Download Government Securities Market in Bangladesh: problems and Issues

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
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
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
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
17.7% of GDP
Borrowing from Banking
12.21% GDP
Outstanding of Securities
Up to 30th June 2011 total outstanding amount of Govt.
securities is BDT 646.36 billion.
Tradable Government securities comprises12.21% 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)
Source :Bangladesh Bank
(in million)
Secondary Trading
Fiscal year
Total Outstanding
Total trading
Trading(% of
Outstanding)
2007-08
269465.10
153,557.40
56.99
2008-09
446634.10
254,173.40
56.91
2009-10
495564.10
225,742.00
45.55
2010-11
665694.10
166,021.85
24.94
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
300000.00
Total
Issued
Total
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%)
-Foreign investment (0%)
Constraints & possible suggestions
• Narrow Investor base
Investor base
Bangladesh
India
Srilanka
Banks’
Dominant
(captive) 72%
Dominant but not 26% of assets
captive(44%)
Of major banks
Insurance
Max 30%
75% of LIC assets
Provident fund
poor participation 40 %
Dominant
participation
(97% assts of its
portfolio)
Mutual fund
No participation
Moderate
13% of total
assts
Foreign
Investment
No participation
Participation
only in dated
Government
securities
Limited Access
from 2006
40 % of total
assets
Constraints & possible suggestions
• Absence of Price discovery
-cutoff yield is not aligned with market
-devolvement culture .
-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
Aug-10
1.0
1.0
1.0
5 year
1.4
10year
Sep-10
1.1
1.0
1.0
1.3
Oct-10
1.1
1.1
1.3
1.3
Nov-10
1.3
1.2
1.0
1.3
Dec-10
1.2
1.1
1.0
1.0
Jan-11
1.0
1.0
1.0
1.0
Feb-11
1.0
1.0
1.0
1.0
Mar-11
1.0
1.0
1.0
1.0
15 year
2
20 year
1
- Low BCR for securities reflects tight liquidity
conditions . Table shows that BCR for bonds in
recent months is just about 1, meaning bids
received are just equal to amount auctioned
Constraints & possible solutions
• Rate of return(yield)
-Others sector interest rate structure
-Not aligned with market
Comparison of return in June 2011
Tenor
Banks FDR
rate(%)
Banks FDR
rate(%)
Govt.sec
yield
(primary)
Govt.sec
yield(primary)
16.00
14.00
13.00
12.00
6.50
interest
12.00
rate
3 month
/91 days
12.00
10.00
8.00
8.26
6.00
6.50
7.05
4.00
1 year
13.00
/364 days
5 year
/ 5 yr
13.50
2.00
7.05
13.50
0.00
8.26
-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
• 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.
-Market oriented yield curve not exist
Constraints & possible solutions
Devolvement on primary auctions
Instrument
PD
BB
2009-10
Instrument
PD
BB
5-Year
41%
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
(as on Oct,2011)
Holdings
Excess Holdings
234.6 billion
414.3 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
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 make the yield aligned with the market
Improve the infrastructure of market.
Not to be price maker but price taker
To reissue the securities