First govt bond auction set for September
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.