Monetary Policy Implications on Your “Personal Wallet”

The much-awaited Monetary Policy Statement has finally been announced. A number of economic commentators have already come up with impact assessments for the economy as well as companies. However, no one has really zeroed-in on how the new monetary measures will affect personal and household incomes. This is when Piggy steps in to give some perspectives on how to devise savings and investment strategies.

The first question though is; What has really happened? In a nutshell, the Reserve Bank of Zimbabwe (RBZ) has moved away from the artificial 1:1 exchange rate and introduced a “new Zimbabwe dollar” in the form of an RTGS dollar that is floated against the USD and other international currencies within the multi-currency basket. The starting rate is roughly around 2.5 against the United States dollar (USD).  This means that the “music has stopped” and it has now been formalised that the money in your bank account or EcoCash wallet is not USD – it is RTGS dollars (simply divide by a rate of 2.5 to get the value in RTGS dollars). Further, it is now clear that Zimbabweans were not earning in USD, despite having the amounts denominated in USD on employment contracts. The ball game has completely shifted and the RTGS dollar is now the new unit of account and exchange. The implications are as follows;

  • Individuals and households that were sitting on RTGS and Bond Note balances assuming that there were at par with the USD are the biggest losers given that the exchange rate has been floated;
  • Individuals and households that had borrowed funds in RTGS and Bond Note (personal loans and mortgages) are the biggest winners given that they will repay less in real terms;
  • Individuals and households that are borrowed in hard forex but earn in RTGS dollars will be worse off given that the cost of servicing the loan in USD has increased;
  • Individuals and households that had invested RTGS and Bond Note balances in real assets (property and commodities) as well as shares have managed to preserve some value (this is why Piggy has been advocating for people to start buying shares using C-Trade);
  • Hoarders of hard FX are not likely going to yield significant returns given that there is a strong probability that the exchange rate will stabilize as more transactions are executed in the formal banking channels via Bureaux de Change;
  • Money Changing is no longer a viable business venture or full-time job. The RBZ  is taking steps to kill or reduce parallel market trading by encouraging foreign exchange transactions to be executed in the formal banking channels;
  • It is worth noting that the parallel market will not “fade away completely” given that it will still remain a source of forex for individuals with a high propensity to spend FX  (Bureaux de Change have a daily  limit of USD10,000 in terms of the FX  they can sell) and informal or unregistered businesses;
  • Flows from the diaspora and tourist funds can now be converted at reasonable rates in the formal system. This development will likely encourage more tourist arrivals (Zimbabwe will become competitive as a tourist destination from a pricing perspective) and diaspora inflows (diasporas will likely send more money back home given that value is realized in the formal banking system); and
  • Inflation is not expected to rise significantly as a result of the new measures given that merchants in the broader economy had already adjusted their prices in line with parallel market rates.

The next big question would be; What should individuals and households do after these changes?

  • Retail investors should take advantage of the Old Mutual trade while it is still profitable. While it is a fact that even in RTGS dollar terms, the ZSE was overvalued (using Market Cap/GDP metrics), improved company performances will in the long term ensure that valuations will unwind. This phenomenon means that patient foreign money may continue to linger on the markets for value. This means that pressure for Old Mutual shares may come off in the medium to long term;
  • Currently, the money market in Zimbabwe lacks depth and returns are still negative and investors should continue to look to the share and real estate market so as to preserve value; and
  • There are opportunities to invest in well managed net exporters or companies with significant export potential as these provide value preservation opportunities to investors with a long-term perspective. Some of the preferred names include Hippo, Padenga, Ariston, SeedCo and SeedCo International;

So what are you waiting for now?  Join a social trading group today and stay updated on developments.

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