The central bank’s monthly auctions of treasury bills and bonds have nearly all missed their debt targets since Parliament doubled government’s note issuance programme to P30 billion in September 2020.
With its own savings only just recovering from the pandemic’s impact, government has largely looked to the domestic capital market to fund budget deficits widened by COVID-19 spending.
On behalf of the government, the BoB conducts monthly auctions of government treasury bills and bonds, with primary dealers bidding to lend government the funds according to the returns on offer. The primary dealers, who are exclusively banks, compete by offering the yields or returns they would desire on the funds they are willing to lend to government.
However, an overwhelming amount of the funding government has been able to secure from the capital market since 2020 has been on the shorter maturing notes, such as treasury bills, with bidders pushing for higher yields on bonds, particularly due to a sovereign credit downgrade, escalating inflation and competing returns in countries such as South Africa.
This week, central bank governor, Moses Pelaelo, revealed that inflation-linked bonds were among the initiatives being planned for the local capital market.
“We are (also) looking at introducing inflation-linked bonds to widen choice for the market and give investors an additional instrument for hedging against inflation which should be I believe, very attractive to annuity issuers/sellers,” he said at the launch of the government borrowing strategy and auction calendar on Tuesday.
Previously, as subsequent monthly auctions underperformed, Pelaelo told BusinessWeek that greater engagement was required with local capital market participants. Pelaelo said while market participants had previously told the central bank that they need long maturing assets to balance their liabilities, this appetite was not being reflected in the demand for long-term government notes.
Pension funds, in particular, have long decried the lack of long-term investment opportunities in the local market, which are required to appropriately match their liabilities.
Government notes, such as TBs and bonds, are considered the most attractive in the market, offering zero risk and stable returns, which, when they are long maturing, mean consistent yields that can be used to match liabilities such as annuities over time.
“It could also be about the differences between us and the South African market, which is highly liquid with international participation,” Pelaelo told BusinessWeek previously. “When people look at the yields here and those from others, they may have that view, but they forget the risk-adjusted returns between the two markets.
Documents availed this week indicate that the BoB plans to raise P3 billion this financial year in long-dated standard and inflation-linked bonds, whose maturities range from six to 25 years.
Draft budget estimates released earlier this year indicate that the Finance ministry expects to pay P6.7 billion extra in debt obligations in the 2023–2024 financial year, as part of funding the higher spending government has committed to going forward.
The Ministry is setting aside P17.1 billion for the repayment of interest and principal on various domestic and external loans in 2023–2024. This compares to an estimated P10.4 billion budget for 2022–2023.
