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 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

To accomplish this principal objective, following specific

• bjectives 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.

Event Year

Adhoc T-Bills 2003 5/10 yr BGTB 2003 Introducing PD system 2003 CDMC 2006

Major development in the Government securities market in BD

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 Domestic debt outstanding 17.7% of GDP Borrowing from Banking 12.21% GDP

Up to 30th June 2011 total outstanding amount of Govt. securities is BDT 646.36 billion.

Tradable Government securities comprises-

Outstanding of Securities

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)

10 YR BGTB 34% 15 YR BGTB 9% 20 YR BGTB 7%

% of instruments

91 Days T-Bills 4% 182 Days T-Bills 7% 364 Days T-Bills 9% 5 YR BGTB 30%

• Long term 80.66% & short term 19.34%

Holder of Securities(Dec 2011) (in million)

Source :Bangladesh Bank

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 45.55

Secondary Trading

2009-10 495564.10 225,742.00 45.55 2010-11 665694.10 166,021.85 24.94

• In 2010-11 the volume of trading drop more than 50%
• less attractiveness in terms of bank higher deposit rate

Source Bangladesh bank

40.00 50.00 60.00

% of Outstanding

Secondary Trading as % of Outstanding

0.00 10.00 20.00 30.00

% % of Outstanding

• though the outstanding of securities increasing but trading is

decreasing.

Secondary Trading, issue & outstanding

400000.00 500000.00 600000.00 700000.00 Total Issued

in million

• comparing with the outstanding & issue the

secondary trading volume is opposite trend

0.00 100000.00 200000.00 300000.00 Total Outstanding Total Trading

• Narrow Investor base
• Commercial bank is captive source(72%)
• Insurance fund (2%)
• provident fund (.10%)
• Mutual fund (o%)

Constraints & possible suggestions

• Mutual fund (o%)
• Foreign investment (0%)

• Narrow Investor base

Constraints & possible suggestions

Investor base Bangladesh India Srilanka Banks’ Dominant (captive) 72% Dominant but not captive(44%) 26% of assets 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 Foreign Investment No participation Participation

• nly in dated

Government securities Limited Access from 2006

• Absence of Price discovery
• cutoff yield is not aligned with market
• devolvement culture .
• effect of SLR

Constraints & possible suggestions

• effect of SLR
• Demand of Securities

– bid cover ratio

Bid cover ratio

Period 5 year 10year 15 year 20 year

Jul-10 1.0 1.2 1.0 1.0 Aug-10 1.0 1.0 1.0 1.4 Sep-10 1.1 1.0 1.0 1.3

2 3 4 5 year 10year 15 year 20 year

bid-cover ratio of BGTBs'

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

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

• Rate of return(yield)
• Others sector interest rate structure
• Not aligned with market

Constraints & possible solutions

• Not aligned with market

Comparison of return in June 2011

Tenor Banks FDR rate(%) Govt.sec yield (primary)

3 month /91 days 12.00 6.50

12.00 13.00 13.50 8.00 10.00 12.00 14.00 16.00

Banks FDR rate(%) Govt.sec yield(primary)

intere

rate

/91 days 12.00 6.50 1 year /364 days 13.00 7.05 5 year / 5 yr 13.50 8.26

6.50 7.05 8.26 0.00 2.00 4.00 6.00 8.00

terest

• individual investor discourage
• Banks cost of fund

• Market infrastructure
• No real time window
• Manual DvP system
• No central source of information on trading activity.
• lack of expertise

Constraints & possible solutions

• lack of expertise
• Reissuance
• There are currently more than 190 BGTBs in existence with an average

stock size of just over BDT 3 billion.

• Devolvement culture
• Auctions do not reflect the market
• Authority is market maker rather than taker
• No transparency in Primary yields, strongly discourage

secondary trading.

Constraints & possible solutions

secondary trading.

• Market oriented yield curve not exist

Constraints & possible solutions

Instrument PD BB Instrument PD BB 2009-10 5-Year 41% 16% Devolvement on primary auctions 2009-10 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

• Burden of Primary dealers

Constraints & possible solutions

Required SLR (as on Oct,2011) Holdings Excess Holdings

234.6 billion 414.3 billion 179.7 billion 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

• 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

Constraints & possible solutions

• 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.

• 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.

Conclusion

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