T-bills auction

Take the goods the gods provide. A good case in point is the government of Pakistan, when it comes to borrowing from the domestic market. With surplus cash in bank vaults and weak credit demand from the private sector, the government has enjoyed strong and sturdy demand for its treasury papers in 1QFY12. The combined participation (face value) in all the six auctions was around 1.6 times higher than the governments total pre-auction target of Rs750 billion for the quarter; while the cash-strapped government sold a total of Rs852 billion worth of papers in 1QFY12. However, on realised value basis; the government raised a total of Rs769 billion, against the maturity of Rs702 billion worth of paper in the 1QFY12. With the country in the throes of high borrowing, debt servicing charges will have an adverse bearing on the governments borrowing requirement in the quarters ahead. The market has seen overweening appetite for 12-month papers; which on average attracted nearly 63 percent of the total participation in all the auctions held during 1QFY12, as opposed to 16 percent (of the total participation level) in FY11. The shift in the market participation from 3-month to 12-month paper will slightly reduce chatter of rollover risk. But since the government borrowing is heavily concentrated in the shorter tenure papers compared to PIBs; the concentration in 12-month paper will not completely thin out rollover risk. The higher participation level in 12-month paper is driven by the strong market expectations that the interest rate will further decline, down the line during the current fiscal year. Since inflationary pressure has been slightly pacified, many expect a 50 bps cut in the next monetary policy meeting scheduled to be held on October 8, 2011. This is also due, in part to the 50 basis points cut in the discount rate to 13.5 percent in the last monetary policy after the status quo in the preceding three policy meetings. However, there are many caveats to the existing interest rate outlook. Deprecation in rupee spells trouble for the countrys economic health. While growth in exports seems unsustainable, given that the countrys exports benefited from higher cotton prices during the last fiscal year. Moreover, the country is banking on strong remittances; an expectation which is unsupported by any tangible evidence that the trend will sustain. On top of that; souring relations with the United States may adversely affect the inflow of aid to the country. With nearly Rs929 billion worth of bills due to mature in the 2QFY11, the next quarters pre-auction target is likely to remain close to Rs1,000 billion.