Bank deposits artificial, says OMSEC report

ZIMBABWE’s banking sector deposits, which amounted to $8,48 billion as at December 31, 2017 from $6,51 billion in 2016, are “artificial” because they are not underpinned by normal market forces, a bank survey report says.
In an analysis of banks’ financial results for the year to December 31, Old Mutual Securities (OMSEC) said if the current trend was maintained throughout this year, it may lead to excessive further crowding out of the private sector, a development that might negatively affect projected economic growth of 4,3 percent by year end.
The survey is based on 18 banks which released year end results for the December reporting season. The banks analysed account for 94 percent of all banking sector advances and 96 percent of total banking sector deposits.
“Banking sector deposit growth was not necessarily underpinned by normal market forces as the issuance of treasury instruments (Treasury Bills) by the Government of Zimbabwe in lieu of State obligations underpinned the growth in some associated client deposits,” said OMSEC.
Treasury Bills (TBs) are exposing the banking sector to significant systemic settlement risk, given the likely default by government on maturity of these securities.
Government, through the Reserve Bank of Zimbabwe (RBZ), issued more than $1,7 billion worth of TBs between 2012 and December year, but the default risk has been high over the period under review due to the fact that government coffers are empty and Treasury has been unable to fund basic commitments such as civil servants’ salaries.
Some observers have argued that the government-backed paper has been a form of money printing, but given that Zimbabwe ditched its currency in January 2019 in favour of a multi-currency regime, this money did not have the backing of real currency and has largely thrived in the virtual, the real time gross settlement platform, with no physical notes to back it.
This, the observers say, may be the real reason behind government’s desperate introduction of bond notes in November 2016 which the RBZ says is a surrogate currency of the US dollar.
“Secondly, the failure to settle outstanding foreign payments due to nostro funding shortages similarly underpinned the high deposit base growth amongst all banks. We believe that the deposit growth exhibited in 2017, if sustained by further debt issuances in 2018, may lead to excessive further crowding out of private sector lending and limit prospects for sustainable GDP growth for the economy in general,” said OMSEC.
The slowdown in credit advancement by banks is only expected to reverse if the business environment improves and banks can access foreign lines of credit to supply industry with nostro funds, it said.
The depletion of banks’ nostro accounts has created serious settlement problems for international payments, resulting in most banks having a backlog for telegraphic transfers going back as far as four months.
The problems are part of an intensifying cash crisis in the country, which has resulted in depositors failing to withdraw their money from banks.
Long queues of people hoping to also make foreign payments have dogged banks. Even those placed on the top of a priority list crafted by the RBZ have not been getting funding for foreign payments on time. The RBZ has indicated that the priority list was meant “to promote efficient utilisation of foreign exchange and to re-orient import demand towards productive uses”.
Going forward, OMSEC said increased use of plastic money is expected to underpin non-funded income growth as a percentage of total banking income. Inflationary risk is also expected to subside provided that Treasury issuances are contained and industry does not incur supply bottl