October 09, 2020 (MLN): The Ministry of Finance (MoF) has decided to issue floating-rate Pakistan Investment Bonds (PIBs) having a maturity of 3, 5, and 10 years with a quarterly profit or coupon payments.
The first auction for these floating PIBs bonds is expected to be held on October 21, 2020.
To discuss features, benefits, and the government’s approach towards floating rate bonds with quarterly coupons, Financial Markets Association (FMA) recently held an online interactive session with Director-General Debt, Ministry of Finance, Mr. Abdul Rehman Warraich. The session was also graced by the presence of the Joint Secretary Finance Division, Mr. Tanvir Butt wherein he talked about the most heated debate i.e. TSA and Assistant Secretary of FMA, Mr. Saqib Sajjad, who was the Session Moderator.
Due to medium-term investment prospects, these floating-rate bonds will be attractive for investors who want to avoid interest rate risk. On the government front, these PIBs having longer maturities along with profit payments in line with 3-months T-bills will lower the rollover and liquidity issues
Sharing the details of floating-rate PIBs, DG debt, Mr. Warraich said, after consultation with the State Bank of Pakistan (SBP) and dealers, the debt office has decided to go for a pre-determined coupon rate (equal to benchmark rate) in the very first auction.
Regarding the benchmark of proposed quarterly floaters, he mentioned that it would be the weighted average yield of the 3-month Market Treasury Bills (MTBs) in the latest auction otherwise average of 3-months PKRV rates of the last 5 days would be used. When asked if there is a need to change the benchmark, Mr. Warraich said that the debt office is open to change the benchmark if it is transparent. There must be a comprehensive platform where all trades reported and recorded. According to him, so far, there are no negative consequences of the weighted average yield of the 3-month as T-bills yields remain closed to the policy rate as it should be. He further said it is time to redefine the PKRV benchmark and find a better solution.
Talking about auction methodology, the debt office said that single price auction has non-serious issues like bidders pay the lowest price bid. However, he highlighted that multiple price auction encourages competitive bidding while lessening the chances of manipulation.
Shedding some light on the benefits of proposed floaters, he underscored those market participants will enjoy higher yields proposed by floaters relative to 3-months T-Bills while carrying the similar interest rate risk involved in 3- months T-bills. Moreover, there will be potential for the structuring of new products around these PIBs for financial intermediaries. On the other hand, govt refinancing risk will decrease as mentioned above.
Mr. Warraich also discussed the Ministry of Finance’s approach to the Govt securities portfolio. He rationalized it is hard to predict what instruments are needed in the market when demand keeps changing as a result of data releases of inflation, Balance of Payment (BoP), etc, therefore, in order to cater overall market, govt provides a variety of options. He mentioned that MoF reveals its preferences through pre-announced targets whereas the market’s preferences are evaluated through the bid patterns. Ministry has to choose mutually acceptable combinations in terms of tenors, volumes, and prices.
He emphasized that MoF’s preferences should not be seen as a binding constraint. He further explained that neither party should be dictated. Ministry will unlikely deviate from pre-announced targets. Lately, they still receive criticism, he further added.
It is prudent to mention all PIBs paying profit on a semi-annual basis will be replaced with proposed quarterly floaters.
Coming to the latest heated debate over Treasury Bank Account (TSA), Joint Secretary Finance Division, Mr. Tanvir Butt said that TSA is not a new concept. He explained it is a bank account or a set of linked bank accounts through which the government transacts all its receipts and payments and get the consolidated view of government financial resources.
He mentioned that many public sector entities park unspent money outside the TSA. As these accounts are not linked to the TSA, therefore, they are not reflected in SBP reports. They remain outside the fiscal reporting framework of the government.
Mr. Tanvir divided the concept of TSA into two phases. To improve the public finance system, in phase I, the focus is to close all dormant and zero-balance accounts with the assistance of SBP. So far, 160 public entities have been identified which are fully funded by the federal government budget. TSA phase-I will be completed before March 2021, he revealed.
Talking about phase II, interactive sessions with entities, after March 2021 will be held. As per the Public Finance Act, these public entities will be classified after disclosure of information including revenue, source of funding, company laws, and rules & regulations.
He emphasized this whole exercise of TSA has no financial implication on the banking sector. SBP, being Custodian, will not allow any exercise which is not beneficial for the banking sector. The central bank shall host and maintain a treasury single account on behalf of the Federal Government, he concluded the session.
Copyright Mettis Link News
37377
