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Qatar builds yield curve with T-bill issues

By Mala Pancholia and Rachna Uppal /Reuters DUBAI: Qatar’s decision to expand its issues of Treasury bills is succeeding in draining excess liquidity from the banking system, but it also appears to have another, long-term policy purpose: building a complete Qatari riyal yield curve. That could have several benefits for the emirate, helping it fund …


By Mala Pancholia and Rachna Uppal /Reuters

DUBAI: Qatar’s decision to expand its issues of Treasury bills is succeeding in draining excess liquidity from the banking system, but it also appears to have another, long-term policy purpose: building a complete Qatari riyal yield curve.

That could have several benefits for the emirate, helping it fund big infrastructure projects as it prepares to host the 2022 soccer World Cup; increasing its attractiveness as a portfolio investment destination; and even giving the Qatar central bank (QCB) a more sophisticated monetary policy.

“The regular monthly issuance of T-bills since last May has been clearly undertaken to develop the shorter end of the yield curve, a benchmark that was previously non-existent,” said Saugata Sarkar, head of research at QNB Financial Services.

“Longer-term, the QCB is clearly aiming to establish a liquid local debt market, in preparation for the expected increase in lending for infrastructure projects over this decade in the run-up to the 2022 FIFA World Cup.”

Traditionally, Qatar’s money market has concentrated on overnight and one-week interbank lending rates, where activity is greatest and quotes are easily available. The central bank’s description of its monetary policy says “the current QCB interest rates framework focuses on the average overnight interbank rate.”

The central bank’s regular T-bill issues, which began last May, could help to change that. The bank began by issuing three-month T-bills, and has gradually introduced six- and nine-month maturities.

In past years, the QCB has issued bonds on behalf of the finance ministry to local commercial banks with tenors of three to seven years, effectively setting benchmarks in that area, market sources said. Early last year, 50 billion riyals of government bonds were sold to local banks.

There is still a gap in the yield curve between one and three years, but market participants think the central bank may eventually fill that by widening its debt issues further.

Volumes of T-bill issuance have grown. Central bank governor Sheikh Abdullah bin Saud al-Thani said last October that the QCB was selling 2 billion riyals every month; this week he said monthly issuance was 4 billion riyals and that the QCB would continue that volume, declining to comment further on monetary policy.

Policy

Signs are that the issues are helping to prevent Qatar’s rapid economic growth, which hit 14 percent last year, from boosting inflationary pressure. M2 money supply growth slowed to a 29-month low of 8.5 percent year-on-year in February from 10.8 percent a month earlier, while March inflation was 1.2 percent, down from last year’s rate of 1.9 percent.

Bank lending growth to the private sector slowed to an eight-month low of 16.4 percent on an annual basis in February from 21.6 percent in January, although growth in real estate credit remains much higher, which some analysts think may be risky given ample supply in the property market.

Qatari banks held about 12.4 billion riyals worth of T-bills at the end of February, up from 12.0 billion in the previous month, the latest central bank data show.

In the longer term, creating a full riyal yield curve could help both the government and Qatari companies issue local-currency debt to fund infrastructure projects. The country of 1.7 million people has outlined public investment plans worth $95 billion over the five years to 2016.

When it comes to international bond issuance, Qatar has possibly the best-developed sovereign yield curve in the region; in November it conducted the Gulf’s largest international bond issue last year, a bumper $5 billion, three-tranche deal with maturities from five to 30 years.

But raising more funds domestically would limit Qatar’s dependence on fickle global markets.

Meanwhile, a complete yield curve could make the emirate more attractive as an investment destination for funds which could benchmark their returns from the local stock market, which Qatar hopes will eventually be upgraded to emerging market status by index compiler MSCI, against T-bill yields.

“Qatar is looking at an MSCI listing and one of the key factors would be to develop a market where investors can compare their dividends to risk-free Treasury yields,” said one regional banker.

Ultimately, a complete yield curve could allow the central bank to conduct a more sophisticated monetary policy that focuses on longer-term market interest rates in addition to the overnight interbank rate.

Not transparent

Qatar’s T-bill market is still far from playing these roles, partly because it is not transparent. The central bank does not publicly disclose results of its T-bill auctions, and auction participants are limited to banks, market sources say.

The result is that auction yields are extremely high; the sources say they range between 1.1 and 1.2 percent for three-month bills, up to 1.6 percent for six-month bills and up to 2.5 percent for nine-month bills.

That compares with a range of 1.74-1.78 percent for Bahrain’s sales of 12-month T-bills and 0.523-0.576 percent for Saudi Arabia, even though inflation in Saudi Arabia, at 5.4 percent in March, is much higher.

“So far, issuances have been done at attractive rates versus regional government and similarly rated sovereigns,” QNB’s Sarkar said.

There is minor secondary market trade in the bills. When they are traded, yields fall dramatically, the market sources say, but trading levels are not generally revealed publicly even though T-bills are listed on the Qatar Exchange.

To build an effective yield curve, Qatar may have to improve the transparency of its debt market dramatically. But its expanded T-bill issues are an important step, bankers say.

“Qatar riyal T-bills have been crucial to develop the yield curve and help price swaps,” the regional banker said.

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