First govt bond auction set for Septem­ber

The Myanmar Times - - Business - STEVE GILMORE s.gilmore@mm­times.com

A TRA­DI­TIONAL rainy sea­son slow­down in lend­ing has left banks with plenty of ex­cess liq­uid­ity, which bankers say bodes well for ap­petite at Myanmar’s first ever Trea­sury bond auction next month.

The Min­istry of Plan­ning and Fi­nance is meet­ing rep­re­sen­ta­tives from its com­mer­cial bank in­vestor base – the only per­mit­ted buy­ers of gov­ern­ment debt – on Au­gust 22, which will help de­ter­mine the tenor and size of the bond auction, deputy min­is­ter U Maung Maung Win told The Myanmar Times.

U Thatha Hla, an economist with the Asian De­vel­op­ment Bank (ADB), which pro­vides tech­ni­cal as­sis­tance to the gov­ern­ment on debt man­age­ment, said the first Trea­sury auction is likely to be for two or three year bonds.

The min­istry is hop­ing to sell around K1 tril­lion (US$841 mil­lion) in gov­ern­ment debt dur­ing its first fi­nan­cial year, but this tar­get can change based on in­vestor in­ter­est, U Maung Maung Win said.

The in­au­gu­ral bond auction marks an­other step in gov­ern­ment ef­forts to fol­low in­ter­na­tional stan­dards and is­sue debt at mar­ket price. Pre­vi­ous ad­min­is­tra­tions sim­ply dic­tated the in­ter­est rate on gov­ern­ment bonds, choos­ing yields that few pri­vate sec­tor banks found palat­able.

Bankers say trea­sury bonds sold un­der the pre­vi­ous gov­ern­ment had sim­i­lar rates of 8.75 per­cent for twoyear bonds, 9pc for three-year bonds and 9.5pc for five-year bonds. Mean­while, lenders typ­i­cally of­fer sav­ings ac­counts with an in­ter­est rate of 8.25pc and charge 13pc on loans.

This mod­est dif­fer­ent be­tween the rates at which banks lent and the rates avail­able from Trea­sury bonds, cou­pled with lim­ited funds with which to in­vest, made ear­lier gov­ern­ment bond sales un­ap­peal­ing.

Ap­petite for Trea­sury bills – debt with a ma­tu­rity one year or shorter – suf­fered for the same rea­son.

The shift to a mar­ket sys­tem started un­der the pre­vi­ous ad­min­is­tra­tion, which switched from sell­ing three-month Trea­sury bills at a set yield to a rate de­ter­mined by com­pet­i­tive auction back in 2015. The new gov­ern­ment ex­tended this auction sys­tem to six-month and 12month T-bills ear­lier this year.

De­mand among Myanmar’s com­mer­cial banks for the new T-bill auctions has not been ef­fu­sive, how­ever. De­spite con­sul­ta­tions be­tween the gov­ern­ment, the banks and the ADB, the gap be­tween the yield banks would like to see and the yield at which the gov­ern­ment would like to lend is tak­ing time to bridge.

Yields on three-month T-bills – the most reg­u­larly auc­tioned ma­tu­rity – have fallen steadily this year (see graph). The in­ter­est rate on auc­tioned debt falls when de­mand rises. But in the case of Myanmar T-bills the ris­ing de­mand is mainly be­cause lenders are sit­ting on ex­cess liq­uid­ity and have no other in­vest­ment op­tions, said U Mya Than, chair of Myanmar Ori­en­tal Bank.

“De­mand for loans and ad­vances are never high in the rainy sea­son. That’s how the cy­cle usu­ally goes,” he said. “Also I hear [ac­tiv­ity] in the busi­ness sec­tor is gen­er­ally slow. I’m not sure why that is, but many banks have sur­plus funds and so are in­ter­ested in buy­ing T-bills – that’s why the rate is down.”

For the same rea­son, U Mya Than thinks de­mand will be high at the new bond auction. MOB’s liq­uid­ity sit­u­a­tion is “favourable” and he plans to bid in the up­com­ing auction.

Even if the yield is only slightly higher than the de­posit rate banks of­fer, lenders need some form of in­vest­ment to stop in­fla­tion – which the ADB es­ti­mates at 9.5pc for this fi­nan­cial year – erod­ing their cash.

“Although you [may not] make prof­its from bonds we in­evitably have to buy them,” U Mya Than said. “Some­thing is bet­ter than noth­ing.”

U Thatha Hla said that although the banks would dearly like higher in­ter­est rates, the fact that liq­uid­ity is high made dis­cussing lower yields with the min­istry tricky.

U Zaw Min Thant, a man­ag­ing di­rec­tor at CB Bank, said his firm would buy gov­ern­ment debt, but has not yet de­cided its in­vest­ment ap­proach for the up­com­ing auction.

Nei­ther of the two Myanmar bankers would com­ment on what the yield on a po­ten­tial two-year gov­ern­ment bond should be. The gov­ern­ment sold a 12-month T-bill with a yield of 8.5pc ear­lier this month.

If an auction sys­tem pro­vides more at­trac­tive yields, that should also help spread bond pur­chases across the pri­vate sec­tor. Be­cause ear­lier bill and bond sales came with un­ap­peal­ing yields, state-owned lenders and the Cen­tral Bank pur­chased much of the gov­ern­ment debt is­sued. This al­lowed the gov­ern­ment to mon­e­tise its deficit and in turn pushed up in­fla­tion.

The min­istry ap­pears to be tak­ing ten­ta­tive steps to ad­dress the Cen­tral Bank’s pur­chase of gov­ern­ment debt at below mar­ket rates. U Maung Maung Win said the min­istry will now de­cide on a “case-by-case ba­sis” whether the Cen­tral Bank is al­lowed to pur­chase gov­ern­ment debt at a lower rate than the auction re­sult.

If the Cen­tral Bank is pre­vented from buy­ing at sub-mar­ket yields, this would in turn re­duce the temp­ta­tion for the gov­ern­ment to fall back on Cen­tral Bank de­mand, said U Thatha Hla.

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