is US$50 000 while the maximum for the SME auction is US$20 000, that’s a huge gap and no way anybody could’ve been crowded out. This presents an opportunity for bigger players looking for smaller amounts to bid for foreign currency. Unless some rule will be established to block them.
So let’s go over the playbook here; the RBZ unhappy with multiple exchange rates starts a new foreign currency auction system to find one true rate for Zimbabwe and then creates another auction to produce another rate? It defeats all logic. Wouldn’t the better play have been to expand the current auction system by reducing the minimum entry in the main auction? This would’ve kept us with one rate as we know it and included everyone. Well everyone who needs US$2 500 and above and has the paperwork to back it up.
The danger of this secondary auction is it increases the velocity or rate of depreciation of the Zimbabwean dollar. Assuming all other rules hold the same, the Thursday auction will base its rate on the Tuesday auction and the following week’s Tuesday auction on the previous week’s Thursday auction and repeat. We have already seen how the lowest accepted bid rate is set higher than the previous weeks (or auctions) weighted average rate and how this correlates to the current weighted average rate more than any other measure. If this perpetuates we will get the depreciation we have been seeing occur twice a week.
One country, two rates?
The bigger question is; which rate do we use now? It’s reasonable to assume we will have different rates from the two auctions unless it is rigged or fixed two blind auctions cannot produce the same rate. So which rate do we use for pricing now? Do we use the big (main) auction rate or the SME (small) auction rate? I’ve also been critical of the auction-rate not being an effective rate because it is not the price anyone pays for the foreign currency. Perhaps one could argue you were part of the auction so you are bound by the rate. What happens now when my auction produces a different rate from the rate I’m asked to use for pricing? After going to great trouble to dismiss the Old Mutual Implied Rate and parallel market rate publishing this is a confusing move, to say the least.
What the statement lacks is a start date for the auction so it is unclear if it starts this Thursday or the next. Interesting, for the lack of a better word, move by the RBZ to throw in another auction when the signs on the first are looking rather discouraging.