Government Securities Market in Bangladesh: problems and Issues By - PowerPoint PPT Presentation

Government Securities Market in Bangladesh: problems and Issues By Emrul Haider chowdury Examination Committee: Dr. Juthathip jongwanich (Chairperson) Dr. Sundar Venkatesh Dr. Yousre Bodir

Agenda � Objectives of the study � Methodology of the study � Government securities market status in Bangladesh in Bangladesh � Constraints & possible solutions to develop secondary market in Bangladesh � conclusions

Objectives • Objectives of the Study: The principal objective of the study is to identify how to promote secondary market for Government securities in Bangladesh . To accomplish this principal objective, following specific To accomplish this principal objective, following specific objectives will be covered: to review the Government securities Market status of Bangladesh • to identify the problems those obstruct the development of • Secondary Market in Bangladesh to suggest some important policy measures to promote government • Securities market in Bangladesh .

Methodology For the study both primary and secondary data collected from different sources. Collection of Primary Data : Assessment of existing literature as well as of discussions with some experts associated with the well as of discussions with some experts associated with the Government securities market like Primary dealers, banks etc. Collection of Secondary Data: The secondary data has been collected from different sources-Bangladesh Bank, Ministry of Finance, Central depository Bangladesh Limited (CDBL), published research journals, published books, websites, etc.

Major development in the Government securities market in BD Event Year Adhoc T-Bills 2003 5/10 yr BGTB 2003 Introducing PD system 2003 CDMC 2006 Discontinue Adhoc T-Bills 2006 Introduction of auction Calendar 2006-07 Rules of BGTB’s 2007 Secondary trading Of BGTBs’ 2007 15 & 20 ye BGTBs’ 2007-08 Multiple price based auction 2007-08 Marking to mark Oct 2008 Own Central depository December 2011

Debt scenario Nominal GDP(billion taka) 7875.00 Govt. Total debt outstanding 37.1% GDP Domestic debt outstanding Domestic debt outstanding 17.7% of GDP 17.7% of GDP Borrowing from Banking 12.21% GDP

Outstanding of Securities Up to 30 th June 2011 total outstanding amount of Govt. securities is BDT 646.36 billion. Tradable Government securities comprises- � 12.21% of total GDP � 69% of total domestic debt � 17.52% total bank deposits � 21.84% of total bank loan & advances

(BDT in Million) % of instruments 10 YR BGTB 34% 15 YR BGTB 9% 20 YR BGTB 7% 91 Days T-Bills 4% 182 Days T-Bills 7% 5 YR BGTB 30% 364 Days T-Bills 9% -Long term 80.66% & short term 19.34%

Holder of Securities (Dec 2011) (in million) Source :Bangladesh Bank

Secondary Trading Trading(% of Fiscal year Total Outstanding Total trading Outstanding) 56.99 2007-08 269465.10 153,557.40 56.91 2008-09 446634.10 254,173.40 45.55 45.55 2009-10 495564.10 225,742.00 24.94 2010-11 665694.10 166,021.85 Source Bangladesh bank -In 2010-11 the volume of trading drop more than 50% -less attractiveness in terms of bank higher deposit rate

Secondary Trading as % of Outstanding % of Outstanding 60.00 50.00 40.00 30.00 % % of Outstanding 20.00 10.00 0.00 - -though the outstanding of securities increasing but trading is decreasing.

Secondary Trading, issue & outstanding 700000.00 600000.00 in million 500000.00 400000.00 Total Issued Total 300000.00 Outstanding Total Trading 200000.00 100000.00 0.00 - -comparing with the outstanding & issue the secondary trading volume is opposite trend

Constraints & possible suggestions • Narrow Investor base - Commercial bank is captive source(72%) -Insurance fund (2%) -provident fund (.10%) -Mutual fund (o%) -Mutual fund (o%) -Foreign investment (0%)

Constraints & possible suggestions • Narrow Investor base Investor base Bangladesh India Srilanka Banks’ Dominant Dominant but not 26% of assets (captive) 72% captive(44%) Of major banks Insurance Max 30% 75% of LIC assets 40 % of total assets Provident fund poor participation 40 % Dominant participation participation (97% assts of its portfolio) Mutual fund No participation Moderate 13% of total assts Participation Foreign No participation Limited Access only in dated Investment from 2006 Government securities

Constraints & possible suggestions • Absence of Price discovery -cutoff yield is not aligned with market -devolvement culture . -effect of SLR -effect of SLR • Demand of Securities – bid cover ratio

bid-cover ratio of BGTBs' Bid cover ratio 4 Period 5 year 10year 15 year 20 year Jul-10 1.0 1.2 1.0 1.0 3 5 year Aug-10 1.0 1.0 1.0 1.4 10year 15 year Sep-10 1.1 1.0 1.0 1.3 2 20 year Oct-10 1.1 1.1 1.3 1.3 Nov-10 1.3 1.2 1.0 1.3 1 Dec-10 1.2 1.1 1.0 1.0 Jan-11 1.0 1.0 1.0 1.0 - Low BCR for securities reflects tight liquidity Feb-11 1.0 1.0 1.0 1.0 conditions . Table shows that BCR for bonds in recent months is just about 1, meaning bids Mar-11 1.0 1.0 1.0 1.0 received are just equal to amount auctioned

Constraints & possible solutions • Rate of return(yield) -Others sector interest rate structure -Not aligned with market -Not aligned with market

Comparison of return in June 2011 Banks FDR Govt.sec Govt.sec rate(%) yield(primary) Banks FDR Tenor yield 16.00 rate(%) (primary) 14.00 13.50 13.00 12.00 12.00 10.00 rate intere 3 month terest 12.00 12.00 6.50 6.50 8.00 8.00 /91 days /91 days 8.26 6.00 7.05 6.50 4.00 1 year 2.00 13.00 7.05 /364 days 0.00 5 year 13.50 8.26 / 5 yr -individual investor discourage -Banks cost of fund

Constraints & possible solutions Market infrastructure • -No real time window -Manual DvP system -No central source of information on trading activity. -lack of expertise -lack of expertise Reissuance • -There are currently more than 190 BGTBs in existence with an average stock size of just over BDT 3 billion.

Constraints & possible solutions • Devolvement culture -Auctions do not reflect the market -Authority is market maker rather than taker -No transparency in Primary yields, strongly discourage secondary trading. secondary trading. -Market oriented yield curve not exist

Constraints & possible solutions Devolvement on primary auctions Instrument PD BB Instrument PD BB 2009-10 2009-10 5-Year 5-Year 41% 41% 16% 16% 91-day 52% 3% 10-Year 28% 0% 182-day 28% 0% 15-Year 34% 0% 364-day 38% 0% 20-Year 26% 0% Sum 41% 1% Sum 33% 6% Source: BB

Constraints & possible solutions • Burden of Primary dealers Required SLR Holdings Excess Holdings (as on Oct,2011) 234.6 billion 234.6 billion 414.3 billion 414.3 billion 179.7 billion 179.7 billion 76.59% of SLR -More holding -less earning, more cost of fund -Hamper profitability -less credibility to private sector

Constraints & possible solutions • Funding risk PDs would take on a large degree of funding risk. Because interest rate of Government securities is not determined by market. Because of volatile interest rate primary dealers of government securities faces a interest rate risk. Since the price discovery process in the primary auction is not seen to risk. Since the price discovery process in the primary auction is not seen to be entirely market driven, PDs find it difficult to get a clear idea of the risk entailed by their primary market obligations.

Conclusion • To make a vibrant and liquid secondary Government securities market in Bangladesh the authority should take steps: � To Widen the investor base of Govt. securities. � To Widen the investor base of Govt. securities. � To make the yield aligned with the market � Improve the infrastructure of market. � Not to be price maker but price taker � To reissue the securities