Monetary Policy Statement January 2014

The enhancement of the role of the Reserve Bank The recapitalisation of the Reserve Bank will pave way for the reestablishment of the lender of last resort and banker to the government functions. This will see the Reserve Bank hosting Governments Exchequer account with effect from 31 March 2014. The restoration of the lender of last resort facility implies that an overnight accommodation rate will be announced by 31 March 2014 and becomes applicable for the facility. The overnight accommodation rate will be the anchor interest rate that will act as a benchmark for market rates. The report further highlighted that as market conditions improve, the Reserve Bank intends to introduce repos and reverse repos to improve interbank trading and help easy attendant liquidity challenges. Inter-bank market and the yield curve The restoration of the lender of last resort function will see the reopening of an interbank market backed by the issuance of Treasury bills as acceptable security to be pledged by deficit institutions when borrowing. Thus the Reserve Bank at its recent Monetary Policy Committee meeting (held on Thursday, 23 January 2014) came up with a proposed yield curve for the country which is adjusted for country risk premium and inflation developments. The proposed yield curve is as follows: 3 months 6.6%, 6 months 7.2%, 9 months 7.8% and one year 8%. The proposed indicative yields are envisaged to sanitise the countrys interest rate structure which had curtailed deposit and credit growth. This proposed yield curve acts as a guide to the structure of interest rates, especially the Treasury Bills rates. Given the attendant sovereign risk due to high debt arrears with
Tonderai. J. Maneswa tonderai.maneswa@imara.com +263 4 700 000, 790 888 / 090

Equity Research Zimbabwe 30 January 2014 Economic Note

On Wednesday, 29 January 2014, Dr. Charity L. Dhliwayo announced her maiden Monetary Policy Statement highlighting the tight liquidity environment and a plan to restore the lender of last resort function of the Reserve Bank. As initially reported in the 2014 National Budget, the government through the Ministry of Finance and Economic Development, has undertaken to adequately fund the resuscitation of the lender of last resort facility with amounts of between USD 150.m and USD 200.0m. Regarding banking sector capitalisation, the Reserve Bank maintained minimum capital requirements at the current levels of USD 25.0m for commercial banks, USD 25.0m for merchant banks, USD 20.0m for building societies, USD 15.0m for discount and finance houses and USD 5.0m for microfinance banks. Compliance with the approved capital levels has now been moved to 31 December 2020 from 31 December 2012 . Banking Sector Capitalisation New Capital Threshold 31 December 2012 (USD m) Commercial 25.0 Banks Merchant Banks 25.0 Building 20.0 Societies Finance Houses 15.0 Discount Houses 15.0 Microfinance 5.0 Banks

multilateral institution we believe the term structure of interest rates is understated and without a full disclosure on the figures used for country risk by the Reserve Bank it is difficult to analyse the term structure of interest rates. Banking charges and lending rates The Memorandum of Understanding that was signed between the RBZ and the participating banks in January 2013 was not renewed. Banks will now be required to apply to the RBZ to be given clearance to increase charges and lending rates. Non-performing loans and insider loans Total banking sector deposits amounted to USD 4.7bn while loans and advances were USD 3.7bn as at 31 December 2013. The non-performing loans (NPLs) to total loans ratio closed the year at 15.92% and they were mainly concentrated in local undercapitalised banks. As at December 2013, the level of total insider loans in the banking system was USD 175.3m (including Interfin Bank). This has resulted in the Reserve Bank banning the granting of loans to insiders with immediate effect while banks are not allowed to roll over any outstanding loans.. Introduction of additional currencies Trade and investment ties between Zimbabwe, China, India, Japan and Australia have grown and this has necessitated the addition of these countries currencies. In addition to opening accounts denominated in Botswana pula, British pound, Euro, South African rand and United States dollars, individuals and corporates can now also open accounts denominated in the Australian dollar (AUD), Chinese yuan (CYN), Indian rupee (INR) and Japanese yen (JPY).

31 December 2020 (USD m) 100.0 100.0 80.0 60.0 60.0 10.0

Our Assessment Just like the national budget the MPS was largely market neutral and the effect on the stock market will be very minimum. Vulnerabilities in the banking sector will remain elevated especially on undercapitalised and less liquid financial institutions. The low yield on the Treasury Bills will act as deterrent to potential investors and we dont expect the resuscitation of the interbank t o impact on the liquidity of ZSE. Returns on the ZSE are expected to be ahead of the yield on the treasury bills and thus will continue to attract investors on the bourse. Legacy issues from the Reserve Bank will also impact the bank in successfully implementing a vibrant inter-bank market.

Imara Africa Securities (A division of Imara SP Reid) Imara House, Block 3 257 Oxford Road Illovo Johannesburg 2146 South Africa Tel: +27 11 550 6200 Fax: +27 11 550 6295

Imara Securities Angola SCVM Limitada Rua Rainha Ginga 74, 13th Floor, Luanda, Angola Tel: +244 222 372 029/36 Fax: +244 222 332 340

Capital Securities Ground Floor Plot 64511 Showgrounds Gaborone Botswana Tel: +267 3188886 Fax: +267 3188887 Members of the Botswana Stock Exchange

Imara Edwards Securities (Pvt.) Ltd Tendeseka Office Park 1st Floor Block 2 Samora Machel Avenue Harare, Zimbabwe Tel: +263 4 790590 Fax: +263 4 791435 4 Fanum House Cnr. Leopold Takawira/Josiah Tongogara Street Bulawayo Tel: +263 9 74554 Fax: +263 9 66024 Members of the Zimbabwe Stock Exchange

Imara S P Reid (Pty) Ltd Imara House 257 Oxford Road Illovo 2146 P.O. Box 969 Johannesburg 2000 South Africa Tel: +27 11 550 6200 Fax: +27 11 550 6295 Members of the JSE Securities Exchange

Stockbrokers Malawi Ltd

Ground Floor NBM Business Centre Cnr. Hannover Avenue/ Chilembwe Road Blantyre

Malawi Tel: +265 1822803 Members of the Malawi Stock Exchange

Namibia Equity Brokers (Pty) Ltd 1st Floor City Centre Building West Wing Levinson Arcade Windhoek Namibia Tel: +264 61 246666 Fax: +264 61256789 Members of the Namibia Stock Exchange

Stockbrokers Zambia Ltd 2nd Floor Stock Exchange Building, Central Park Cairo Road/ Church Road P O Box 38956 Lusaka Zambia Tel: +260 211232456 Fax: +260211224055 Members of the Lusaka Stock Exchange

This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara Edwards Securiti es (Pvt.) Ltd. (Imara) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara group of companies including their respective associated companies (together Group Companies), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. Imara Edwards Securities 2014