Government plans longer tenors for debt auctions

The Ministry of Finance is planning to extend competitive bidding auctions on government debt to a range of new maturities this year, which will mean getting comfortable with paying market price.

The government switched from selling three-month Treasury bills at a set yield to one determined by competitive auction a year ago, and is still tweaking the structure, according to ministry official U Maung Maung Win.

So far the Ministry of Finance has only sold three-month bills through competitive auction, but ideally would start selling six- and 12-month bills later this year, according to U Thatha Hla, an economist at the Asian Development Bank, which provides technical assistance to the government on debt management.

U Maung Maung Win said the ministry also plans to issue longer-dated Treasury bonds this fiscal year – starting with two-year debt and moving out to three- and five-year paper.

U Thatha Hla said the ministry plans to start issuing Treasury bonds under the competitive bidding system too, which could begin for some tenors this year.

Competitive debt auctions represent a clean break from the old approach. A mechanism for issuing government debt at market rates brings Myanmar in line with international practice.

It will also create a government yield curve, which is the key to the development of any domestic financial and securities market, U Maung Maung Win said.

Yet progress on extending the maturities of Treasury bills and bonds under the competitive bidding system relies on the government becoming comfortable with letting the market set the price.

The yield on a three-month Treasury bill was previously set at 4pc – well below inflation – and the bills were sold mainly to state-owned banks, U Thatha Hla said.

“They sold the bills to the Central Bank for decades, which led to monitisation of the deficit and didn’t help with inflation,” he said.

Competitive auctions, on the other hand, have brought a doubling in interest rates.

“That’s hard to swallow,” said U Thatha Hla, referring to the government’s adjustment to the higher cost of debt. “But we’ve had good discussions with the ministry.”

Recent T-bill auctions resulted in yields of just over 8pc, but the government only sold around half its target volume, he said.

The move to competitive auctions for six- and 12-month bills would only make sense when take-up at the three-month auctions was closer to the ministry’s target volume, he added.

The three-month yield has already moved much of the way to the 9.5pc that commercial bank officials and U Thatha Hla say the market is asking for.

“If the rate is 9.5pc that’s ok,” said an official at one commercial bank, adding that at 8pc-8.5pc many commercial banks weren’t interested in bidding. “We have to pay our customers at least 8pc [on bank deposits],” he said.

Bridging the gap between the yield expectations of the government and the commercial banks will take time. Inflation is likely to rise to 13pc by the end of this fiscal year, according to International Monetary Fund projections.

Myanmar is the latest in a long line of countries facing the challenge of moving to market rates on government debt. The ADB brought Myanmar treasury and Central Bank officials to meet their Thai counterparts, said U Thatha Hla.

Thai officials explained that debt is most expensive when a country lacks access to financing, and emphasised the importance of making sure the local market is interest in government auctions, he said.

“The rates will also come down again,” U wThatha Hla said. “It’s just a matter of accepting that the market is the market.”

Only banks are eligible to bid in the competitive Treasury bill auctions, but U Maung Maung Win expects securities companies to be added to the list of eligible bidders.

U Maung Maung Win said that in the competitive auctions there were “no plans to place a limit on how much one bank can buy, but this will be discussed during the market consultation process”.

“Consultations will be undertaken at some point in the future to determine whether this should be extended to pension funds or insurance companies,” he said.

 

Source: Myanmar Times

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