MTB bites dust as economy improves

Criticisms aside, the $1.5 billion "gift" received from Saudi Arabia last week, pushed up the foreign exchange reserves, helped strengthen the currency and ended up improving the countrys macroeconomic perception. Besides, improved food prices have kept inflation quiet for the third consecutive month.
Local investors, who had already turned their gaze towards long-term investments (see BR Research column: Twist of fate: Investors taking a long-term view, March 3), are now likely to further reaffirm their stance.
The last two MTB auctions of 3Q FY14 bear testament to the fact that owing to a stable macroeconomic outlook, which now bodes a rate-cut, short-term paper no longer appeals to investors to the extent that they didn even rollover the maturing sum.
That goes quite in favour of the fiscal authority that has been keen to shift the onus of budgetary borrowing from SBP to commercial banks and improve the maturity profile of its debt as per the directives of the IMF.
Although SBP, thus far, has conducted three reverse repo transactions of over Rs270 billion to even out the tight liquidity conditions in the interbank market but the investors preferred holding back their assets in the pretext of managing their quarter-end outflows.
But more important than this, investors are hanging around their investments to enjoy the PIB auction due on March 26. The 3-year PIB that has a remaining maturity of little over two years offer a handsome rate differential of over 200 basis points when compared to 12-month MTBs and a real return of almost five percent.
Bear in mind, PIB pulled Rs449 billion for the government in the last two auctions against the target of Rs120 billion. Conversely, in the last two auctions, MTB, against the collective target of Rs1 trillion (which includes maturing amount of Rs938.5 billion and additional requirement of Rs61.4 billion) could fetch little over Rs536 billion, barely satiating 54 percent of the target.
With the market having enough liquidity in hand amid subdued inflationary expectations, and a better current account in February, the upcoming PIB auctions are largely expected to witness an overbidding phenomenon. While this improves the maturity profile of government debt, it comes with a high borrowing cost, further escalating the fiscal woes. However, with better expected foreign flows as well as 3G flows, that shouldn create a hitch.