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 statusin Bangladeshin Bangladesh

�Constraints & possible solutions todevelop secondary market inBangladesh

�conclusions

• Objectives of the Study: The principal objective of the study is to identify how to promotesecondary market for Government securities in Bangladesh .

To accomplish this principal objective, following specific

Objectives

To accomplish this principal objective, following specificobjectives 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 fromdifferent sources.

Collection of Primary Data: Assessment of existing literature aswell as of discussions with some experts associated with thewell as of discussions with some experts associated with theGovernment securities market like Primary dealers, banks etc.

Collection of Secondary Data: The secondary data has beencollected from different sources-Bangladesh Bank, Ministry ofFinance, Central depository Bangladesh Limited (CDBL), publishedresearch journals, published books, websites, etc.

Event YearAdhoc 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 GDPDomestic 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 m

illion

-

-comparing with the outstanding & issue the

secondary trading volume is opposite trend

0.00

100000.00

200000.00

300000.00Total

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

participationparticipation

(97% assts of its

portfolio)

Mutual fund No participation Moderate 13% of total

assts

Foreign

Investment

No participation Participation

only 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 1.32

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

TenorBanks FDR

rate(%)

Govt.sec

yield

(primary)

3 month

/91 days12.00 6.50

12.00

13.0013.50

8.00

10.00

12.00

14.00

16.00

Banks FDR

rate(%)

Govt.sec

yield(primary)

inte

rest

rate

/91 days12.00 6.50

1 year

/364 days13.00 7.05

5 year

/ 5 yr13.50 8.26

6.507.05

8.26

0.00

2.00

4.00

6.00

8.00

inte

rest

-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