PML(N) held the reins of the economy with an objective of a better economy in the long term even at the expense of dabbling with the short-term macroeconomic indicators. Although, it didn look fascinating to many in the beginning as inflation started rebounding soon after the new government came into power and reserves dipped to the lowest, the bitter pills swallowed by the economy appear to have started yielding positive results.
Investors interest for the long-term papers like never before bears testament to their confidence in the reforms and actions of the new government and their anticipation of a stable economic outlook.
Lately, SBP released the auction calendars of government securities for 4Q FY14. As expected, the regulator has almost doubled the PIB auction target to Rs300 billion--the highest PIB auction target in the history.
The unprecedented participation level in the PIB auctions (Rs980 billion in the third quarter alone against the target of Rs180 billion) in the last quarter triggered the fiscal authority to capitalise this avenue in order to shift the onus of budgetary borrowing from SBP to commercial banks, to improve the maturity profile of government debt and to reduce the rollover risk.
While MTB auction target for 4Q FY14 is Rs2.275 trillion, much higher than the PIB; however, a glance at the auction calendars show that over 97 percent of the MTB auction target for 4Q FY14 is to rollover the papers maturing on that date, while additional requirement is just Rs56 billion. Conversely, in case of PIB, 89 percent of the auction target is to meet the additional budgetary requirements.
The first MTB auction for 4Q FY14 was held on April 2, whereby against the target of Rs125 billion (maturing amount of Rs94.2 billion and additional requirement of Rs30.78 billion), a trivial auction participation of Rs27.4 billion was witnessed--not even enough to rollover the maturing MTBs. This translated into a participation ratio of 22 percent.
Cut-off yields have been static for eight auctions now as the SBP has been sitting on the fence for the past two policy announcements owing to subdued inflation numbers and an unwavering currency for quite some time now. An intriguing factor is that unlike last auction where investors betted for 12-month papers, this time around, the participation was tilted in favour of 6-month papers.
However, a skimpy participation of Rs27 billion doesn warrant a change in the investor sentiment from long term to medium term. Market participants further added that majority of the auction participation was done by the banks on behalf of their corporate clients while they themselves refrained to cope up with the quarter-end deposit movements.
Industry insiders revealed that IMFs directive of keeping the policy rate high to help accumulate reserves and to contain inflationary pressures shall not be confused with monetary tightening as the economic backdrop doesn demand that. However, so as not to squabble with the Fund, the SBP is likely to maintain status quo in the medium term.
Sources further opined that while the country might not be able to meet the fiscal-end NIR targets, it will comfortably meet the ceiling on government borrowing from SBP and swap/forward position which it missed in the second IMF review. Experts further pointed that even if the inflation starts bouncing back in FY15 as the government phases out power and gas subsidies, it will remain in single digit owing to high base effect.
Besides, flows expected from CSF, IMF, Eurobonds, World Bank, spectrum auctions and privatisation proceeds are expected to keep the currency intact. Some sources also pointed out that the forex reserves would touch a mark of $14 billion by fiscal-end.
While soft inflation numbers and steady currency validate a status quo in the medium term, Saudi oil facility if materialised can well be a game changer for the economy creating ample room for monetary easing. PIB will sell like hot cakes in the ongoing quarter too.
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