T-Bill Conundrum

T-Bill Conundrum

Investors Shy Away T-Bills Due to Low Interest

As Ethiopia attempts to lay the foundations for economic transformation, it has embarked on highly ambitious development programmes. While heavy state-led investment has helped the economy grow at double digits for over a decade; there are costs attached to it. The huge finance needed to cover the construction of large infrastructure has created financial pressure leading to budget deficit. Treasury- bill also know as T-bill is among the mechanism employed by the government to mobilise financial resources and cover its growing budget deficits. In addition to this, T-bills can serve as a monetary instrument to tackle economic disasters such as inflation. Despite its uses, investors that participate in the purchase of T-bills say its low return on investment is pushing them away. EBR’s Ashenafi Endale talked to stakeholders to understand the issue and know what the government is planning to improve the system.

In developing country like Ethiopia where lack of financial resources and inflation pressures persist, the role of treasury-bill as an instrument for both fiscal and monetary policies is immense. This can be demonstrated by the fact that investment in treasury bills also known as T-bills is growing faster in Ethiopia despite the fact that it bears the lowest interest rate compared with interest rates of corporate bonds and certificate of deposits that are traded in the money market.

Although the amount of treasury-bills offered surged by 46.5Pct compared with 2014/15 and reached ETB147.6 billion in the last fiscal year, the demand grew by 18.3Pct to ETB161.6 billion, according to the National Bank of Ethiopia (NBE) annual report. This means ETB161.5 billion worth of T-bills was sold during 2015/16 fiscal year, which shows ETB13.9 billion (9.4Pct) oversubscription. Compared with the amount of T-bills offered by the government in 2012/13, last fiscal year’s figure shows a 55Pct upsurge.

T-bill has two major purposes on the fiscal and monetary sides. On the fiscal side, treasury-bill helps the Ministry of Finance and Economic Cooperation (MoFEC), a government body responsible for formulating development policies, preparing development plan and budget, to manage its liquidity by using short term debt instrument. For this purpose, the NBE issues T-bills every week on behalf of the Ministry. In order to fill the budget deficit that should be covered by domestic credit, MoFEC forecasts the amount of money to be collected from T-bills and notifies the NBE.

On the other hand, T-bills is used by NBE as monetary policy instrument to manage reserve money balance. The NBE looks on the monetary variables that are needed to suppress inflation. Based on the forecast by the Ministry, plus the amount of money that should be sacked from or inject in to the economy the NBE decides the amount of T-bills that should be offered to the buyers on weekly basis.

The NBE sells T-bills at weekly auction, which matures within 28, 91, 182 and 364 days. The 91 days T-bill is started in January 1993, while the 28 and 182 days T-bills were introduced in December 1996. NBE also started issuing 364 days T-bills in November 2011.

The investments in 91 days T-bill, in which most institutions prefer to invest, have stood at ETB140 billion in 2015/16, taking 86Pct of the total T-bills investment under the four categories. There are close to 20 government affiliated enterprises as well as institutions and private companies that have been investing in T-bills.

“As the annual budget keeps growing significantly, the deficit also keeps widening, which increased the role of T-bill in the future,” says Tesfaye Alemu (PhD), senior expert at the debt management directorate of MoFEC. “But, there are limited participants in the treasury bills auction, which affects government spending.”

Ethiopia is aiming to join the lower rank of middle income category by 2025, which requires a lot of investment to transform the agrarian economy in to an industrial based one. As a result, the annual budget of the government has been increasing immensely in the past decade and the momentum is expected to continue. For instance, the annual budget deficit that is covered by domestic credit has increased to ETB35 billion in 2016/17 fiscal year, up from ETB25 billion in the previous fiscal year, a 48Pct upsurge. Here, T-bill can benefit the government by raising money to cover the budget deficit and fund various public projects.

An official at the NBE also concur with Tesfaye. He says the major challenge to T-bills is the fact that it attracts few individual and institutional investors, due to its lower return. “As it bears no risk, there should be high competition among individual as well as institutional investors, at tax free interest” argues an expert at NBE who is not authorized to speak to the media.

Indeed, studies reveal that T-bills can be attractive for investors since it offers a very low risk way to earn a guaranteed return. The average interest the four T-bill categories bears have stood at 1.438Pct in 2015/16, less than the 5Pct interest paid for depositors at commercial banks. The average weighted yield on T-bills increased slightly in 2015/16 from 1.416Pct a year earlier. The highest yield was recorded for the 364-day T-bills, which is 3Pct and the lowest (0.78Pct) for 28-day bills.

T-bill is purchased for the price that is less than its face value. When the maturity date comes, the government pays the purchaser the full face value, which means the interest for investor is the difference between the purchase price and what the investor receive at maturity.

Any individual or institution with a minimum of ETB5,000 can compete in the auction. However, since the government wants huge money from the auctions, the winner is decided based on big sum purchase. The NBE usually takes ETB100 million as minimum sum of investment required to win in auctions, according to insiders.

“We prefer the 364 days treasury bill mostly,” explains Woldeab Demise, director of Treasury Directorate at MoFEC. “This is because the government can use the money for a relatively longer period.”

The Public Servants Social Security Agency holds a little over 50Pct of the outstanding T-bill at the end of 2015/16 fiscal year. The Agency, which mobilizes pension funds, is top participant in T-bills investment. The Ministry has introduced a proclamation that prohibits the Agency from investing the fund in any other investment than the T-bills, since 2010. “Before the proclamation, the Agency used to invest in more interest bearing investments like real estate and shares in different banks,” says Yeshi Fekade, Public Relations manager at the Agency.

The Agency has mobilized ETB12.66 billion in 2015/16, more than four times of the ETB3.92 billion it collected in 2011/12. It also paid ETB3.5 billion for pensioners in the last fiscal year. The Agency’s interest income from T-bills have rose to ETB314 million by 2015/16, up from ETB87.3 million in 2010/11, according to data obtained from the Agency.

“The Agency mostly bids for the 91 days T-bill because we can invest a single note of money four times in a year, which increases our interest income,” stress another official at the Agency who wishes to remain anonymous. For instance, the 91 days T- bill yields 0.3Pct interest last fiscal year, which multiplies to1.2Pct in four auctions that will be held in a year. Investors also say the interest rate of the 28 days T-bill, which stood at 0.797Pct currently, is better but its share out of the total T-bills offered is small.

“As the salary for public servants is increasing, the payment for pensioners needs increment. We are also investing in mobile payment, opening more branches and investing in technologies to serve the pensioners more closely,” Yeshi explains. “So, we should be allowed to invest on other securities to meet the growing demand. We want the fund to fetch more profit.”

According to Yeshi, the Agency has asked MoFEC to reconsider the proclamation and allow the Agency to participate in other investment areas. She says, a feasibility study on collection, payment and investment issues is also undergoing, which help the Agency to decide how it will proceed forward.

Agreeing with Yeshi, Simegn Mulugeta, director of Investment Fund at the Private Employees’ Organization Social Security Agency (PEOSSA), which holds 23Pct of the outstanding T-bills in 2015/16, adds that the current pensioners’ payment is far less than the inflated prices of goods in the market. “The government needs the fund for the various projects undergoing. However, it will also be of great benefit for the pensioners, if our investment portfolio is expanded.”

PEOSSA has directed ETB4.3 billion to purchase 91 days Treasury bill in 2015/16, more than 10 times of the ETB413 million it disbursed in 2011/2. Its interest income also increased to ETB107 million from ETB924,000 in the past five years.

Few private banks also used to invest in T-bills in the past. They invested ETB3.4 billion in 2012/13, a year that marked the end of investment towards T-bills by banks. “Because of the regulation related restrictions commercial banks withdrew from investing on T-bills,” says a senior manager of a private bank. In addition, the stiff competition to mobilise deposits in recent years means less liquidity in the hands of banks while a lot more is needed as loans. “It is [unnecessary] to divert money towards T-bill because of its lower interest” says the senior manager.

Woldeab agrees with the views of institutional investors. “Mostly, treasury bill investment comes from a few government institutions, so there might be no competition at all,” he says. “The auction is not based on the demand of the buyer. It is on government interest. If it has to consider investors interest and also include the private sector, the proclamation must be changed, and the treasury bills market must evolve to secondary market.”
Although officials at the MoFEC and the central bank gave no information about the amendment of the proclamation in the near future, insiders have informed EBR regarding the works being done by the two institutions to establish a secondary market by the coming year.

“The target of T-bills is not only covering budget deficit, it also aims to beef up NBE’s reserve money, drying up the circulating money to control inflation, and push banks on deposit mobilization,” argued an official at the NBE. “However, as most banks are also in financial shortages, the secondary market will be a solution for all” Woldeab, who is also a member of a committee formed by the Ministry and the NBE to establish a secondary market, said a foreign consulting company is working on how to establish the market based on the treasury bills market.

A secondary market is a system where investors buy and sell securities they already own. Investopedia, a website dedicated for financial education stress that transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question.

“It has been challenging to involve banks in treasury-bill market. They might invest it today and want the money the next day. So, in order to accommodate this, the primary market must grow to secondary market,” argues Woldeab. “We are studying experiences of developed countries, in order to decide how it should evolve from T-bill to secondary market.” EBR

5th Year • April 2017 • No. 49

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