Sunday, August 20, 2017

Ambitious target set for upcoming bond auctions

The government has set an ambitious target for its upcoming Treasury bond auctions next month, aiming to sell about K1.85 trillion (US$1.53 billion) in debt, to account for 60 percent of its domestic borrowing for this year’s budget, a senior official from the Central Bank told the Pyidaungsu Hluttaw last week.

Cashiers secure piles of Central Bank K5000 notes.AFPCashiers secure piles of Central Bank K5000 notes.AFP

Speaking during a parliamentary session on August 25, U Set Aung, deputy governor of the Central Bank, said that the estimated domestic borrowing for the Union budget for 2016-17 was K3.09 trillion.

The government hoped to raise 60 percent of the funds through bond and bill sales, he said, while the remaining 40pc, or K1.236 trillion, will be borrowed from the Central Bank.

“We are planning to sell not only Treasury bills, but also Treasury bonds at the Treasury security auction commencing in September, to reduce the impact of inflation while covering the budget deficit,” he said. “The Central Bank is doing its best to reduce the inflationary impact.”

The upcoming auctions are intended to be a shift toward international standards with market-led pricing. Previous administrations would simply fix the interest rate on government bonds, failing to attract any private sector buyers from the banking industry.

In early 2015, the government started selling Treasury bills though an auction system, but it could not achieve rates high enough to entice commercial banks – the only permitted investors – so much of the debt was sold to the Central Bank. In order to buy government debt the bank typically has to print money, which in turn pushes up inflation.

Likely to begin with the sale of two- or three-year debt, the government is seeking to reduce its reliance on borrowing from the Central Bank, in part to help control inflation, which the ADB estimates at 9.5pc this financial year.

The government sold K2.99 trillion to the Central Bank in the 2015-16 fiscal year.

U Maung Maung Win, deputy minister at the Ministry of Planning and Finance, said the government would only borrow from the Central Bank “if there is no other way to borrow”.

“But our expectation over the long term is to reduce borrowing from the Central Bank,” he said. “This year might be 40pc, then next 30pc and so on.”

The previous government made initial steps to secure a credit rating that would pave the way for Myanmar to issue an international bond, hiring global lenders Citigroup and Standard Chartered to help with the process.

But the country has still not gone through the process of securing a rating, and any moves to do so will require a discussion in parliament, said U Maung Maung Win.

“There’s no international bond imminent,” he said. “We need to go through some internal processes and submit the idea to parliament.”

By virtue of the rainy season slowdown in lending, banks have indicated that excess liquidity this time of year, combined with few investment alternatives may help spur bond sales.

“The government’s target is possible,” said Daw Thidar Aye Mon, a managing director at KBZ Bank.

The savings are now slated to fund the two new ministries – the Ministry of Ethnic Affairs and the Ministry of the State Counsellor. The budget deficit will dip slightly, to K3.76 trillion from the previous estimate of K3.9 trillion.

The government sold K2.99 trillion in government debt to the Central Bank in the 2015-16 fiscal year, U Maung Maung Win told parliament, and gave several reasons why the amount had increased to that level.