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Pakistan Economy: Implications of Jumbo T-Bill Auction

(PDF attached)

(May 23, 2019)

 

• The Government conducted one of the largest T-Bill auctions yesterday where the cutoff came in at 150 basis points higher at 12.74% from previous cutoff of 11.25%. The amount picked up was an astounding Rs3.1bn (realized), which was an 11-month high. It is interesting to note this amount was 5 times target of Rs600bn and 6 times maturity of Rs500bn.
• It is interesting to note that the government has maintained spread of around  50 basis points for 3-month paper even after the recent 150 basis points hike in Monday’s Monetary Policy Statement (MPS), which had signaled considerable hike in inflation for upcoming year.
• The second key implication from yesterday's auction is that the excess amount picked up over maturity of Rs2.5tn will most likely result in lower borrowing from the State Bank of Pakistan (SBP). Broad Money (M2) data dated May 17, 2019 shows that government has borrowed a whopping Rs5tn from SBP from Jul’18 to date, which is higher then the total stock of borrowing as of end Jun’18 of Rs3.6tn. Reduction in SBP borrowing could also likely be a prior action of the upcoming IMF program.
• It should be noted that banks were sitting on cash as the SBP had mopped up Rs1.7tn in the last Open Market Operation (OMO) held on May 17, 2019 for a tenure of 1 week. This is because banks had not fully subscribed in previous auction held on May 8 where only Rs560bn were picked up against maturity of Rs2.1tn. As per channel checks, the Rs1.7tn will come back to banks today and given maturity of Rs500bn, banks have borrowed around Rs650bn at 12.31% in today’s OMO, 6 basis points above the Policy Rate.
• In secondary market today, 3-month paper was trading slightly below yesterday’s cutoff at 12.68% while yield on longer tenure paper were up by around 10 basis points with 3yr paper trading at 13.35% while 10yr was close to 14%. This shows that fixed income market’s view may be mixed towards further rate hikes in the near future.
• We expect the upcoming Pakistan Investment Bonds (PIBs) auction on May 29 to also see significant large participation as was seen in yesterday's auction. Its highly likely the government may pick up the significant amount being offered in order to shift more SBP borrowing to banks prior to IMF program.

 

 

Regards,

Topline Research