The Board of Directors of Karachi Stock Exchange on November 29 approved in principle the development of a platform and mode for trading in government securities through bourses. For the equity investors, it opens up an alternative avenue and brand new market products — Treasury Bills and Pakistan Investment Bonds.
Investors are disenchanted with the stocks, as the average daily trading volumes at the KSE have been drying up. According to the brokerage firm Topline Securities, they plunged in November to a 14-year low of 45 million shares (equal to volumes seen in January 1998). The investors in equities have earned nothing and instead lost nearly four per cent of their wealth in 2011.
Many market participants welcoming the move said, it would provide an ordinary retail investor access to government securities, which, so far, had remained an exclusive purview of banks, large institutions and big deep-pocket individuals.
A market observer thought there could be resistance from banks, which enjoyed ample spread between what they pay to depositors and the yield they earn on investment in T-Bills and PIBs. The banking sector spreads (measured as difference between yield on advances and cost of deposits) stood at 7.67 per cent in October. “The banks, therefore, have vested interest in keeping this avenue of investment to themselves,” said an equity analyst at a brokerage firm.
But Sayem Ali, Country Economist at Standard Chartered Bank Pakistan (SCB), disagreed, saying that trading of bonds and government securities at the country’s capital market was ‘a win-win situation’ for all. He agreed that an alternative platform at the equity market would offer competition to banks, but said it would not materially impact the banking sector.
“Some of the savers who strictly lock funds in fixed deposits may shift to the KSE’s bond market,” he said, but argued that in addition to yields, banks provided host of other value-added services to clients, such as foreign currency transactions, salary management, ease of cash flows and in effect total management of finances.
Mr Ali said addition of a new product was a positive step. Bank deposits, which loomed high at six trillion rupees, were scarcely at peril, he said and added, but the real competition could be with the National Saving Schemes (NSS), for both would be offering risk-free yield with the government-backed guarantee. “By starting to trade in T-Bills and PIBs, the equity markets would be holding government debt and developing a secondary market for their trading,” the economist said.
In its Monetary Policy Statement (MPS) released on November 30, the State Bank of Pakistan pointed to “three solutions to the predicament of reconciling price and financial stability considerations and supporting private investment in the economy.” The central bank insisted that it had been actively working on the third solution, which it said was “to promote competition in the banking system and to offer alternative sources of savings to the population.” The SBP observed that it had been “encouraging depositors to invest in government securities through Investor’s Portfolio Securities (IPS) accounts.
The option of maintaining saving deposits or investments in IPS accounts could provide a stiff competition to banks forcing them to offer better returns on deposits, the SBP stated in the MPS. “Moreover, it will improve the transmission of monetary policy changes to market interest rates,” the central bank stated, believing that over time this strategy would also diversify the government’s funding source, deepen the secondary market of government securities and facilitate the issuance of corporate debt.
Arif Habib, former chairman of KSE, commented that the development of trading platform and system for the government securities was an encouraging sign of market quest for new products. He said such a trading segment would facilitate individual investors and more importantly provide a vibrant and active secondary market for trading in government securities. He said investors, who choose to park money for long term, would have the benefit of high yield, risk-free secure investment avenue.
With the secondary market for government securities and bonds in operation, such investors would be free to unfreeze their deposits before the date of maturity and still earn return, unlike the NSS, where minimum period to encash certificates together with a profit was six months. He also thought that the KSE’s secondary market for bonds would offer competition to banks, which were handing out pittance in returns to depositors.
A member at the stock market said that though there already was the Over-the-Counter (OTC) market at the KSE which invested in the government securities; the counter was used mainly by banks, financial institutions and some wealthy individuals.
“Foreign investors scarcely stepped into the OTC market for lack of absolute transparency in dealings,” he added. The broker maintained that in most developed markets, the size of bond markets were five and even ten times the equity market.
“A start, though late, was, however, a good omen for the development of capital markets in Pakistan,” he observed.