T-bills: Government raises record Rs449b through PIBs

Intent is to re-profile domestic debt to longer terms, says analyst.

KARACHI:

The government raised a record Rs449 billion in the last two auctions of Pakistan Investment Bonds (PIBs) held in the previous two months – an amount that exceeds the target of Rs120 billion.

According to Topline Securities, the large auction size shows the government’s intent to re-profile its domestic debt to longer terms in order to reduce rollover and refinancing risk besides reflecting the rising confidence of local participants, like banks, non-banking finance institutions, corporate and high net worth individuals in the country’s economy. “Resultantly, banks’ margins are likely to improve due to the rising proportion of higher yield bonds,” said Topline Securities research analyst Zeeshan Afzal.

As opposed to the average of Rs130 billion a year in the last decade, the current government has generated Rs617 billion in the current fiscal year so far, although four more auctions are yet to be held until June 30.

Currently, the government’s domestic debt stands at Rs10.2 trillion, which is 42% of the gross domestic product (GDP). Approximately 57% of the debt consists of short-term, floating debt.

“This requires frequent rollovers and refinancing, which poses risks. In the third quarter of the current fiscal year the government intends to raise Rs2.45 trillion, which is the highest in the history of Pakistan, due to outstanding t-bill maturities of Rs2.45 trillion in the same quarter,” Afzal said.

He added that the government is changing its focus to longer tenure bonds. “We think the trend is positive and will reduce the country’s dominance on the short-term floating debt.”

The cut-off yields for the three, five and seven-year bonds remained at 12.09%, 12.55% and 12.89% respectively. The three-year instrument received the highest interest from investors with Rs134 billion or 55% of the total amount raised.

According to KASB Securities’ Farrukh Khan, the rising participation in PIB auctions will improve the banking sector’s net interest margins (NIMs) in 2014. The yield on the three-year PIBs, which has less than 30 months to maturity, is significantly (210 basis points) higher than what is offered by treasury bills, which is approximately 10%, Khan noted. He added that banks will have the advantage of raising yields without risking non-performing loans (NPLs) creation in the future.

However, there is a drawback of raising huge amounts through PIB auctions. The government will crowd out the nascent recovery in private-sector credit.

“As banks are operating with limited liquidity, they must choose between lending to either the government or the private sector. PIBs seem favourable to the banking sector (currently) as they offer higher yields than corporate lending without the risk of non-performing loans,” Khan said.

Moreover, since most analysts agree that the discount rate will remain at the current level of 10% in the near future, the risk of capital losses on the bond portfolio are also reduced. From the government’s perspective, issuing PIBs is raising the cost of fiscal financing, Khan observed. However, with limited funding options, the government will likely continue with this policy in 2014, he added.

Published in The Express Tribune, February 28^th, 2014.

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