* Rejection of over 90% of the money offered indicates there is ‘too much cash in the system’ and that Government is not ‘desperate to borrow’
* When there is ‘too much money’ and the Government says ‘no’ rates must fall — that is not an accident — it is policy through action, not talk—economic analyst Benedicto Nkhoma
By Duncan Mlanjira
Soon after assuming office in October, President Arthur Peter Mutharika indicated that his administration inherited an unprecedented high debt from public borrowing and promised to solve this through austerity measures that were instituted, which included prudent public borrowing and this has come to pass.
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When the Government went to the market, through the Reserve Bank of Malawi (RBM) to borrow money through Treasury Bills auction, investors offered an excess of K179 billion but what happened surprised many as only K12.4 billion was accepted.
This represents over 90% rejection and according to financial market analyst, Benedicto Bena Nkhoma — a respected social media influencer on economic matters — indicates there is ‘too much cash in the system’ and that Government is not ‘desperate to borrow’.
“When there is ‘too much money’ and the Government says ‘no’, rates must fall — that is not an accident — it is policy through action, not talk,” wrote Nkhoma on his Inspirational and Motivational Facebook platform a day after RBM posted the results of the Treasury Bills auction.
“Smart money watches these signals early,” he said. “Banks and institutions are holding a lot of money and are looking for a safe place to park it”, thus his observation that the Government is not ‘desperate to borrow’ and that if it was under pressure, it would have taken more money that was offered.
He further indicated that the move is for interest rates in the commercial banks to be pushed down as the 91-day Treasury Bill yield fell to 12% — which was 15% in the previous auction.
He analyses that “there is a clear signal; no long-term borrowing was accepted” since there was zero allotment in the 182-day and 364-day bills: “Government refused to ‘lock itself into expensive long-term debt’.”
Benedicto Bena Nkhoma
Nkhoma appraised his audience that this means “short-term interest rates are likely to continue softening” and that “banks and the general fixed income investing public, including pension funds, will earn less from Treasury Bills”.
“Deposit rates may slowly come down,” he continues. “Investors must rethink where returns will come from [and] the big message is: when there is ‘too much money’ and Government says ‘no’, rates must fall.
Nkhoma’s ‘Inspirational and Motivational’ social media platform is closely followed by like mind thinkers, and one of them, McGiven Chiyombo Msukwa wondered why the investors are “afraid” of diversifying their businesses “with great ideas like textile industry, irrigation farming and value addition, manufacturing like organic fertilizers and inorganic fertilizer, shoe making, animal rearing and meat processing?”
In response, Bena Nkhoma said: “People have different risk appetite depending on so many factors. Treasury Bills are risk free but also provide the needed liquidity and fixed income.”
Ovani Sita also responded to Msukwa to say that the investors were used to the former system of no rejection, and observes that if the trend will continue “they will think in other ways of investing. To my thinking, this may boost the private investment sector where ordinary citizens will be involved.”
Levi Kalumba opined that if commercial banks were operated “in honesty, this is the time to trim the interest rates downward, or capped low interest rates which will stimulate the business booming” — which Chance James Mbale agreed to, saying: “This is a very positive move; as the government is rejecting the money, lenders will be forced to lend this money to the private sector, which, in turn, will accelerate investments and production.
“This is how the economy grows. Indeed, this is not by accident,” Mbale said in agreement with Bena Nkhoma.
Madalitso Manuel Phiri applauded the new government administration’s approach, observing that the financial service institutions we finding it easy to do business in the last few years since “the treasury bills were easily accepted and the stock market was booming”.
“[Minds must now work overtime] on where to invest those money now. This government is making a lot of money through taxes, I don’t see them borrowing a lot like before. It’s no longer business as usual.”
James Langford perceive that there will be “no super normal profits for banks this year [as they will be forced] to channel their idle funds to private sector, which will have a bargaining power on the borrowing rates”, with Vincent Wandale commenting that “this confirms that there is excess liquidity in the market. How do we wipe out the excess liquidity; city creation project”.
Joshua Chrissford contended that “the banking sector and the other side of financial institutions should now find another market to invest its money like in the private sector. The government is now trying to restructure its debt borrowing and financing. This will hit the financial institutions differently but I believe the market is not yet saturated out there.
“The government haircut is also the one thing that will even force these financial institutions to look elsewhere for better because they can’t keep their money idle,” said Chrissford.
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When asked if this is Government’s move to mopping liquidity, Bena Nkhoma said “it is not at all [but] it’s allowing institutions to deal with excess cash and in the process it will force them to quickly find ways of productively redeploying them through lending”.
“In the process, with the low Treasury Bills yields and low maize price, the reference rate may come down making loans more affordable. The question is whether Government’s action means they have ‘fiscal space’ that they don’t really need the money or they are just driving a certain policy position to drop rates.”
Levi Kalumba wondered why commercial banks and the RBM are not revising interest rates downwards, “which could trigger the borrowing and also make the money move around — through production and consumption. He observed that “Government could collect more taxes and banks may generate more money through interests and economy move upwards — creating jobs and opportunities”.
In his response, Bena Nkhoma said: “There is always a lag! Until inflation figures and other relevant inputs are known, then they would make the changes. Mind you, excessive and if not properly managed, low interest rates can affect other areas like demand for more forex which can put pressure on balance of payment.
“It can also mean a lot of liquidity which can increase inflation — I t’s a delicate balance,” said Nkhoma, who persistently offers insightful economic analyses on his Inspirational and Motivational Facebook platform.
