Wednesday, April 28, 2010

BoZ allays fears on Forex stability

BoZ allays fears on Forex stability
By Chiwoyu Sinyangwe
Wed 28 Apr. 2010, 03:40 CAT

THE Bank of Zambia (BoZ) has said dumping of government securities by foreign portfolio investors does not pose a threat to the stability of the foreign exchange market because their position is almost insignificant.

There has been some fears that with yields on the government securities collapsing as BoZ reduces its Open Market Operations (OMO) and excess liquidity will result in insignificant demand for government paper and international portfolio investors are probably trying to exit Zambia as their local-currency fixed income positions mature.

According to some market analysts, this could place some pressure on the foreign exchange market in the immediate short term, or at least prevent the kwacha from appreciating against global currencies.

But BoZ head of public relations Kanguya Mayondi said the position of foreign portfolio investors in the government securities was not big enough to cause instability in the local foreign exchange market.

Mayondi said reduction in the holdings of government treasuries was a rational investment decision as investors search for better returns in competing financial assets and destinations following falling yield rates in Zambian treasury securities.

“However, given the presently small proportion of non-residents’ investment in government securities relative to amounts held prior to the financial crisis, the reduction in their securities holdings does not pose a significant threat to the stability of the foreign exchange market nor to the macroeconomic environment in general,” Mayondi said. “Nonetheless, the Bank will continue to closely monitor developments in this segment of the market and will take appropriate remedial action should this be deemed necessary.”

Mayondi observed that yield rates on Treasury Bills and Bonds had collapsed in recent months.
“The sharp fall in yield rates is a result of many factors, including high liquidity levels in the banking sector. As banks compete for investment in treasury securities, they exert a downward pressure on interest rates and this is what has been happening lately,” said Mayondi.

“The withdrawal of foreign investors from the domestic debt market is also driven by a number of factors, including global risk concerns and return considerations on their investments. Zambian treasuries have historically provided investors with a high return even at the height of the global financial crisis.”

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