Money Market (19-07-07)

THE money market that was expected to close down by $763 billion yesterday Tuesday actually closed short by $1,4 trillion down, among other factors, significant cash withdrawals by individuals and companies and

limited inflows by way of Treasury bills as only $24.2 billion are expected to mature during the month of July. 

As a result, today (Wednesday) the market is forecast to close short again to the tune $1,1 trillion.

All along the effect of the liquidity withdrawals through Statutory Reserve Payments that occur every Monday have been dampened by fiscal payments to tobacco farmers and gold producers, among others. 

It seems these inflows have not been taking place in significant amounts.  Maturities of CPI-linked bonds have also significantly dwindled.

Another factor that explains the massive liquidity shortage on the money market is the increase in daily cash withdrawal limits by the Central Bank on 9 July 2007.  Unfortunately, the money is not quickly coming back into circulation showing that it is going into various parallel markets. 

This resultant financial disintermediation has forced the Central Bank to limit the amount of cash it gives to banks which in turn has been cascaded downwards to individuals through cash limits by banks. 

Furthermore, shops have are reluctant to re-stock following the Government-sanctioned price cuts since the last week of June 2007 that have seen operating margins being reduced to between 5% and 10% in an environment where monthly inflation is higher than 50%. 

Money withdrawn from the market for restocking by shops usually takes about a week to come back.  However, this is not happening as restocking levels have significantly fallen to very low levels.

It seems the liquidity crunch has not affected all banks in the same way as some banks actually had surplus positions hence the support of the afternoon Treasury bill tender yesterday Tuesday of $12,5 billion.

Reflecting the tightening of the money market, short-term interest rates continued firm today with the 7-14 day rates being quoted in the 450-500% range while 90-day rates continued in the 250-300% range.

Post published in: Economy

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