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Structuring Asian Bond Market
From Demand Side
case study-Pakistan
Muhammad Arif
Joint Director/Head Money Market Operations
State Bank of Pakistan
March 25, 2006
Bangkok, Thailand
Contents
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Why Bond Market Required?
Pre requisites
How to buildup Bond Markets
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ACD initiative regarding development of Asian
Bond Market
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Case Study
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Pakistan
Why Bond Market Required?
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Following Mexican and Asian crisis, the importance
of local bond market came into limelight
These crises gave following lessons:
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Foreign exchange exposures can be devastating
Foreign capital flows can be volatile
The risk of liquidity and maturity mismatches can be very
acute and is a source of systemic risk
These risks can be mitigated through the
development of financial sector and this goes hand
in hand with the need for substantial mobilization of
local savings, with key role for the local debt market
and local stock market
Why Bond Markets? (continued)
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Development of local bond market provides:
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Diversification of financial sector into equity, debt and bank
financing
Effective allocation of capital
competition in financial sector
Supports infrastructure development, privatization,
securitization, and the rise of new institutional investors
requiring long term assets to match long term liabilities
Reduces the currency, interest rate and funding exposures
risks
Allows more efficient allocation of savings by reducing
banks role that also reduces the element of political
interference
Why Bond Markets? (continued)
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Allows borrowers to use capital that is tailored to
their assets and operations
Provides retail and institutional investors with
several high quality and liquid domestic saving
vehicles
Creates monetary policy instruments
Provides most stable type of borrowing that a
country or corporation can engage in
Pre requisites
Following are the pre-requisites for the development of
Bond Markets:
 Credible and Stable Govt.
 Sound fiscal and monetary policies
 Sound exchange rate and capital account policies
 Effective Legal, Tax and regulatory infrastructure
 Smooth and secure settlement system
 Liberalized financial system with competing
intermediaries
How to Buildup Bond Market
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More complicated then developing equity
market as it needs
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Supporting pricing infrastructure
Money market and longer-term benchmarking
Dealers and market makers which means creating
a new class of intermediaries that can take
positions and manage their risks
How to Buildup Bond Markets (continued)
Environment supporting bond markets
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Macro and political stability
Economic growth and low Inflation
Sufficient number of issues
Interest rate structures
Tax policies
Broader legal framework
Additional Factors supporting bond market
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Presence of government securities market
Market yield curve
Dealer community
Well developed trading, clearing and settlement systems
ACD initiative regarding development of
Asian Bond Market
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ACD bond initiative under Chiang Mai declaration is
to provide support to regional bond market in Asia to
check outward flows and to create an avenue for
investment by Central Banks as well as
institutional/retail investors.
In this respect the challenges faced by ABF floated
so far by EMEAP group are;
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Widening investors base
Enhancing market liquidity,
Raising price transparency,
Improving market infrastructure.
Removal of cross-border impediments.
Credit ratings.
ACD initiative regarding development of
Asian Bond Market
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ABF expertise in PAIF and single market funds
may be utilized for further development.
As next phase, when other ACD members will be
considered to qualify for next Fund, ideas may be
explored to structure it on two layered structure
with Senior and subordinated structure where
Senior segment may hold AAA rated securities
and subordinated segment may have less than
AAA rated securities. These segments will remain
subject to rebalancing. This is one of the solution
for moving forward and making all ACD members
part of ACD initiative.
ACD initiative regarding development of
Asian Bond Market
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The consensus among member countries is
essential to materialize followings;
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Regional rating agency.
Comprehensive communication mechanism,
Cross border funds flow arrangements.
Key Indicators – Pakistan
FY 02
FY 03
FY 04
FY 05
4,402
4,823
5,533
6,548
GDP Real Growth Rate at factor cost
3.1%
4.8%
6.4%
8.4%
National Savings (% of GDP)
18.6%
20.8%
18.7%
15.1%
Total Revenue (% of GDP)
14.2%
14.9%
14.3%
13.7%
Budget Deficit (% of GDP)
4.3%
3.7%
3.0%
3.2%
3.54%
3.10%
4.57%
9.28%
Gross Domestic Product
(in billion PKR)
Inflation Rate (CPI)
Bond Market Data (as on June 2005)
(%age of GDP)
Total Debt
63.9
Domestic Debt
32.5
External Debt
31.4
As of Feb 2005 (US$. in billion)
Market Treasury bills
10.00
Pakistan Investment Bonds
(Government Bond)
5.00
Bond Market Data (as on June 2005)
As of Feb 2005 (US$. in billion)
Corporate Bonds
Commercial Papers
2.00
.1
Status of Bond Market in Pakistan
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Tenors
sovereign, quasi-sovereign and private sector bonds are
in place
MTBs are of 3, 6 & 12 months
Long term government securities i.e PIB’s are of 3,5,10,
15 & 20 years
Tenors in Corporate bonds i.e TFC’s are 3,5,7 and 10
years
Tenors in commercial papers are up to 9 months.
Auction calendar is available in Market Treasury Bills on
monthly basis and in PIBs on quarterly basis
Status of Bond Market in Pakistan
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At present Auction is conducted manually which will be
done electronically after full implementation of RTGS/
Globus in this year
Govt. Bonds are of fixed nature while corporate bonds
are fixed/ floating & collars
Participation of non-residents in the primary market is
facilitated by Special convertible account and secured
depository arrangements
Primary dealer system exists with 12 banks,1 brokerage
house and 1 DFI for distribution of Government
Securities. Their performance is measured periodically
on given performance criteria.
Status of Bond Market in Pakistan
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Market making facilities are available through online dealing
systems at the well equipped treasuries of Primary Dealers
KIBOR/KIBID rates appear on Reuters daily at 11.30 AM to
disseminate rates up to 3 years to the market participants.
Above 3 years rates are also available on Reuters provided by the
Primary Dealers.
Corporate Bonds rates are also made available by credible brokers.
Short selling is allowed.
OMOs as and when market conditions desire
Captive source of Govt. Funding discontinued
Govt. securities Outright/ Repo market well developed
Securities settlement on Delivery versus Payment System
Status of Bond Market in Pakistan
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Regional and global investors are encouraged to
participate through Special Convertible Account facility
All bonds are rated through local Rating agencies as well
Standard and Poors and Moody's.
Retail investors are encouraged to invest through non
competitive bidding option
For govt. securities SBP has issued all relevant
instructions whereas in corporate bonds, SECP has a
system in place. Both coordinate on these matters on
quarterly basis.
Securities Laws under Public Debt Act 1944 and Public
Debt Rules 1946 exists whereas for Corporate Bonds
SECP has full regulations in place.
Status of Bond Market in Pakistan
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State Bank acts as depository for Government
Securities, who has been declared eligible by New York
based Global Custodian agency for making investment
by American investors under section 17 of its SEC law.
For Corporate Bonds Central Depository Company act
as depository
All Government/Corporate Bonds now exist in scripless
form.
SBP and SECP are now actively working to list
Government Securities on Stock exchange and to allow
Strip trading against these bonds.
Status of Bond Market in Pakistan
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Fiscal Responsibly ACT 2005 is now in place that restricts
Government to over borrow above given threshold and to plan
Government Debt under Public Debt Office on regular basis. This
will check crowding out effect in the market.
In last three years GOP has accessed three times international bond
market by floating its sovereign bond with oversubscription each
time.
GoP is in contact with IFC and ADB to allow supranational Bonds
flotation in Pakistan.
SBP and SECP are working actively to make Corporate Bond cost
effective.
Three bond indices are now in pace that provide price discovery to
the investors on daily basis on clean price/Total Return basis.
Revaluation rates are disseminated on Reuters daily to the tenors
up to 20 years
Yield Curve
1998 Sovereign Yield Curve
16%
Yield
15%
14%
13%
12%
3 Month
6 Months
12 Months
3 Years
Tenor
5 Years
10 Years
Yield Curve (cont.)
1999 Sovereign Yield Curve
16%
Yield
14%
12%
10%
8%
3 Month
6 Months
12 Months
Tenor
3 Years
5 Years
10 Years
Yield Curve (cont.)
2004 Sovereign Yield Curve
12.00
10.00
8.00
6.00
4.00
2.00
0.00
3M
6M
1Y
2Y
5Y
10Y
15Y
20Y
Yield Curve (cont.)
2005 Sovereign Yield Curve
12.00
10.00
8.00
6.00
4.00
2.00
0.00
3M
6M
1Y
2Y
5Y
10Y
15Y
20Y
BMA PGBI
JSPGBI
FMA PGBI
28-11-05
14-11-05
31-10-05
17-10-05
03-10-05
19-09-05
05-09-05
22-08-05
08-08-05
25-07-05
11-07-05
27-06-05
13-06-05
30-05-05
16-05-05
02-05-05
18-04-05
04-04-05
21-03-05
07-03-05
21-02-05
07-02-05
Pakistan Government Bond Indices
100.00
95.00
90.00
85.00
80.00
Corporate Bonds
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Term Finance Certificates (TFCs) is local name for corporate
bonds.
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Companies are trying to raise debt through TFCs. The CY 05
was relatively better in this regard as 14 companies issued
corporate bonds at KSE worth Rs16.8bn, highest since 1995.
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Out of 14 TFCs, 6 were issued by commercial banks for raising
their equity levels.
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In all issues of TFC’s during 2005, Kibor (Karachi Inter-bank
Offered Rate) was used as a base rate. The range of spreads
over Kibor was 150bps to 375bps. Before 2005 most of the
issuer used SBP discount rate or PIBs as a base rate.
WAPDA Sukuk Certificates
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Recently issued first quasi Sovereign Islamic instrument
WAPDA Sukuk Certificates were launched on Nov 28, 2005.
The initial offered amount is Rs. 8 billion, with semi annual
floating coupon, with reference rate as KIBOR and positive
spread of 35 basis points.
The certificates are approved security for SLR for Islamic banks
only.
The certificates are issued in denominations of Rs.5,000/-.
The certificates are tradable in secondary markets, and prices
are updated on Reuter’s pages.
Conclusion
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The Asian Bond Market Development will go
a long way for the regional prosperity and
progress.
Pakistan is looking forward to extend its
complete support in this respect.
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Thank You.