GEMs Paper #10
Primer GEM Fixed Income Strategy & Economics | Global 12 September 2012
2012 Guide to EM Local Markets Alberto Ades
In-depth investment guide to better understand each market This guide aims to assist the growing investor base in emerging local markets, an asset class that combines attractive opportunities with some significant challenges. While we do not make specific investment recommendations, the guide leverages BofA Merrill Lynch’s GEM research team to provide a clearer understanding of the intricacies and pitfalls present in these growing markets.
Jane Brauer
Increasing investor demand
Flavio de Andrade
Foreign investor interest in emerging markets has increased consistently in recent years. Continued interest in these countries is due in part to uncertainty surrounding the developed economies, as well as strong fundamentals across emerging markets in general. The appeal not only lies in the healthier balance sheets and more fiscally responsible attitudes of these countries, but also in the attractive growth and interest differentials of their asset markets. Specifically, local debt markets (LDM) have become an attractive asset class as investors seek alternative investment opportunities amid converging inflation. LDMs offer opportunities for debt income through coupons, price and currency appreciation.
Unauthorized redistribution of this report is prohibited. This report is intended for
[email protected].
High historical returns From January 2001 to today, local currency bonds in the emerging markets generated a cumulative return of 199.9% for an unhedged investor, compared to 88.7% invested in US Treasuries over the same period. Additionally, the Sharpe ratio for local currency debt for a USD investor was 1.25, but for US Treasuries only 0.71. The stock of domestic sovereign debt dropped 2% to US$5.5tn in 2011. Among the three regions, Asia claims the majority of LDM issues, although capital controls make the region relatively less accessible to foreigners. Emerging Europe, the Middle East and Africa (EEMEA) is the most accessible region, and Latin America generally offers the highest yields and total returns. We report monthly on local bond performance through BofA Merrill Lynch country indices.
GEM FI Strategist, Economist MLPF&S
Capital controls While opportunities are abundant, understanding the characteristics of every market in each region is difficult. An important issue for various governments is the excessive inflow of capital that strengthens their currencies and interferes with economic policy. In response to that, some policy makers may intervene and impose measures to discourage such flows, adding to the challenge of investing in LDMs.
Quantitative FI Strategist MLPF&S
David Beker Brazil Economist, FI Strategy Merrill Lynch (Brazil)
LatAm FI Strategist MLPF&S
Bin Gao Rates Strategist Merrill Lynch (Hong Kong)
Vasileios Gkionakis GEM FI Strategist, Economist MLI (UK)
David Hauner, CFA EEMEA FI Strategist, Economist MLI (UK)
Claudio Irigoyen LatAm FI Strategist MLPF&S
Albert Leung Emerging Asia FI Strategist Merrill Lynch (Hong Kong)
Claudio Piron Emerging Asia FI Strategist Merrill Lynch (Singapore)
Arko Sen EEMEA FI Strategist MLI (UK)
Christy Tan Emerging Asia FX Strategist Merrill Lynch (Singapore) See Team Page for Full List of Contributors
c58da9b710df662c
Trading ideas and investment strategies discussed herein may give rise to significant risk and are not suitable for all investors. Investors should have experience in FX markets and the financial resources to absorb any losses arising from applying these ideas or strategies. BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 206 to 207. Link to Definitions on page 204. 11201538
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GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Contents
Introduction Overview Stock of debt BofAML local market bond indices EM FX performance contributes Capital controls GEM surprise indices Economic conditions & PMI indices Asia countries China Hong Kong India Indonesia Korea Malaysia Pakistan Philippines Singapore Sri Lanka Taiwan Thailand Vietnam EEMEA countries Czech Republic Egypt Hungary Israel Poland Russia South Africa Turkey LatAm countries Argentina Brazil Chile Colombia Mexico Peru Appendix
5 6 7 10 12 13 14 14 23 24 34 40 46 52 58 66 70 76 82 88 96 102 107 108 114 118 124 130 136 142 148 155 156 164 172 180 186 194 200
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GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Introduction Welcome to the 2012 edition of our very comprehensive Guide to EM Local Markets! This guide aims to assist the rapidly growing investor base in emerging local markets, an asset class that combines attractive opportunities with some significant challenges. From January 2001 to today, local currency bonds in the emerging markets generated a cumulative return of 199.9% for an unhedged investor, compared to an 88.7% return for those invested in US Treasuries. Additionally, the Sharpe ratio for local currency debt for a USD investor was 1.25, but only 0.71 for US Treasuries. Although we do not provide specific recommendations here, we leverage BofA Merrill Lynch’s GEM research team and our significant local presence in many emerging markets to help provide a clear understanding of the intricacies and pitfalls present in these markets, which we expect will continue to offer interesting opportunities. While opportunities are abundant, understanding the characteristics of every market in each region is difficult. An important issue for various governments is the excessive inflow of capital that strengthens their currencies and interferes with economic policy. In response to that, some policy makers may intervene and impose measures to discourage such flows, adding to the challenge of investing in LDMs. We cover these and other related issues extensively in our guide. We have introduced some important changes to this year’s edition, expanding and homogenizing the discussion on policies and markets for all 27 countries that we cover in the guide. We now include access issues in local bonds, local interest rate derivatives, foreign exchange spot and foreign exchange derivatives. For each market, we address the liquidity, depth, primary instruments, ease for foreign investor participation and main participants. For a foundation on monetary policy, we include the main drivers that affect each economy, current policy framework, base policy rate, open market operations, lending and deposit facilities, reserve requirements, and a long-term historical perspective. For fiscal policy, we include government size and participation, evolution, financing needs, debt profile and debt issuance. We also include the CNH offshore market in addition to the CNY market. Special thanks go to Jane Brauer, who coordinated this effort. We hope you enjoy our guide and look forward to your feedback. Best regards,
Alberto Ades Head of GEMs Fixed Income Strategy and Co-head of Global Economics
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Overview Jane Brauer
Local debt markets (LDM) have made great strides in the last 15 years. As of September 2011 the outstanding stock of local market domestic government debt amounted to US$5.5tn, compared to just US$0.8tn in December 1997. By far the largest market in absolute terms is mainland China, with US$1.4tn in outstanding government debt, followed by Brazil (US$0.8bn) and India (US$0.6bn). It is clear from this that local currency government debt markets have become an important source of domestic financing for emerging economies. However, the size of debt stock should not be taken as a good guide to the underlying liquidity and functioning of debt markets.
Chart 1: Outstanding debt in USDbn by local governments and corporates 10000 Corporate Sov ereign
9000 8000
LDM investment considerations
7000
While the variety of local bonds open to foreign investors may be familiar, there may be regulations that could lead to capital controls and convertibility risk for foreign investors. Countries have different regulations, laws and limits for foreign investment, typically including the need to set up a local account, hire a local custodian, report activity to the local regulator and pay taxes, if applicable. Also, each country has its own requirements.
6000 5000 4000 3000 2000 1000 0 1995
1998
2001
2004
2007
2010
Source: BofA Merrill Lynch Global Research, BIS
Table 1: Barriers to cross-border investment and settlement (Regulatory barriers) 1 Foreign investor quota 2 Foreign investor registration 3 Currency exchange controls 4 Cash controls-credit balances, overdrafts 5 Tax 6 Omnibus accounts restrictions 7 Regulatory framework 8 Legal framework 9 Local custodian required
(Settlement barriers) 1 Messaging standards 2 Securities numbering 3 Settlement cycle 4 Trade and settlement matching 5 Physical certificates Source: ADB, BofA Merrill Lynch Global Research
6
Local bond types issued by emerging market countries are no different in nature than those issued by developed markets. While calculating conventions may differ, foreign investors normally have access to several debt instruments denominated in local currency. The most common instruments are fixed-rate bonds (coupon bonds); fixed-rate notes or bills (zero-coupon bonds sold at discount); inflation-linked bonds; floating bonds, which are linked to the reference interest rate or to a market rate close to the reference interest rate; and, in some cases, foreign exchange-linked bonds, which are linked to a hard currency but payable in local currency.
For example, some countries limit the amount and/or the type of bonds that foreign investors can hold, while others impose taxes on capital inflows, have minimum holding periods or intervene heavily in the foreign exchange market, and so on (see page 13 for more on capital controls). In some cases, local trading conventions differ from the international conventions, adding another layer of caution when trading a local debt instrument. Even on this basis, investors will need to weigh the relative merits of potential withholding taxes, clearing and settlement accessibility, and whether they are included in key global benchmark bond indices. The country sections in the following pages are intended to guide investors through this maze. Additionally, policy makers and debt management offices have worked hard to establish benchmark curves as a means to improve secondary trading. This has been achieved through coordinated auction schedules, bond buybacks, and switches to maintain liquidity and benchmarks. Active and liquid interest rate swap markets are also available for investors hedging in many local markets. Measures such as average bid-offer spreads and the bond turnover ratio (the value of bonds traded divided by the average amount of bonds during the quarterly period) provide a good indication of the accessibility and liquidity of the underlying markets.
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Table 2: Foreign investor holdings of local debt in major GEM local bond markets Change in LOC (bn) Holdings USD (bn) Holdings LOC (bn) 1Y 2Y
Asia India Indonesia Malaysia South Korea Thailand EEMEA Turkey Poland Egypt Israel Hungary LatAm Brazil Mexico Peru
Change in LOC (%) 1Y 2Y
Outstanding
As of
4.8 25.1 38.0 49.7 11.6
236.8 235660 115.0 58518 357.6
18 -13210 27.18 1715 166.07
143.64 63440 57.12 19915 252.01
0.9% 29.5% 39.1% 16.4% 12.6%
-0.1% -6.1% 6.0% -0.5% 5.2%
0.3% 2.1% 12.3% 3.8% 7.9%
3/1/2012 7/2/2012 5/1/2012 6/1/2012 5/1/2012
44.5 47.2 0.2 5.3 19.8
79.83 167.7 1.47 20.59 4543
13.62 15.66 -23.15 7.68 821.9
38.40 64.70 -44.69 9.83 2331.2
21.1% 31.4% 0.4% 4.9% 40.3%
2.9% 3.0% -7.0% 1.5% 1.9%
9.1% 10.4% -15.6% 2.0% 18.9%
7/31/2012 5/31/2012 4/30/2012 6/30/2012 7/31/2012
111.0 64.6 6.7
224.7 834.9 17.58
34.0 221.25 5.56
72.16 457.39 13.58
12.3% 48.6% 51.4%
0.8% 10.6% 12.2%
2.2% 22.4% 35.5%
7/18/2012 5/1/2012 5/1/2012
Source: BofA Merrill Lynch Global Research
Foreign ownership is increasing Following the 1997 Asian crisis, foreign investment has cycled out and back in again. Foreign ownership of classes of outstanding government bonds has been increasing to unprecedented levels, with Peru, Mexico and Hungary up 36%, 22% and 19%, respectively. The highest concentrations of foreign ownership are in Peru (51%), Mexico (49%), Hungary (40%), Malaysia (39%), Indonesia (29%), Poland (31%), Turkey (21%), Korea (16.4%) and Thailand (12.6%) (Table 2). The net effect of this is that with the increase in the share of outstanding bonds held by foreigners, domestic yields have declined significantly.
Stock of debt Jane Brauer
GEM debt stock has been growing 17% per year for 10 years The total global emerging market (GEM) tradable debt universe increased another 7% in 2011 to reach a new high of US$11.7tn total debt outstanding (Table 3). It followed 16% yoy growth in 2010. On average, total GEM debt stock has grown approximately 17% per year since 2002 and 14% per year since 1994. Growth in 2011 was due to increased government funding needs, opportunistic issuance by corporates to fund expansion, and global and GEM-specific demand for fixed income debt, as fundamental improvements in most emerging countries provided an attractive alternate to increased risk in developed markets.
Domestic market dominates Corporate and government debt are mostly in local currency bonds. Domestic debt (US$9.85tn, up 6%) accounts for approximately 84% of total GEM debt outstanding, and most of that is government debt (Chart 3). Domestic government debt accounts for approximately 47% of all GEM debt, followed by domestic corporate debt at 37% (Chart 3). As a whole, corporate debt has assumed a much greater stake in GEM debt. Corporate debt grew 17% to US$5.5tn in 2011. Total government debt outstanding decreased 1% (Table 3). Table 3: GEM tradable domestic debt (US$bn) 2005 2006 2007 Government Corporate Total
2856 1268 4124
3515 1594 5109
4317 1989 6306
2008 4136 2372 6507
2009 4951 3113 8064
2010 5599 3727 9326
2011 5488 4364 9853
Note: Domestic corporate and financial debt from BIS for Brazil, India and Philippines included only debt with maturity 1y but only since 2008; As of September 2011. BIS local market data is reported on a lagged basis of 6-9 months. Source: BIS, BofA Merrill Lynch Global Research
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Table 4: Country domestic debt stock (USDbn) Country Sovereign Corporate
Asia China Hong Kong India* Indonesia Korea Malaysia Philippines Singapore Sri Lanka Taiwan Thailand Vietnam EEMEA Czech Rep Egypt Hungary Israel Poland Russia S Africa Turkey Latin Am Argentina Brazil Chile Colombia Mexico Peru
Fin Inst.
Total
1376
3232
557 92 478 125 64
214 7
189 6
960 104
86 10
73 5
284 79
152 171
65 58
37 3
254 233
59
9
18
86
61 106 192 113 122 196
0 51 75 25 2
10 46 12 39 32 1
71 203 203 226 179 199
48 847 51 78 270 20
6 85 27 2 36 3
7 139 1
85 80 445 24
As of 30 September 2011; BIS local market data is reported on a lagged basis of 6-9 months. Source: BIS, BofA Merrill Lynch Global Research
Domestic debt heavily concentrated in a few countries China, Brazil and South Korea comprise almost 60% of domestic debt. Now at US$3.2tn, China domestic debt grew 6.6% as of 3Q11, on top of the 18% in 2010 and 16% in 2009. China alone has risen to 33% of domestic debt, which is larger than all of LatAm’s domestic debt. The BRIC countries (Brazil, Russia, India and China) comprise 60% of all domestic GEM debt, while the GEM-10 (Brazil, Mexico, China, India, Indonesia, South Korea, Poland, Russia, Turkey and South Africa) account for 82% of it. Chart 2: Domestic tradable debt growth outpaces external debt (US$bn) 10,000
Ex ternal Debt
Domestic Debt
8,000 6,000 4,000 2,000 0 1995
1997
1999
2001
2003
2005
2007
2009
2011
Note: These estimates should be regarded as indicative and may not be strictly comparable across countries. The detailed country data are available on the BIS website (www.bis.org/statistics/secstats.htm). Domestic debt as of 30 September 2011; BIS local market data is reported on a lagged basis of 6-9 months. Source: Source: BIS, BofA Merrill Lynch Global Research
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Chart 3: Domestic tradable debt growth (by region, % yoy) Latam
60% 50%
Asia
Emerging Europe
Chart 4: Dom. tradable debt accounts for 85% of total GEM debt outstanding* 666 , 6%
Africa & ME
1,178 , 10%
40% 30% 20%
4,364 , 37%
10% 0% -10%
5,488 , 47%
-20% -30% '00
'01
'02
'03
'04
'05
'06
'07
'08
'09
'10
Ex ternal Gov ernment Domestic Gov ernment
'11
Ex ternal Corporate Domestic Corporate
Note: As of September 2011. Source: BIS, BofA Merrill Lynch Global Research
* Shown in US$bn and as % of total, September 2011. Source: BIS, BofA Merrill Lynch Global Research
Chart 5: Top countries with domestic tradable debt (US$bn)
Chart 6: Domestic tradable debt regional breakdown
3,500
8%
3,000
4%
2,500 2,000 1,500
23%
65%
1,000 500 0 CN
BR
KR
IN
MX
TW
MY
TR
Latam
Source: BIS, BofA Merrill Lynch Global Research
Asia
Emerging Europe
Africa & ME
Source: BIS, BofA Merrill Lynch Global Research
Table 5: GEM tradable debt outstanding by segment 2010-2011 (US$bn) Sovereign Corporate 2010 2011 2010 2011
Total 2010
2011
% change 2010-2011 Sovereign Corporate Total
External
616
666
1,001
1,178
1,617
1,844
8
18
Domestic
5,599
5,488
3,727
4,364
9,326
9,853
-2
17
14 6
Total
6,215
6,154
4,727
5,543
10,943
11,697
-1
17
7
Note: External as of December 2011; Domestic as of September 2011. BIS local market data is reported on a lagged basis of 6-9 months. Source: BIS, BofA Merrill Lynch Global Research
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BofAML local market bond indices Jane Brauer
In broad USD and market capitalization-weighted terms, local bond markets have delivered 65% in total returns since December 2005. We show the performance of the Merrill Lynch Local Debt Market Plus Index, in which countries are capped at 10%.
Preston Peacock
BofA Merrill Lynch offers two benchmark types for measuring local debt market performance:
The LDMP Index offers a broad composite index that tracks countries with US$10bn in outstanding local currency sovereign debt, excluding foreign currency ratings of AA3 or higher. Asia accounts for 43% of the LDMP Index, with EEMEA and LatAm constituting 35% and 22%, respectively.
The Liquid LDM Indices comprise GLEM and GLEE. Asia, EEMEA and LatAm make up 31%, 43% and 26% of the GLEM index, respectively.
Chart 7: Aggregate total return of BofAML Local Market Bond Index – LDMP (in USD) 190 LDMP Index 170
GLEM represents a net cap-weighted liquid local debt markets index made up of liquid fixed-rate bonds with country allocations weighted according to capitalization weights. GLEE is based on a net equal-weighted methodology, representing a basket of fixed-rate bonds with equally-weighted country exposure. Further details can be found on Bloomberg: IND .
150 130 110
We provide an overview of the country indices, LDMP Plus and Liquid LDM GLEM in terms of market characteristics and country total returns since inception.
90 Dec05
Dec07
Dec09
Dec11
Please see the Appendix for LDMP index rules and a list of numerous BofA Merrill Lynch local market indices, including fixed-rate and inflation-linked, by country and maturity buckets.
Source: BofA Merrill Lynch Global Research
Chart 8: Local bond market total return (January 2006 = 100) in USD LatA m
EM EA
A sia
To tal
190
13
170
11
150
9
130
7
110
5
90 Dec05
LatA m
EM EA
A sia
To tal
3 Dec06
Dec07
Source: BofA Merrill Lynch Global Research
10
Chart 9: Local bond market yields (%) 15
210
Dec08
Dec09
Dec10
Dec11
Jan06
Jan07
Jan08
Source: BofA Merrill Lynch Global Research
Jan09
Jan10
Jan11
Jan12
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Table 6: Local currency country indices – characteristics and total return performance, 30 June 2012 Ticker
No. of issues
Maturity /WAL
Mod duration
YTM (%)
Face value (US$mn)
LOC
Rolling 12m total return USD EUR JPY
% mkt val of LDMP GLEM
ASIA
LDMA
302
8.3
5.6
5.0
781,186
8.7%
1.0%
15.0%
-0.3%
42.9
India
G0IN
70
9.6
5.7
8.2
447,502
9.2%
-12.3%
-0.1%
-13.4%
10.0
30.6 --
Indonesia
G0ID
31
12.4
7.0
6.3
52,107
18.9%
9.1%
24.3%
7.8%
4.5
7.9
Malaysia
G0MY
58
5.9
4.9
3.3
129,564
5.4%
0.7%
14.6%
-0.6%
9.2
14.8
Philippines
G0PH
56
11.6
7.0
5.0
47,814
16.3%
20.1%
36.7%
18.5%
3.9
--
Singapore
G0SP
17
7.2
6.0
0.9
53,915
5.9%
3.1%
17.4%
1.8%
0.0
8.0
South Korea
G0SK
27
6.4
5.0
3.5
271,963
7.1%
0.7%
14.7%
-0.6%
10.0
--
Thailand
G0TH
43
7.8
5.9
3.5
71,023
5.0%
1.9%
16.0%
0.6%
5.3
--
EMEA
LDME
196
5.8
4.1
6.7
661,843
8.7%
-6.6%
6.4%
-7.8%
35.0
43.2
Czech Rep
G0CZ
14
6.4
5.2
2.1
41,846
8.4%
-8.8%
3.8%
-10.0%
3.0
--
Egypt
G0EG
28
3.0
2.1
16.2
32,197
13.1%
11.4%
26.8%
10.0%
2.2
--
Hungary
G0HU
13
4.5
3.4
7.4
30,817
5.9%
-13.1%
-1.0%
-14.2%
2.2
4.7
Israel
G0IS
12
5.8
4.5
3.2
39,308
10.1%
-3.4%
10.0%
-4.6%
3.1
5.4
Morocco
G0MA
49
5.4
4.4
3.9
23,900
2.9%
-7.1%
5.7%
-8.3%
1.8
--
Nigeria
G0NG
13
6.8
3.5
15.5
12,478
--
--
--
--
0.7
--
Poland
G0PL
15
5.1
4.0
4.7
97,005
7.8%
-10.4%
2.0%
-11.5%
7.1
13.6
Russia
G0RU
28
6.3
4.1
8.0
63,961
5.1%
-9.2%
3.3%
-10.4%
4.2
--
South Africa
G0SA
11
9.4
5.7
7.0
84,018
14.3%
-4.4%
8.8%
-5.6%
6.2
10.2
Turkey
G0TR
13
3.3
2.5
8.6
62,851
11.0%
-0.1%
13.7%
-1.4%
4.6
9.4
LatAm
LDML
42
5.9
3.9
6.8
417,442
16.4%
-0.8%
12.9%
-2.1%
22.0
26.2 11.2
Brazil
G0BR
12
2.9
2.3
8.4
211,082
21.4%
-5.5%
7.6%
-6.7%
10.0
Colombia
G0CO
10
6.2
4.1
6.2
47,833
9.7%
9.5%
24.6%
8.1%
4.0
--
Mexico
G0MX
20
9.2
5.7
5.2
106,625
15.0%
0.8%
14.7%
-0.5%
8.1
15.0
LDM Plus
LDMP
523
6.9
4.7
6.0
1,860,471
10.3%
-1.5%
12.2%
-2.7%
100
--
Liquid LDM
GLEM
10
5.6
4.5
5.5
847
11.7%
-2.3%
11.2%
-3.6%
--
100
Source: Bloomberg, BofA Merrill Lynch Global Research
Table 7: Historical analysis of fixed income asset classes, July 2012
Total return for year 2001
LDM (unhedged USD investor) 8.5%
LDM (LOC) 17.7%
US Treasury 6.7%
Global Govt. -0.4%
Total return for year 2002
22.8%
16.2%
11.6%
19.5%
-1.9%
3.3%
13.7%
Total return for year 2003
16.2%
8.8%
2.3%
14.4%
28.1%
11.3%
27.6% 11.8%
US HY 4.5%
Global EM FX 0.2%
EM USD Sovereign 4.8%
Total return for year 2004
15.7%
5.5%
3.5%
10.1%
10.9%
9.5%
Total return for year 2005
4.2%
6.2%
2.8%
-6.5%
2.7%
1.8%
12.0%
Total return for year 2006
12.7%
6.9%
3.1%
6.2%
11.8%
4.8%
10.6%
Total return for year 2007
13.9%
5.0%
9.1%
10.7%
2.2%
7.0%
6.4%
Total return for year 2008
-4.4%
12.0%
14.0%
10.9%
-26.4%
-8.7%
-10.2%
Total return for year 2009
12.5%
4.9%
-3.7%
2.3%
57.5%
10.7%
27.2%
Total return for year 2010
12.8%
8.7%
5.9%
5.6%
15.2%
6.2%
12.5%
Total return for year 2011
-0.1%
7.7%
9.8%
6.8%
4.4%
-1.8%
8.2%
Ytd, 2012
5.8%
6.9%
2.6%
1.0%
8.0%
2.3%
10.6%
Cumulative return
199.9%
167.1%
88.7%
112.3%
149.0%
53.7%
229.9%
Annualized return
10.0%
8.9%
5.6%
6.7%
8.2%
3.8%
10.9%
Annualized volatility
6.1%
2.3%
4.6%
7.1%
8.4%
5.5%
9.7%
Sharpe ratio
1.25
2.82
0.71
0.61
0.70
0.26
0.88
Note: LDMP index inception was on 2005. The values prior to then are estimates. Note: The cumulative return, annualized return and annualized volatility pertain to the ‘2001-to-current’ period. Source: BofA Merrill Lynch Global Research
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EM FX performance contributes Jane Brauer
A large part of foreign investor interest in emerging market local debt markets has been driven by the conviction that most local currencies are undervalued and will continue to appreciate as part of the global rebalancing effort. Given the significance of FX performance, BofA Merrill Lynch has a series of benchmark regional FX indices to measure spot and total returns across regions and on an aggregate global emerging market basis. Since the CNY revaluation in July 2005, Asia FX spot returns have been outperforming the global GEM spot benchmark while the total returns, which include local yield differentials, have been underperforming the global benchmark. Asia now represents 54.5% of the Global Emerging Markets FX Index, EEMEA 25.5% and LatAm 20.0%. Table 8: GEM foreign exchange indices Index
Spot ticker
Total return ticker
Global Asia EEMEA LatAm Brazil China India Mexico Russia Turkey Mini Global Mini Asia Mini EEMEA Mini LatAm
MLFXGEMS MLFXAXES MLFXEMES MLFXLATS MLFXBRLS MLFXCNYS MLFXINRS MLFXMXNS MLFXRUBS MLFXTRYS MLFXMGES MLFXMAXS MLFXMEMS MLFXMLAS
MLFXGEMT MLFXAXET MLFXEMET MLFXLATT MLFXBRLT MLFXCNYT MLFXINRT MLFXMXNT MLFXRUBT MLFXTRYT MLFXMGET MLFXMAXT MLFXMEMT MLFXMLAT
Source: BofA Merrill Lynch Global Research
Chart 10: ML FX regional spot indices
Chart 11: ML FX regional total return indices 180
130
170
120
160
Global EM - M LFXGEM T LatAm - M LFXLATT EM EA - M LFXEM ET Asia - M LFXAXET
150
110
140 130
100
120
90
80
70 Jan-05
110
Global EM - M LFXGEM S Lat Am - M LFXLATS EM EA - M LFXEM ES Asia - M LFXAXES Jan-06
Jan-07
Jan-08
Source: BofA Merrill Lynch Global Research
12
100 90
Jan-09
Jan-10
Jan-11
Jan-12
80 Jan-05
Jan-06
Jan-07
Jan-08
Source: BofA Merrill Lynch Global Research
Jan-09
Jan-10
Jan-11
Jan-12
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Capital controls Jane Brauer
A capital control is a policy device that a government uses to regulate the investment-oriented foreign currency flows into and out of the country, usually used to restrict volatile movements of capital due to investor speculation. Controls on inflows typically respond to the macroeconomic implications of the increasing size and volatility of capital inflows. Controls on outflows are used to limit the downward pressure on their currencies, a significant risk to a local bond investment. Most emerging market countries have some form of capital controls that can be increased as needed. Even those with free convertibility of their currency could institute capital controls if deemed necessary. Capital controls can take the form of transaction taxes, transfer taxes, withholding taxes, reserve requirements, unremunerated reserve requirements, multiple exchange rate systems and/or limitations in terms of the amount of assets to be held, caps on volume permitted, controls on the international sale or purchase of various financial assets, and sometimes even limits on the amount of money a private citizen is allowed to take out of the country. As the IMF discussed, 1[1] the most common experiences in using capital controls are capital controls to limit short-term inflows, capital outflow controls during financial crises and extensive exchange controls during financial crises.
Convertibility risk Convertibility, or transfer, risk is the risk regarding the conversion from local currency into foreign currency, and the inability to transfer foreign currency out of the country. In other words, it is the risk that an investor will not be able to convert local currency into foreign currency, normally due to exchange restrictions imposed by a government. Drastic measures may occur during crises. Three such examples are:
Korea, 1997. Daily currency movement was limited to 5% and the FX market would shut down after that level was reached.
Russia, 1998. Banks froze dollar withdrawals and the central bank terminated the fixing of the currency in the Moscow International Currency Exchange auctions.
Argentina, 2001. Authorities limited domestic resident access to dollars.
Investors can gain exposure to local currency debt in emerging markets by buying Eurobonds denominated in local currency or transferring money to a specific country and then buying a local debt instrument. For Eurobonds, although the debt may be referenced in local currency, it is payable in hard currency, eliminating the convertibility risk. As a result, Eurobonds’ local currency yields typically are lower than domestic yields for a particular tenor. However, the convertibility risk is not the only driver for higher yields in local bonds. In some countries local debt liquidity is limited, local bonds are governed by local laws and, in some cases, there are restrictions that prevent or limit the amount of bonds that can be held by foreign investors. 1
International Monetary Fund, “Capital Controls: Country Experiences with Their Use and Liberalization”. Occasional paper 190 (2000).
13
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
GEM surprise indices Vasileios Gkionakis +44 20 7995 0143
We introduced a new suite of activity and inflation economic surprise indices (ESIs) for the emerging markets in May 2012, Surprise! New indices point to downside risks to GEM assets. We constructed series for the three EM regions (Asia, EEMEA, LatAm), CEE3 and Turkey, current account surplus and deficit countries, and the GEM-10 and GEMs.
Table 9: BofAML GEM surprise indices Description of economic Bloomberg surprises ticker
We built our methodology on the assumption that what matters for markets is not simply the actual level of surprise but 1) the deviation of surprise from its recent trend and 2) the volatility of surprises. As a result, surprises that are positive but also much higher than the recent trends matter, whereas those that are close to their recent average generally do not. The same holds true for negative surprises.
ML Eco Surprise Asia ML Eco Surprise CA Def ML Eco Surprise CA Surplus ML Eco Surprise CEE ML Eco Surprise China ML Eco Surprise EEMEA ML Eco Surprise GEMs ML Eco Surprise GEM10 ML Eco Surprise LatAm ML Eco Surprise GEMs Infl ML Eco Surprise GEM10 Infl ML Eco Surprise Asia Infl ML Eco Surprise LatAm Infl ML Eco Surprise EMEA Infl ML Eco Surprise China Infl ML Eco Surprise CEE Infl ML Eco Surprise CASurp Infl ML Eco Surprise CA Def Infl
MESIASIA MESICAD MESICAS MESICEET MESICNY MESIEMEA MESIGEMS MESIGM10 MESILAT MESIGEMI MESIGTI MESIASII MESILATI MESIEEMI MESICNYI MESICEEI MESICASI MESICADI
Source: BofA Merrill Lynch Global Research
Table 10: BofAML activity indices Description of economic surprises
Bloomberg ticker
GLOBALcycle (DMs and GEMs) DMcycle GEMcycle (10 largest GEMs) BRICycle CHINAcycle INDOcycle INDIAcycle KOREAcycle POLANDcycle RUSSIAcycle TURKEYcycle SAFcycle BRAZILcycle MEXcycle Composite PMI of 10 largest EMs (miGEM) Composite PMI of BRICs (miBRIC) Composite PMI of EM Asia (miASIA) Composite PMI of EEMEA (miEEMEA) Composite PMI of LatAm (miLATAM)
MECIGLBC MECIDMC MECIGEMC MECIBRIC MECICNYC MECIIDRC MECIINRC MECIKRWC MECIPLNC MECIRUBC MECITRYC MECIZARC MECIBRLC MECIMXNC MECIMGEM MECIMBRC MECIMASA MECIMEME MECIMLAT
Source: BofA Merrill Lynch Global Research
14
How we construct our regional surprise indices For each activity series that we use for a country, we calculate the surprise element (actual minus Bloomberg consensus) and then generate a z-score, which is basically the deviation of the latest surprise from its six-month moving average (or six-quarter moving average for quarterly data) divided by the standard deviation of the surprise over the last six months (or six quarters). Our country activity surprise index is then calculated as a diffusion index between those series that were greater than 0.5 standard deviations and those that were less than -0.5 standard deviations. In other words, we assume there is a noise zone (-0.5, 0.5) in which readings do not matter. To calculate the regional index, we aggregate the country indices in a specific region by GDP-weighting them.
Relationship to GDP growth and market performance We found that our GEM and regional surprise indices have been highly correlated with activity and inflation, as well as asset prices. We use the surprise series for generating trading signals for equities and currencies (see FX and Equity trading signals from new GEM surprise indices). In our view, results using these indices and trading rules provide evidence for the usefulness of ESIs as an additional tool in discretionary and systematic portfolios.
Economic conditions & PMI indices We developed Economic Conditions Indices (ECIs) in which we apply the framework used by the Philadelphia Fed to track US real business cycles at a high frequency. This approach optimally extracts information from data of different frequencies, which allows us to produce timely estimates of economic activity. The final reading is expressed as standard deviations away from the long-run average (z-score); the aggregate indices are GDP-weighted Economic Condition Indices across the countries included (see GLOBALcycle: a new finger on the global pulse). We calculate regional composite PMI indicators as a way of gauging regional manufacturing performance by filtering out the noise at the individual country level; these series are also GDP-weighted (see Introducing our GEM manufacturing indicator: a PMI based approach). For access to our suite of models please visit MLGD page on Bloomberg (MLGD ).
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
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15
Table 11: Economic policy regimes Country
Policy regime
Policy rate
2012 inflation % forecast
Inflation target
Operational independence
Meeting frequency
Multiple Objectives
Lending Rate
3.7%
n/a
Limited but improving
Adhoc
Currency Board Arrangement (CBA)
Base Rate
4.5%
n/a
High, but limited by CBA
Following FOMC
Multiple Objectives
Reverse Repo
7.2%
n/a
High
Quarterly
FX/Inflation
Reference Rate
4.7%
n/a
High
Monthly
Inflation Targeting
Repo Rate
2.8%
2.0% - 4.0%
Very High
Monthly
Informal Taylor Rule
Overnight Rate
2.6%
n/a
Moderate
Monthly
Philippines
Inflation Targeting
Repo Rate
3.3%
n/a
High
Every 6 weeks
Singapore
Informal Taylor Rule
n/a
3.6%
n/a
Very High
Bi-annual
Taiwan
Informal Taylor Rule
Rediscount Rate
1.9%
n/a
Very High
Quarterly
Inflation Targeting
Repo Rate
4.1%
0.5% - 3.0%
High
Every 6 weeks
Inflation Targeting
2 Week Repo Rate
3.0%
2.0% ± 1.0%
High
8 per year
FX/Inflation
Overnight Lending/Deposit
8.6%
Not Official
Low
Every 6 weeks
Asia China Hong Kong India Indonesia Korea Malaysia
Thailand
1 2 Se ptembe r 20 12
16
BofAML reference sheet: economic policy regimes
EEMEA Czech Rep Hungary
Inflation Targeting
2 Week Bill
5.4%
3.0%
High w/ rising political pressure
Monthly
Israel
Inflation Targeting
Discount Rate
1.6%
1-3%
High
Monthly
Poland
Inflation Targeting
7 Day Bill
3.8%
2.5% ± 1.0%
High
Monthly
Russia
FX/Inflation
Refinance Rate
4.9%
Not Official
Low
Monthly
South Africa
Inflation Targeting
Repo Rate
6.1%
3-6%
High
Bi-monthly
Turkey
Inflation Targeting
7 Day Repo Rate
8.9%
5.0%
High
Monthly
Mon. Aggregates
NA
9.8% (CER)
NA
Very Low
NA
Inflation Targeting
Selic Rate
5.1%
4.5% ± 2.0%
High
8 per year Monthly
Latin Am Argentina Brazil Chile
Inflation Targeting
Overnight Rate (TPM)
2.0%
3.0% ± 1.0%
High
Colombia
Inflation Targeting
Minimum Offered Rate
2.8%
3.0% ± 1.0%
High
Monthly
Mexico
Inflation Targeting
Overnight Rate (Fondeo)
4.1%
3.0% ± 1.0%
High
8 per year
Peru
Inflation Targeting
Reference Rate
3.6%
2.0% ± 1.0%
High
Monthly
Source: Bloomberg, BofA Merrill Lynch Global Research
GEMs Pa pe r #1 0
Egypt
Table 12: Local debt market characteristics Dom sovereign Local accnt Country
% foreign Withholding and
required? Euroclearable? ownership (May)
Can foreigners
other taxes? repo anywhere?
debt stock Futures?
(US$bn) 1623
Inflation
BofAML fixed
Index mod
Index mkt cap
linker? (Index) rate index name
duration
(US$mn) 2574000
Asia China
No
-
Yes
QFII Required
No
No
Yes
-
No
Yes
Yes*
India
Yes
No
1%
Yes
No
Yes*
Indonesia
Yes
No
30%
Yes
Yes
No
82
Korea
Yes
No
17%
Yes
Yes
Yes
475
Malaysia
Yes
Yes
39%
No
No
No
128
Philippines
Yes Only global pesos
-
Yes
No
No
62
Singapore
Yes
-
No
Yes
No
Taiwan
Yes
No
-
Yes
Yes
No
Thailand
Yes
Yes
13%
Yes
No
No
Czech Rep
Yes
Yes
10%
Yes
Yes
Egypt
Yes
No
0.4% (bills)
Yes
No
Hungary
Yes
Yes
40%
Yes
Israel
Yes
No
2%
Poland
Yes
Yes
31%
Yes
No
G0CN
7.2
No
G0HK
4.2
90830
No
G0IN
5.8
448,805
No
G0ID
6.5
111340
Various
G0SK
4.8
530790
No
G0MY
5.0
118590
No
G0PH
5.9
72670
No
G0SP
5.9
128650
157
No
G0TW
7.7
158500
166
THCPI
G0TH
6.2
199530
No
73
No
G0CZ
5.8
42,509
No
110
No
G0EG
2.1
31,130
Yes
No
45
No
G0HU
3.6
29,475
Yes
No
No
134
ISCPINM
G0IS
4.7
42,917
Yes
Yes
No
154
POCPILB
G0PL (G0P I-LINKED)
4.1
98,420 (6,716)
608
EEMEA
Russia
Yes
Only 2018s
4% (OFZ)
Yes
No
Yes
115
No
G0RU
4.3
61,279
No
Yes
29% (2011)
No
Yes
No
129
SACPI
G0SA
6.1
90,928
Yes
No
19%
Yes
Yes
No
221
TUCPI
G0TR
2.5
66,668
Argentina
Yes
Some Bonds
-
Yes
Yes
No
71
CER
-
-
-
Brazil
Yes
No
12%
Yes
No
Yes
936
IPCA and IGPM
G0BR
2.6
181,000
Chile
Yes
Yes
-
Yes
Yes
No
54
UF
G0CL
4.3
10,278
Colombia
Yes
No
-
Yes
No
No
86
UVRI
G0CO
4.4
55,711
No
Yes
31%
Yes
Yes
Yes
304
UDI
G0MX
6.1
Yes
No
-
Yes
No
No
12
VAC/IDR
G0PE -
8.7-
122,734 12,026-
South Africa Turkey Latin Am
Mexico Peru
Source: Various local authorities, BIS, Bloomberg, BofA Merrill Lynch Global Research
GEMs Pa pe r #1 0
Yes (offshore no)
Hong Kong
1 2 Se ptembe r 20 12
BofAML reference sheet: local debt market characteristics
17
Table 13: Major local debt instruments Country Asia China
Hong Kong India Indonesia
Philippines
Avg daily vol (US$mn)
BBG ticker
Act/365 Act/365
1-3 1-3
-
5000-6000 11-12
PBOC 0 Govt CGB Govt
10 yrs 365d / 10 yrs
zero annual (< 7yrs) / semi-annual (>10 yrs) CNH semi-annual HKD zero / semi-annual
Act/365 Act/365
2/3
128 / 25
Treasury Bill / Treasury Bond SBI / T-bills
365d / 30 yrs
INR zero / semi-annual
Act/365 / 30/360
2-3 / 3-5
6/1
9 mos / 1 yr
IDR
zero
Act/360
-
-
-
Sovereign Bond / Fixed Rate Bond KTB / MSB
30 yrs
IDR
semi-annual
Act/Act
2-7 / 2-3
1-2 / -
200-500 / -
20 yrs / 2 yrs
KRW
Act/365
2-3 / -
10
4800 / 2900
365d 20 yrs 1 yr / 3 yrs
MYR MYR MYR
semi-annual / quarterly (>1 yr) zero semi-annual zero
Act/Act -
4 1.5 5
7 7 7 / 34
11 740 3 / 425
10 yrs 3 yrs 364d 25 yrs / 5 yrs
MYR MYR PHP PHP
semi-annual zero semi-annual / quarterly
Act/Act Act/360 30/360
1.5 3 -
7 34 1 1yr) semi-annual
IRSB CH IRSB HK IRSB IN
Act/360
quarterly quarterly annual (s/a for >1yr) semi-annual
Act/365
Act/365
quarterly
KLIB 3m
Act/365
Act/365
quarterly
n/a 2 2-3 3-4
US LIBOR 6m SORF 6m TDCC 90day THBFIX
Act/365 Act/365 Act/365 Act/365
Act/360 Act/365 Act/365 Act/365
semi-annual semi-annual quarterly semi-annual
good
3-5
PRIBOR 6m (1y IRS is 3m)
Act/360
Act/360
annual
semi-annual (1y IRS is quarterly)
IRSB CZ
n/a 1-10y 1-10y 1-12y
good good good
4-6 4 3-4
Act/365 Act/365 Act/Act
Act/360 Act/365 Act/365
annual annual annual
CCS
1-5y
good
5-10
BUBOR 6m TELBOR 3m WIBOR 6m (1y IRS is 3m) US LIBOR 3m
Act/Act
Act/360
annual
semi-annual quarterly semi-annual (1y IRS is quarterly) quarterly
IRS CCS
1-10y 1-5y
very liquid good
3-5 5
JIBAR 3m US LIBOR 3m
Act/365 Act/360
Act/365 Act/360
quarterly annual
quarterly quarterly
good 1 liquid tenors, 2-5 for les liquid moderate 4-5
CDI
DU/252
DU/252
at maturity
Camara and UF linked swap
Act/360
IBR (IRS) & 6m LIBOR (CCS) TIIE 28d & US LIBOR 1M US LIBOR 6m
Act/360
(Please see separate table in Argentina section) Yes Yes IRS (Futures)
Chile
Yes
Yes
Colombia
Yes
Yes
Mexico
Yes
Peru
Fixed cpn freq
No
IRS
1-5y (January contracts) 1-10y
CCS (IRS gaining liquidity) Yes IRS
1-10y
poor
1-10y
Good
10 (IRS)/6 (CCS) 3-4
Yes
1-10y
very poor
20
CCS
Source: Bloomberg, BofA Merrill Lynch Global Research * Poor liquidity, but some banks with strong onshore presence may quote on a bilateral basis to clients.
28/360 Act/360
1/360 of rate semi-annual compounded on (bullet < 18m) ACT days Act/360 quarterly & semiannual 28/360 Monthly (28d) Act/360
semi-annual
IHUSWO3 quarterly IHUSWO1 CMPN quarterly MRSWQO1 semi-annual semi-annual IRSB SI quarterly IRSB TW semi-annual IRSB TH
n/a IRSB HU IRSB IS IRSB PD RRUSSW IRSB SA TYUSSW
Futures settled ODA CT daily semi-annual
IRSB CL
quarterly& semiannual monthly
IRSB CO
semi-annual
FWCM PEN
IRSB MX
GEMs Pa pe r #1 0
Bid/ask (bp)
Philippines Singapore Taiwan Thailand EEMEA Czech Rep
Floating leg Fixed day count
Floating day count
Liquidity
1 2 Se ptembe r 20 12
20
BofAML reference sheet: major local swap characteristics
Table 16: FX characteristics Country
FX regime
Deliverable?
Code
FX spot avg daily trading vol (US$bn)
Forward liquid tenors
Options liquid tenors
Asia China
Managed Float
No (offshore Yes)
CNY (offshore CNH)
20 (CNH 0.8-1.3)
2y
2y
Hong Kong
Currency Board
Yes
HKD
6
1y
2y
India
Managed Float
No
INR
5
1y
2y
Indonesia
Managed Float
No
IDR
1
1y
1y
Korea
Free Float
No
KRW
6
1y
2y
Malaysia
Managed Float
No
MYR
1.5-2.0
1y
2y
Philippines
Free Float
No
PHP
0.8-1.2
1y
1y
Singapore
Managed Float
Yes
SGD
6.0-7.0
1y
2y
Taiwan
Managed Float
No
TWD
1.0-1.5
1y
2y
Thailand
Managed Float
Yes
THB
1.0-1.2
1y
n/a
Czech Rep
Floating
Yes
CZK
3.0
up to 1y
up to 2y
Egypt
Managed Float
Yes
EGP
0.3-0.4
up to 6m
n/a
Hungary
Floating
Yes
HUF
5.0
1y
up to 1y
Israel
Floating w/ Intervention
Yes
ILS
2
up to 1y
up to 1y
Poland
Floating w/ Intervention
Yes
PLN
6.0
up to 1y
up to 2y
Russia
Managed Float
Yes
RUB
5.0-10.0
up to 1y
up to 2y
South Africa
Floating w/ Intervention
Yes
ZAR
7.0-8.0
up to 1y
up to 1y
Turkey
Floating w/ Auctions
Yes
TRY
10.0-12.0
up to 1y
up to 1y
1 2 Se ptembe r 20 12
BofAML reference sheet: FX characteristics
EEMEA
Argentina
Highly Managed
No
ARS
0.2
2y
1y
Brazil
Floating w/ Intervention
No
BRL
1.8
2y
2y
Chile
Floating w/ Intervention
No (convertible, most offshore
CLP
1.6
2y
1y 1y
trades are non-deliverable) Colombia
Floating w/ Intervention
No
COP
1.0
1y
Mexico
Floating w/ Intervention
Yes
MXN
10
2y
2y
Peru
Floating w/ Intervention
No
PEN
0.5
1y
n/a
Source: Bloomberg, BofA Merrill Lynch Global Research
GEMs Pa pe r #1 0
Latin Am
21
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
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22
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Asia countries
23
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
China Overview Bin Gao +
China’s bond market has undergone a dramatic change in the past 10 years. Government debt accounted for just 16.8% of GDP in June 2001, compared with 34.7% of GDP today (US$2.6tn absolute size) 2. This represents by far the largest local government bond market in Asia ex-Japan terms, and ranks third in terms of government bonds outstanding, behind the US and Japan. Regulated onshore access to foreigners has limited its international role, but the government is making big efforts to open up its bond market for foreign access through revised qualified foreign institutional investor (QFII), RMB qualified foreign institutional investor (RQFII) and other programs.
3969
Ethan Mou + 3741
Monetary policy
Table 17: China ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Aa3 Aa3 Aa3 A1 A1 A1 -
AAAAAAA+ A+ A A ABBB+ BBB BBB BBB BBB
AAAAAAAAAAAAA+ A+ A A A A -
Source: BofA Merrill Lynch Global Research
Chart 12: Estimated CPI components for China in 2011 19.2
Housing
13.7
Recreation & education
10.2
Transport and comm. Health, medical and
9.5
personal products
5.5
Household items
Background. Originally founded in 1948, the People’s Bank of China (PBoC) was given the authority by the state department to start performing the duties of the country’s central bank in 1984. The authority was legalized by the National Peoples Congress in 1995, along with the legal confirmation. The bank was further modernized and given greater macroeconomic responsibility in the same year, and again in 2003. A nine-member management team including five deputy governors supports current Governor Zhou Xiaochuan. There is also a Monetary Policy Committee (MPC) consisting of at least 12 members with outside representatives from the State Council and financial regulatory bodies that meet quarterly. In practice, the MPC plays an advisory role. Policy framework. The 2003 legislation outlines 13 major policy responsibilities. Key among them are regulating financial markets, maintaining CNY equilibrium, managing FX reserves and managing the state treasury as fiscal agent. The reality is that the executive State Council holds considerable sway over the PBoC in appointing the governor and signing off on policy rate decisions and CNY appreciation. The PBoC does not have an explicit inflation target mandate, but targets a combination of inflation, M2 money supply and loan growth. The key policy rates are the 1y deposit and lending rates. Unlike many other central banks that tend to favor price tools only, the PBoC actively conducts its policy using both measures. Base rate. The PBoC officially regulates the whole curve of deposit and lending rates. It sets the benchmark rates for deposits from demand to 5y time deposits, and for lending from 3 months to more than 5 years. Of them, the 1-year deposit and lending rates are the benchmarks that the market focuses on. Previously, banks’ deposit rates were capped at benchmark rates, while lending rates could float from 0.9x to 4x the benchmark rates. The household mortgage rate is allowed to go as low as 0.7x the benchmark lending rate. In June and July, the PBoC took an important step toward interest deregulation by increasing the cap on the deposit rate to 1.1x the benchmark rate and lowering the floor on the lending rate to 0.7x the benchmark rate.
8.4
Clothing 3.3
Tobacco & alcohol
30.2
Food 0
10
20
30
40 %
Open market operations. Given State Council influence over policy making, open market operations (OMO) are an important discretionary tool of the PBoC in managing liquidity and monetary targets. It schedules auctions every Tuesday and Thursday at 10am. Tuesday is typically for 1y PBoC bills and 28-day repo, while Thursday is for 3m and 3y bills and the 91d repo. Primary dealers must
Source: NBS, BofA Merrill Lynch Global Research 2
24
Including both sovereign and policy bank bonds
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions Bonds
indicate their bidding interest (level and size) a day in advance, with the PBoC announcing the auction size at 4.30pm on Monday and Wednesday.
Quote: Yield to maturity Settlement: T+3 Basis: Act/365 Coupon frequency: semi-annual above 10-year, annual below 7-year
IRS
Above and beyond sterilization needs, the 3m and 1y bills are used to manage liquidity from redemptions and IPO demand. There are some constraints on the ability for the PBoC to issue 1y bills above the official 1y lending rate without the approval of the State Council. As such, the 1y bill auction yield is watched closely for impending signs of a policy rate hike if it rises meaningfully above the 1y lending rate.
Fixing: Various products: 7d repo fix, 3M Shibor, 1y benchmark deposit, 1y benchmark lending Coupon frequency: Quarterly, floating/fixed Act/365
CCS Fixing: 6m USD LIBOR
So far this year the PBoC has stopped issuing bills in the OMO and mainly resorts to repo and reverse repo operations, with the latter rarely used in the past. More active use of reverse repo suggests the PBoC is moving toward its western peers and starting to manage the short-term money market rate, more specifically, the 7d repo rate.
Coupon frequency: Semi-annual USD day count Act/360, local Act/365
Lending and deposit facilities. Commercial banks and other depositary institutions can borrow from the PBoC for short-term liquidity support. The rate is usually set higher than the benchmark deposit rate but lower than the benchmark lending rate. The July 2012 rate was at 3.85% for 1y loans, compared to the 1y benchmark deposit and lending rates at 3% and 6%, respectively. Financial institutions can also borrow at the PBoC’s discount window by using commercial bills as collateral. The July 2012 rediscount rate is 2.25%. These facilities are not used by banks very often, as seeking help from the central bank might send a bad signal to the PBoC and the banking regulator – the Chinese Banking Regulatory Commission (CBRC). Reserve requirements. The reserve requirement ratio (RRR) is an important discretionary policy tool. Unlike many other countries that use bills to sterilize the FX inflow explicitly, the PBoC primarily relies on the RRR to do the work. By doing this, it transfers the sterilization costs to the banking sector. The PBoC started a new round of RRR cuts in November 2011, and has cut the RRR three times by 50bp as of July 2012. In July 2012, the RRR was 20% for major banks, and 16.5% for small and medium sized banks. RRR changes have a tendency to be announced in the second half of the month. The PBoC pays 1.62% on required reserve and 0.72% on any excess reserves deposited at the PBoC.
Fiscal policy The key market drivers are monthly CPI, industrial production, money supply, fixed asset investment and PMI. The National Bureau of Statistics has not officially disclosed the CPI component weightings; however, there is partial information available: food is at 30.2% and housing 19.2%. Key multi-year macro policy and leadership changes are decided by the party first, with the National Congress typically meeting every five years. The measure is then sanctioned by the National People’s Congress and the People’s Political Consultative Conference. The 18th National Congress of the Communist Party of China will take place in 2012. Usually held between September and November, it marks a symbolic change in leadership and policy direction for the next five years. The short end of the bond curve moves with monetary policy, which in turn is driven by a combination of growth and inflation. The longer end has strong correlation with the stock market.
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Bond market China’s onshore bond market represents the largest in Asia ex-Japan with an estimated US$3.5tn in outstanding bonds. However, relative to its own GDP it is a more modest 47%. There are seven broad categories of bonds: government bonds, PBoC bills, policy bank financial bonds, corporate bonds, enterprise bonds, commercial papers and medium-term notes. Bond trading occurs through two key platforms: the more liquid interbank OTC market, and the Shanghai and Shenzhen exchanges. Foreign investor access is limited to qualified Foreign Institutional Investor status and specially approved central banks, sovereign wealth funds and certified Hong Kong/Macau/foreign banks. For a more comprehensive guide on the onshore bond market, please see our primer, China: large bond market growing and opening, 11 April 2012. Money market. The money market is made up of three curves: repo, Shibor and depo. The overnight and 7d repo rates are the established benchmarks and account for more than 70% of market volume. This is a collateralized lending rate, and its fixing is published every day at 11am local time, based on the median of all transacted prices from 9-11am on the China Foreign Exchange Trading System (CFETS). Daily average turnover is CNY300bn for o/n repo and CNY50bn for 7d repo. The Shibor curve is an uncollateralized interbank borrowing offer rate set by 16 onshore banks with tenors from o/n to 1y. Beyond credit premium, the Shibor rate can be biased higher, as banks are incentivized to set higher fixings to improve the margins on loans linked to the Shibor rates. PBoC bills. PBoC bill tenors range from 3, 6 and 12 months up to 3 years. The primary objective is sterilization and liquidity management. They are auctioned via the China Government Securities Depository Trust and Clearing Company (CDC). Treasury bonds. Also known as Central Government Bonds (CGB), Treasury bonds are issued by the Ministry of Finance to fund the government’s budget deficit. Total outstanding CGB is estimated at CNY6.5tn, or 30% of total outstanding government and corporate bonds. Maturities range from bills (3, 6, and 9 months) to bonds (1, 3, 5, 7, 10, 15, 20, 30 and 50 years). Coupons are paid semi-annually above 10y tenors and annually for 7 years and below.
Chart 13: Maturity profile of Treasury bonds in CNYbn
Chart 14: Outstanding bonds by type in CNYbn 9,000
1,200
8,000
1,000
Treasury bonds
7,000 PBoC bills
6,000
800
5,000
600
Financial bonds
4,000 Enterprise bonds
3,000
400
2,000
Short-term financing
1,000
200
0
Source: BofA Merrill Lynch Global Research, Bloomberg
26
May-12
Nov-11
May-11
Nov-10
May-10
Nov-09
May-09
Nov-08
MTN May-08
2061
2042
2039
2033
2030
2027
2024
2021
2018
2015
2012
0
* Financial bonds include both the policy bank bonds and commercial ban bonds. Source: BofA Merrill Lynch Global Research, chinabond.com.cn
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Policy bank bonds. Issued by the three policy banks (China Development Bank, Agricultural Development Bank of China and China EXIM Bank) for infrastructural development. Strictly speaking CDB is no longer a policy bank, but a commercial bank. However, its bonds still enjoy the zero-risk weights on bank assets and dominate under the category of policy bank bonds with an outstanding amount at CNY4.8tn, or 67% of outstanding policy bonds. From January to May 2012, the CDB issued 38 times for a total of CNY506bn, while the other two issued a combined 17 times for CNY371bn. Corporate debt. A collection of bonds predominantly issued by state-owned enterprises and foreign joint venture companies. However, this category has been opened to private sector corporations without the need for bank guarantees. The main bond category includes commercial bank bonds, enterprise bonds, shortterm financing papers (ST financing) and medium-term notes (MTN). ST financing and MTN are the most actively traded in the interbank market. Total outstanding corporate bonds are at CNY5.3tn, or 25% of total bond market. Auction and placement mechanism. Government Treasury bonds are issued under a hybrid auction by the Ministry of Finance with maturities up to 50 years. Beyond the MoF, the three policy banks also issue bonds by auction, but usually in Dutch style. There is no complete calendar of regular auction, though daily updates can be found on chinabond.com. The MoF typically publishes its issuance plan of key maturities (1, 3, 5, 7, 10 years) at the end of the year, and complete issuance plan for the next quarter at the end of the quarter. However, the issuance amounts are not disclosed. In 2012, the CDB announced its issuance plan for the year, with detailed tenors, dates and amounts.
Derivatives market Interest rate swaps. The swap market continues to grow fast and robustly, despite continued concern over the reliability and consistency of the fixing for the floating reference leg of the swap. Essentially, there are five IRS curves based on the 7d repo (compounded quarterly), the overnight Shibor, the 3m Shibor, the 1y benchmark deposit rate and the 1y benchmark lending rate. Although the 7d repo offers the best in underlying liquidity, it suffers from abrupt and volatile squeezes in market liquidity. As a result, it may not always be reflective of underlying macroeconomic trends. While the 1y deposit provides a better macro proxy, it lacks the same liquidity as the 7d repo and Shibor-based IRS instruments. Table 18: China interest rate swaps (IRS) - market notional values (May 2012) Total notional amount % of total Benchmark (CNYbn) notional amount 7-Day Repo Rate SHIBOR Overnight SHIBOR 3-Month 1-Year Term Deposit Interest Rate 1-Year Lending Interest Rate
149 59 40 15 1
56.5 22.4 15.1 5.5 0.3
Source: BofA Merrill Lynch Global Research, chinamoney.com.cn
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Table 19: Summary statistics of China derivative products and their markets Avg daily Avg Bid-Ask Fixings and Product trading volume transaction size spread other notes Interest rate swaps 1-year
CNY 3.2bn
CNY 100mn
2bp
CNY 1bn
CNY 50mn
2bp
CNY 1.5bn
CNY 200mn
3bp
CNY 800mn
CNY 100mn
5bp
CNY 10mn
10-15bp
USD 50mn USD 10mn USD 5mn
15bp 20bp 30bp
5-year ND Interest rate swaps 1-year 5-year Cross-currency swaps
ND Cross Currency Swaps 1-year USD 300mn 5-year USD 50mn 10-year USD 10mn
CIRS Bloomberg 11am 7-day repo, 11.30 Shibor CNREPOFIX=CFX, Reuters 11am local time fixing illiquid PNDS, Reuters
Source: BofA Merrill Lynch Global Research
FX market The CNY is characterized as a managed float, with PBoC officials claiming that the currency is managed against a basket of top 10 trading partners. So far, the weights have not been disclosed. Our economists estimate that four major currencies (USD, EUR, JPY and KRW) account for roughly 77% of the basket (Cracking yuan’s basket, 28 June 2010). Table 20: Weights of RMB basket weights USD EUR
JPY
KRW
SGD
RUB
AUD
GBP
MYR
INR
CAD
BRL
IDR
THB
PHP
TWD
BoAML BIS
12.3 16.8
8.3 8.2
2.9 3
2.7 1.3
2.5 1.2
2.5 3.1
2.4 2
2.2 1.3
1.8 2.7
1.7 0.9
1.6 0.8
1.4 1.8
1.4 0.8
6.6
40.3 21
16 18.4
Source: BIS, BofA Merrill Lynch Global research calculations. Note BIS'basket for China has 43 currencies.
The key shift in regime came on 21 July 2005 when the PBoC announced a one-off 2.1% revaluation against USD. Thereafter, CNY has been characterized by three types of appreciation: aggressive 12% annualized appreciation, modest 5-6% annualized appreciation, and marginal 0-2% annualized appreciation against the USD. Table 21: Vital statistics and characteristics of China's FX markets FX Tradable products product CNY Onshore Spot Spot Forwards
Forwards
CNY Offshore Forwards NDF
Options
NDO
CNH Offshore Spot Spot
Forwards
Forwards
Avg daily trading volume
Bid-Ask spread
Reuters reference Key facts
USD 20bn USD 5-20mn CNY 0.0005- CNY=CFXS ▪ Proper documentation required. 0.002 ▪ Trading hours: 9:00-16.30 Beijing USD 5-10bn USD 10- CNY 0.0010- CNYF= 50mn 0.0150 USD 4-5bn
USD 1050mn
CNY 0.00200.0100
PNDF PNDG
USD 500800mn
USD 50mn
0.3-1.0 vol
TTDE
USD 1.5-2bn USD 10mn CNH 0.00200.0030 USD 2-3bn
Source: BofA Merrill Lynch Global Research
28
Avg trading size
USD 1020mn
▪ CNY is non-deliverable currency, offshore entities can access the market through NDF. ▪ Dollar settled NDF on CNY are available till tenors of 10y and are liquid for tenors shorter than 2y. ▪ Dollar settled NDO on CNY are available till tenors of 7y and are liquid for tenor shorter than 2y.
CNH=D2 ▪ CNH is CNY traded and deliverable offshore, primarily in HK. ▪ There is no fixing rate set by the authorities. CNH 0.0020- BGCHKCNY ▪ CNH forward curve is liquid up to one year. 0.030
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Bloomberg pages FX rates CNY Curncy ALLQ Cross section of China markets OTC CNY
Reuters pages PBoC pages, Reserve Requirements PBoC SAFE fixings 7-day repo fixing
Useful official websites The People’s Bank of China (PBOC) www.pbc.gov.cn State Administration of Foreign Exchange (SAFE) www.safe.gov.cn National Development and Reform Commission www.ndrc.gov.ch China Banking Regulatory Commission www.cbrc.gov.cn China Securities Regulatory Commission www.csrc.gov.cn Ministry of Commerce www.mofcom.gov.cn
Useful market websites China Depository & Clearing www.chinabond.com.cn China FX Trade System www.chinamoney.com.cn China Government Securities Depository Trust & Clearing Company Ltd http://www.chinaclear.cn Shanghai Interbank Offered Rate http://www.shibor.org
CNY transactions are managed by the electronic brokerage system CFETS, established in 1994. Its functions also include CNY lending, bond trading, derivatives and surveillance. Operating hours are 9am to 4.30pm, and every morning at 9:15am (local) a fixing is announced based on weighted average of market makers with discretion and published on Reuters page SAEC. USD/CNY is then allowed to trade within a +/-0.5% band around this fixing. The PBoC widened the USD/CNY trading band to +/-1.0% on 16 April 2012. Currently, USD/CNY, HKD/CNY, JPY/CNY, EUR/CNY, GBP/CNY, CNY/MYR and CNY/RUB are directly traded on the system. SAFE is the State Administration of Foreign Exchange, a sub-division of the PBoC, and responsible for FX regulations, reserve management and intervention. Table 22: Local institutional base (by May 2012) Holdings (CNYbn) Total bonds PBoC, MoF, Policy banks Commercial Banks - National Commercial Bank - Foreign Bank - City Commercial Bank - Rural Commercial Bank - Rural Cooperative Bank - Others Credit cooperative banks Non Bank Fin Inst Securities Companies Insurance Companies Fund Houses Non Financial Inst Individual Investors Exchanges Others
21,728 1,650 14,737 12,401 245 1,441 574 62 14 490 78 164 2,075 1,774 30 265 372 92
% of total 7.6 67.8 57.1 1.1 6.6 2.6 0.3 0.1 2.3 0.54 0.8 9.6 8.2 0.1 1.2 1.7 0.4
Source: BofA Merrill Lynch Global Research , chinabond.com.cn
Investor base Major local investors include state-owned banks, shareholding commercial banks, securities companies, credit cooperatives, insurance companies and investment funds. Among the pension funds, the Social Security Fund has an estimated size of US$130bn, of which 50% is designated to be invested in deposits and government bonds. The government has also made efforts to provide foreign investors with better access to the onshore bond markets. There are three main avenues to invest in onshore bond markets: QFII, RQFII and interbank bond market investment quota. All three are subject to approvals and quotas. The QFII scheme was launched jointly by the CSRC and PBoC in November 2002 and came into force on 1 December 2002. Bonds-wise, a QFII was only allowed to invest in bonds traded on exchanges, which barely accounts for 2% of total bonds outstanding. However, on 27 July 2012, the CSRC officially revised the QFII rules to allow QFIIs to invest in the dominant interbank bond market. The entry requirements of QFII are also lowered significantly. Awarded QFII quota is US$28.5bn out of a total of US$80bn, as of July 2012.
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RQFII refers to offshore institutional investors with RMB raised offshore. The program was launched in December 2011 and allowed for investment in the interbank bond market. However, currently the pilot program is restricted to only Hong Kong subsidiaries of the onshore fund and securities firms. In August 2010 the PBoC launched a scheme to allow three kinds of institutions to invest in the onshore interbank bond market. The eligible investors are:
Foreign central banks that facilitate cross-border trade/investment with China and are involved with currency cooperation.
CNY clearing banks in Hong Kong/Macau.
Offshore CNY trade settlement banks.
As of June 2012, these investors held CNY96bn bonds in the interbank market. There are also 18 countries/regions that signed currency swap agreements with China, and the total size is CNY1.84tn.
Rules, regulations capital controls and taxation Foreign investor access in local bonds is principally through QFII status. This sets several criteria laid out by the CSRC that require fund management, insurance, securities and bank entities to have relative AUM size, years of experience and capital. QFII also requires a local custodian and broker. Additionally, QFII access is designated through the exchange traded market (see Clearing & Settlement), which is not as liquid as the interbank market. CNY tradesettlement banks and central banks are allowed to access the interbank market. More recently, the CSRC announced revisions to the QFII rules to allow access to the interbank bond market for the QFII and lower the entry criteria. Tax on QFII investment for coupon and dividend follows corporate income tax rules, currently at 10%. The capital gains are also exempted from business tax. But the issue of whether corporate income tax applies remains unclear and waits to be clarified. The degree to which that the tax can be reimbursed depends on the tax treaties and other regulatory considerations defined by the China State Administration on Taxation.
Clearing and settlement There are two clearing and settlement platforms. The China Government Securities Depository Trust and Clearing Company (CDC) clears transactions in the interbank market in real time. The China Securities Depository and Clearing Company (CSDCC) is the sole depository, clearing and registration company for securities traded on the Shanghai and Shenzhen exchanges. CSDCC provides settlement T+1. Note that CDC is under the regulatory supervision of the PBoC and CBRC, while the CSDCC is under the supervision of the CSRC.
CNH market The simple definition of CNH is the offshore deliverable FX market for CNY created in Hong Kong. However, its scope and implications are far-reaching and could conclude with the internationalization of the renminbi. While Hong Kong is the justifiable focus of the CNH market, efforts are also under way in Macau, ASEAN and around the world to facilitate the deliverability of CNY. For a more comprehensive guide on the CNH markets, see Credit primer: Off-shore RMB market, 07 February 2011. For the latest CNH trends, see Off-shore RMB bond market: Retrospectives & perspectives, 29 Jan 2012.
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The genesis of the CNH market began on 18 November 2003 when Hong Kong announced that banks could conduct personal renminbi business on a trial basis, following approval by the PBoC and China’s State Council. The next key milestone occurred in July 2007, when the China Development Bank completed its first issuance of renminbi bonds in Hong Kong. Essentially, this marked the start of the “dim sum bond” market and the establishment of financial intermediation between Hong Kong and the mainland. Table 23: Comparing offshore CNH spot with onshore and offshore NDFs CNY spot FX Onshore CNY Offshore CNH Offshore NDF Average daily turnover Average transaction size Bid-Ask spread Settlement Fixing
USD10-15bn USD100mn 10pips CNY 9.15am Beijing, Reuters CNY=CFXS
USD1.5-2bn USD10mn 20pips CNY CNYFIX=
USD3-4bn USD10-20mn 30-40pips 1Y USD net settlement 9.15am Beijing, Reuters CNY=CFXS
Source: BoA Merrill Lynch Global Research, Bloomberg - these are indications under normal market conditions
The CNH spot market. Established in August 2010, the CNH spot market is open to all corporates or institutions so long as they comply with the banking regulations of Hong Kong. Market liquidity has improved as corporate trade settlements have supplied CNY liquidity to the markets. More recently, the Hong Kong Monetary Authority (HKMA) dropped limits to the net open position ruling, and started to conduct 7d repo to provide liquidity if requested by banks. As such, the differential between the CNH and onshore CNY spot markets has narrowed as improved supply has been able to satiate global demand. Forwards and swaps. Beyond the onshore CNY and offshore CNH spot markets, there has been a rapid development in the CNH FX forwards markets. Thus far, liquidity has improved significantly, and the curve extends out to one year. This compares to the onshore CNY forwards and NDF forwards, which trade out to five years and beyond. Unlike the NDF forwards market, both the onshore and offshore deliverable forwards are a function of their respective money-market interest rate differentials. CNH deposit rates are significantly lower than the onshore CNY market due to the “liquidity duopoly” of the clearance bank, Bank of China, and the PBoC Shenzhen branch that sets the benchmark for the market. Table 24: Comparing offshore CNH forwards with onshore and offshore NDFs CNY FX forwards Onshore CNY Offshore CNH Offshore NDF Average daily turnover Average transaction size Bid-Ask spread
Settlement Fixing
Volatile, average USD1bn USD10mn 1W 5pips 1M 5pips 3M 20pips 6M 45pips 1Y 25pips CNY No fixing
USD2-3bn USD10-20mn 1W 5pips 1M 10pips 3M 15pips 6M 30pips 1Y 30pips CNY No fixing
USD3-4bn USD10-20mn 1W 35pips 1M 20pips 3M 30pips 6M 30pips 1Y 30pips USD net settlement SEAC Reuters page, 2 day before maturing
Source: BoA Merrill Lynch Global Research, Bloomberg - these are indications under normal market conditions
CNH forwards. In the case of CNH forwards, the curve is based on the USD and RMB deposit differentials in the offshore market. Typically, the CNH forward curve trades above the onshore CNY curve at the front end, as the CNY interest rate is higher than the USD. The higher offshore renminbi deposits rates are a function of the typically thinner liquidity and CNH demand imbalance than the onshore market. The estimated average daily turnover in this market is around USD200-500mn.
31
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Chart 15: CNH deposits in Hong Kong (CNHbn) 700 600 500
CNH IRS market. This market is benchmarked off the onshore 3m Shibor rate, though other benchmarks may be used. The tenor is quoted up to 10y, but demand for the product is limited as, offshore corporates typically source and hedge cheaper funding in USD and HKD markets. Moreover, existing hedging needs are also being handled by the current CNY NDIRS market. Prospects for the development of this market will depend on the development of the offshore CNY bond market in Hong Kong and liberalization of the offshore bank access to the onshore bond market. Ultimately, the key purpose of the CNH IRS market will be for bond issuers and investors to hedge their interest rate risks.
400 300 200 100
Jan-12
Jul-11
Jul-10
Source: BoA Merrill Lynch Global Research, HKMA
Jan-11
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
0
CNH dim sum bonds. Dim sum is the Cantonese term given to dumplings and a reference to “the heart’s little treasures”. Dim sum bonds are the adopted name for CNH-denominated bonds settled in CNH that are issued offshore in the Hong Kong market. A CNH sovereign bond curve has emerged following the CNY5bn issuance by the mainland’s Ministry of Finance of 3y, 5y and 10y Chinese government bonds on 1 December 2010 (details of which can be found in Tender Information Memorandum). On 28 June 2012, the Ministry of Finance made another issuance of the 3y, 5y, 10y and 15y government bonds. Note the first CNH sovereign issue took place in October 2009 for RMB6bn. These issues traded at significantly lower yields than their mainland counterparts, illustrating the higher demand for offshore CNH bonds. However, the spread has narrowed significantly due to a declining expectation of CNY appreciation and improved access to the onshore bond market by offshore investors. Trend of CNH dim sum bonds. As the expectation of CNH appreciation cools down, investors are focusing more on the yields and credit quality of the dim sum bonds. From the perspective of supply and demand, the previous low yields of CNH bonds were largely due to the imbalance of supply and demand. The fast growing CNH deposits were chasing a very limited amount of CNH bond supply. However, after hitting a peak of CNH627bn in November 2011, the CNH deposits are experiencing a continuous declining trend and dropped CNH75bn by the end of April 2012. There are also more investment channels for the CNH funds. Banks in Hong Kong are making more CNH loans and thus offering higher deposit rates, and the onshore fixed income market is becoming more open to offshore investors. Therefore, the yields of CNH bonds are converging to their onshore counterparts; and so far this convergence has been more apparent in the longer tenor. Table 25: BofA Merrill Lynch Dim Sum Bond Index Reference List Ticker Name All maturities: CNHJ The BofA Merrill Lynch Dim Sum Index CJHG The BofA Merrill Lynch Dim Sum Government Index CJHC The BofA Merrill Lynch Dim Sum Corporate Index CJHQ The BofA Merrill Lynch Dim Sum Agency Index CJHP The BofA Merrill Lynch Dim Sum Policy Bank Index CNIJ The BofA Merrill Lynch Dim Sum Investment Grade Index One year and longer indices: CNOH The BofA Merrill Lynch 1+ Year Dim Sum Index CNHG The BofA Merrill Lynch 1+ Year Dim Sum Government Index CNHC The BofA Merrill Lynch 1+ Year Dim Sum Corporate Index CNHQ The BofA Merrill Lynch 1+ Year Dim Sum Agency Index CNHP The BofA Merrill Lynch 1+ Year Dim Sum Policy Bank Index CNIH The BofA Merrill Lynch 1+ Year Dim Sum Investment Grade Index Source: BofA Merrill Lynch Global Research
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On 28 June 2012 the Ministry of Finance issued CNH15.5bn CGB bonds to institutional investors with maturities of 3y, 5y, 7y, 10y and 15y. The issuance drew orders of CNH58.6bn, with a bid-cover ratio of 3.8, which is lower than the 4.6 last year. The auctioned yields were lower than the secondary market for the 3-7 tenor, but higher for the 10-15y tenor. The results show that the demand for CNH bonds is still quite robust, although not as strong as last year. Furthermore, the narrower spread with the onshore bond suggests that the expectation for continued CNY appreciation has diminished. There are also higher hopes of continued capital account opening. For this auction, the MoF also separately allocated CNH2bn to global central banks. This is the first time the MoF has done so to a dedicated class of investors. It drew bids from five central banks. Table 26: Summary of China bond markets and products Instrument Government bonds Issuer
Currency Minimum Denomination Tenor Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Form Amount outstanding (as of Feb 2012) Secondary market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism
Major players
Trading hours Regulations Restrictions on Foreign Investment Custodian Withholding Tax Capital gains Tax Entry/Exit Primary Auctions Auction Style
Average Issue Size
PBoC bills
Policy bank bonds
CNY CNY100,000 1, 3, and 6 months; 1 and 3 years Annual coupon paid on 1y and above Zero-coupon below 1y Act/365 Bullet Scripless CNY2.1tn
CNY CNY1,000 Up to 30 years Fixed/Floating Semi-annual above 10y, annual below 7y Act/365 Bullet Scripless CNY6.7tn
Interbank and stock exchanges Yield (2 to 4 decimals) T+0/1 CNY37bn 2-8bp, 1-3bp for current issue 2-8bp
Interbank Yield (1-3 decimals) T+0/1 CNY50bn 1-3bp
Interbank Yield (2 to 4 decimals) T+0/1 CNY78bn 2-8bp, 1-3bp for current issue 2-8bp
Interbank: China Government Securities Depository Trust & Clearing (CDC) Stock Exchanges: China Securities Depository Clearing Corporation (CDSCC) Interbank participants and domestic institutional investors trade OTC in bearer form. Smaller domestic investors and QFIIs trade listed securities on the Shanghai or Shenzhen stock exchanges 9:00-12:00 and 13:30-16:30 (Beijing)
Interbank: China Government Securities Depository Trust & Clearing (CDC)
Interbank: China Government Securities Depository Trust & Clearing (CDC)
Only primary dealers
Interbank participants
9:00-12:00 and 13:30-16:30 (Beijing)
9:00-12:00 and 13:30-16:30 (Beijing)
Government of the People's Republic of China, local governments CNY CNY1,000 Up to 50 years Fixed Semi-annual above 10y; annual below 7y Act/365 Bullet Scripless CNY7.4tn
QFIIs permitted or approvals under PBoC pilot scheme for CB, CNH clearing and settlement banks Local custodian required Exempted Residents are exempted; tax treatment on capital gains by foreign investors is as yet unclear, may be subjected to 25% corporate tax Approval needed from PboC and CFETS
People's Bank of China
CDB, CADB, EXIM Bank
Approvals under PBoC pilot scheme for CB, approvals under PBoC pilot scheme for CB, CNH clearing and settlement banks CNH clearing and settlement banks. NA NA NA NA
Local custodian required Exempted Residents are exempted; tax treatment on capital gains by foreign investors is as yet unclear, may be subjected to 25% corporate tax. Approval needed from PboC
American auction - sale is done either Dutch auction - sale is done either through Dutch auction through mandatory allocation to state banks mandatory allocation to state banks for for distribution to individuals or via distribution to individuals or via underwriting underwriting syndicates. The PBoC will act as syndicates. The PBoC will act as chief chief coordinator in both cases. coordinator in both cases. RMB22-32bn RMB3-50bn CNH10-30bn
Minimum Amount of Tender. Source: BofA Merrill Lynch Global Research , CEIC, China Government Securities Depository Trust and Clearing Company LTD
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Hong Kong Overview Albert Leung + 7137
Hong Kong is one of three Currency Board regimes in Asia, along with Macau and Brunei. It is viewed as having one of the deepest and most liquid capital markets free from any capital restrictions. As such, the HKD Currency Board remains a very credible and robust regime.
Monetary policy Background. The Hong Kong Monetary Authority (HKMA) was created in 1993 and oversees the smooth running of the Currency Board under the Linked Exchange Rate System created in 1983 as part of its four key functions. Other functions include financial system stability, maintaining Hong Kong’s status as an international financial center and managing the Exchange Fund. The HKMA’s chief executive is Norman Chan, who reports to John Tsang, the country’s financial secretary.
Table 27: Hong Kong ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Aa1 Aa1 Aa1 Aa2 Aa2 Aa2 Aa3 Aa3 Aa3 -
AAA AAA AAA AA+ AA+ AA AA AAAAAAAAAAA+
AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+ AA+
Base rate. The base interest rate forms the foundation upon which the discount rates for repurchase agreement transactions are computed. Currently, the base rate is set at 50bp above the US Fed Fund Rate, or the average of the five-day moving averages of the overnight and 1m HIBORs (Hong Kong Interbank Offered Rate), whichever is higher. The HKMA announces the base rate every day. Note that HIBOR liquidity came under stress during the 2008-09 global financial crisis, leading the HKMA to institute temporary refinements to ease HIBOR liquidity conditions. These have since expired, with the exception that the HKMA will use FX swaps and term repos to provide HKD liquidity on a case-by-case basis.
Source: Bloomberg, BofA Merrill Lynch Global Research
Chart 16: Key CPI components for Hong Kong %
Housing Food Misc serv ices Transport
Open market operations. By virtue of the Currency Board system, the HKMA is not required to sterilize intervention, but rather enforce two-way convertibility conditions; meaning, to sell HKD at 7.75 and buy it at 7.85 against the USD. In doing so, the interest rates automatically adjust to incentivize capital flows to bring the HKD back in line with its 7.8 central parity against USD. For example, intense pressure and capital inflows to buy HKD at 7.75 against USD would prompt the HKMA to sell HKD, expanding the monetary base and causing HKD interest rates to fall below USD interest rates. Assuming 100% Currency Board credibility would mean capital would flow out of HKD and back into USD. The HKMA also operates a discount window facility to smooth interest rate volatility and allow banks to access overnight funding based on the base rate used to repo eligible securities such as Exchange Fund paper as collateral. Currently, the base rate is set at 50bp above the prevailing US Fed Funds Rate or the 5d moving average of the overnight and 1m HIBOR rate, whichever is higher. HIBOR is fixed daily at 11am and published at 11.30am on Reuters (HIBOR=R), using a panel of 17 banks. An average is taken after eliminating the highest and lowest two values.
Durable goods Misc goods Clothing Utilities Alcohol & Tobacco 0
10
Source: BofA Merrill Lynch Global Research
34
Policy framework. The Hong Kong dollar is officially linked to the US dollar at a rate of 7.8 through a linked exchange rate system, the Currency Board. This means that every HKD7.8 in the monetary base are backed by USD1. The monetary base comprises Certificates of Indebtedness (CoIs), notes and coins, the Aggregate Balance, and Exchange Fund Bills and Notes. Banks are required by law to buy CoIs in exchange for issuing HKD notes and depositing the necessary USD backing with the HKMA’s Exchange Fund. The Aggregate Balance represents the balance of clearing accounts held by banks with the HKMA.
20
30
40
The HKMA can also buy and sell Exchange Fund Bills to execute OMO. Note that the May 2005 refinements to the Currency Board allow the HMKA discretion to conduct OMOs when HKD is within the Convertibility Zone of 7.75-7.85 against the USD to ensure “smooth functioning”.
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Conventions Bonds Quote: Yield to maturity Settlement: T+1 Basis: Act/365 Coupon frequency: Semi-annual
IRS Fixing: 3m HIBOR Coupon frequency: Quarterly, floating/fixed Act/365
CCS
Lending and deposit facilities. In Hong Kong banks are allowed to obtain temporary liquidity through the discount window using repurchase agreements with Exchange Fund Bills and Notes as collateral. Discount window refers to the facility through which banks can borrow HKD funds overnight from the HKMA. The discount rate is calculated as follows: the base rate will apply for the first 50% of the borrowing and the rate applied for the other half will be the base rate + 5% or overnight HIBOR for the day, whichever is higher. Reserve requirements. The HKMA does not have any reserve requirements for local banks, though there is a requirement for all authorized institutions in Hong Kong to meet a minimum monthly average liquidity ratio of 25%. This is calculated as the ratio of liquefiable assets to qualifying liabilities (liabilities due in one month).
Fixing: 3m USD LIBOR
Economic drivers
Coupon frequency: Quarterly USD day count Act/360,
Given the nature of the Currency Board system, the Hong Kong monetary policy is effectively tied to that of the US. More recently, a decoupling has occurred by virtue of the Fed’s zero interest rate policy. As a result, the front end of the curve can be driven by liquidity shifts related to IPO funding activity, HKD revaluation speculation and Hong Kong bank funding needs.
local Act/365
Overall we expect Hong Kong’s economy to be very tied to the fortunes of both China and the US. Inflation remains an issue, although it has moderated from the 8% peak in 2011. As in the CPI component, housing and food are the two most important components (Chart 17). While food price have moderated, we expect rent to stay high, keeping inflation pressure intact.
Bond market HK Exchange Fund Bills. The Exchange Fund issues these bills, which are guaranteed by the government. Maturities range from 91 to 182 and 364 days. Respectively, the bills are issued at discounts weekly, biweekly and monthly. They are principally used for OMO and owned mainly by banks for their own liquidity needs. As of June 2012, there was HKD587.5bn in outstanding bills. Average daily turnover stood at HKD20bn as of June, with bid-off spreads of 3bp and issuance sizes of HKD4-40bn. Negotiable Certificates of Deposit. Issued by banks and financial institutions either as fixed or floating rates, NCDs have bounced back strongly following a sharp decline in issuance during the global financial crisis. Issuance is done through private placement or public syndication. As of May 2012 there was HKD175bn in outstanding NCDs, which are actively traded in the secondary market Hong Kong Exchange Notes. Issued by the Exchange Fund, these notes range in maturity from 2-15 years and underpin the benchmark yield curve for Hong Kong. They are semi-annual fixed coupon bullet bonds with the longer tenors (10 and 15 years) issued semi-annually and the 2, 3, 5 and 7 years issued quarterly. Again, these are mainly held by banks and used as collateral against the discount window. Moreover, market makers can run short positions in bills and notes under a condition known as “fungibility”, which circumvents the need for a cash repo market. In principle, it is possible to go short above and beyond the outstanding amount of a specific security. As of June 2012, there was HK$69bn in outstanding Exchange Notes, with the 13y tenors accounting for 42%. Average daily turnover stood at HKD11.6bn as of June and bid-offer spreads at 5-10bp, depending on tenor. Issuance sizes range from HKD700mn to HKD1.3bn per auction.
35
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Hong Kong Special Administrative Region (SAR) Government Bonds. Initiated in 2004 as part of an effort to develop the benchmark bond market further, in 2011 2 and 5y paper has been issued with 10y issuance scheduled in August 2011 (HKD8.5bn total). An estimated HK$30bn was outstanding in remaining tenor of institutional bonds as of June. Retail bond issuances are also offered. Importantly, unlike Exchange Fund paper, government bonds are not backed by FX reserves and do not form part of the monetary base. The bonds represent an unsecured liability of the Hong Kong government and cannot be used as collateral against the discount window. The Hong Kong Mortgage Corporation. Issuance began in 1998 as a means to funding mortgage purchases from the secondary market. Owned by the government through the Exchange Fund, the 1998 HKD20bn Debt Issuance Program (DIP) was established to raise funds in the institutional market for general financing requirements (developing the mortgage market and home ownership). The program doubled to HKD40bn in 2003. In 2004, the program was extended to the retail market for HKD20bn. Auction and placement mechanism. The Exchange Fund Bills Program was introduced in 1990 and issued by competitive tender on a bid-yield basis (minimum bid HKD500,000). Bills are issued at discounts in denominations of HKD500,000 in computerized book entry form. Announcements of tender results are made on Reuters (HKMAOOD) and (HKMAOOE). Settlement is completed on the first business day immediately following the relevant tender day. Exchange Fund Notes are issued by competitive tender on a bid-price basis or by non-competitive tender, subject to a minimum bid of HK$50,000. The form of the notes is a computerized book entry form in the Securities Accounts maintained by the HKMA. Competitive tenders must be submitted through Recognized Dealers, which are also appointed as Eligible Market Makers by 10:30am on the relevant tender day. Tender results will be announced no later than 3:00pm on the relevant tender day. Settlement will be effected on the first business day immediately following the relevant tender day.
Derivatives market Interest rate swaps. These swaps are very actively traded and very liquid with tenors ranging up to 15 years, though beyond 10 years liquidity is less abundant. There are no restrictions on foreign investors to the IRS market. The 3m HIBOR fixing provides the reference rate for the floating leg with settlement being T+0 before 11am and T+1 afterward. Chart 17: Maturity profile of Hong Kong government bonds (HKDbn) 18 Hong Kong GB maturing (HKDbn)
16
Chart 18: Outstanding government debt (HKDbn, as of Dec’ 2011)
Gov ernment Bonds
50
12
Statutory Bodies
50
10
Local Corporates
14
8
96
Non MDB Ov erseas Borrow ers
6 4
Authorized Institutions
2
Ex change Fund
HKD
15
Multilateral Dev elopment Banks
167 229 655
0 2012
2014
2016
2018
Source: BofA Merrill Lynch Global Research, CEIC, ADB
36
2020
2022
2024
2026
0
100 200 300 400 500 600 700 800
Source: BofA Merrill Lynch Global Research, CEIC, ADB
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages HKD CURNCY ALLQ OTC HKD - HK market monitor HKMA - HKMA page GBHK HK government bonds HKMC - HK Mortgage Corporation HIBO - HIBOR fixing
Reuters pages HIBOR= HIBOR fix HKMAOOB – HKMA Aggregate Balance HKMAOOD – Bills and Notes tenders HKDISC1 – Chronology of discount rate HKEFB – EF Bills issuance schedule
Basis swaps. These swaps represent cash flow exchanges between 3m floating USD LIBOR against 3m floating HKD HIBOR. They are typically used for corporate liability hedging and investor asset swapping and are liquid out to five years in normal conditions. In turn, basis swap pricing can also affect issuer participation in Hong Kong’s bond market. For instance, debt fundraising by overseas issuers (excluding multilateral development banks) as the pronounced negative basis in 2010 increased the hedging costs of overseas issuers raising funds in HKD and then swapping into USD proceeds. In the end, it was cheaper to issue directly into the USD debt market. In 2012 the opposite occurred with basis turning positive, meaning it is cheaper to raise funds in USD. In this respect, the HIBOR-LIBOR basis is very sensitive to local and global liquidity and funding conditions.
HKEFN – EF Notes issuance
Swaptions. Actively quoted and traded in Hong Kong with a market in caps, floors and generic swaptions.
Useful official websites
Table 28: Summary statistics of Hong Kong derivative products and their markets
Hong Kong Monetary Authority (HKMA) www.info.gov.hk Financial Services and Treasury Bureau http://www.fstb.gov.hk/ Invest Hong Kong www.investhk.gov.hk Hong Kong Government Bond Program www.hkgb.gov.hk Mandatory Provident Fund http://www.mpfa.org.hk/eindex.asp
Avg daily trading volume
Avg transaction size
Bid-Ask spread
Interest rate swaps 1-year 5-year
HKD3-4bn HKD500mn
HKD 150K DV01 HKD 100K DV01
2bp 2bp
10-year
HKD200mn
HKD 50K DV01
2bp
HKDSW1/ HKABHIBOR HKDSW5/ HKABHIBOR HKDSW10/ HKABHIBOR
HKD1-2bn
HKD 100K DV01
2bp
HDBS/ LIBOR01 / HKABHIBOR
Trades individually as IRS & Basis
HKD 50k DVO1
4bp
LIBOR01 PYHKD
NA NA
HKD500mn HKD60mn
2 vol 2 vol
HDSP015 Curncy HDSP055 Curncy
Product
Basis swaps
Cross currency swap
Useful market websites HK Securities and Futures Commission http://www.sfc.hk/sfc/html/EN HK Exchanges and Clearing Limited http://www.hkex.com.hk/eng/index.htm Hong Kong Association of Banks www.hkab.org.hk Central Money markets Unit https://www.cmu.org.hk/cmupbb_ws/eng/page/wmp0100/wm p010001.aspx Hong Kong Mortgage Corporation Limited www.hkmc.com.hk/eng/ HK Interbank Clearing Limited http://www.hkicl.com.hk/clientbrowse.do?docID=119&lang=e n HK Institute for Monetary Research http://www.hkimr.org/index.asp
Bloomberg / Reuters Reference
Swaptions 1x5 5x5 Source: BofA Merrill Lynch Global Research
FX market Hong Kong is one of the largest centers for FX activities globally. Transactions across all instruments have increased, particularly in forwards and FX swaps. Domestically, HKD trading averages US$15bn daily for spot, forwards and options. The HKD has been linked to the USD since 1983 with the objective of maintaining a stable external value of the HKD against other major currencies. To achieve stability, HKMA has been accumulating substantial reserves to keep the exchange rate within a narrow band, HKD7.75-7.85 per USD. HKMA only intervenes when either the strong (7.75) or weak side (7.85) is triggered. This convertibility undertaking reinforces the automatic stabilization of the system by expanding or contracting the monetary base and affecting interest rate differentials to encourage capital flows consistent with the Currency Board.
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Table 29: Hong Kong FX market vital statistics and characteristics Avg daily Avg FX Tradable trading trading Bid-Ask Reuters Products product volume size spread reference Key facts HKD Onshore Spot HKD Spot
USD8.0bn USD5-20mn
Forwards
USD6.0bn
Options
Forwards
FX Options USD1.0bn
USD1050mn USD50mn
HKD 0.00020.0010 HKD 0.00020.0010 0.1-0.5 vol
HKD=D2 ▪ No restrictions, accessible to both onshore and offshore entities. HKDF= ▪ Forwards are available till tenors of 10y and are liquid for tenors shorter than 1y. TTDE ▪ Options are available till tenors of 10y and are liquid for tenors shorter than 2y.
Source: BofA Merrill Lynch Global Research
Investor base The key holders of Exchange Fund Bills and Notes are banks due to their wide use as collateral with the HKMA discount window. Moreover, banks are required to maintain a minimum liquidity ratio of not less than 25% on average during each calendar month in accordance with the Ordinance. Moreover, the investments are required to be in high-quality liquid assets. Exchange Fund Bills and Notes are held by banks to meet the liquidity ratio requirement. Banks hold Hong Kong Special Administrative Region Government Bonds, but some are held by fund managers and insurance companies. However, overall the supply of Hong Kong bonds has been insufficient to satisfy investor demand. In particular, pension funds and insurance companies continue to receive rising contributions from scheme members and policy holders. The key pension funds include the Mandatory Provident Fund and Occupational Retirement Schemes Ordinance (ORSO). In 2008, total contributions and premiums were estimated at HKD212bn against HKD debt issuance of HKD138bn (excluding Exchange Fund debt). The difficulty is that Exchange Fund issuance is contingent on USD inflows given its overriding purpose as part of the Monetary Base and Currency Board system. Table 30: Hong Kong – asset allocation of Mandatory Provident Fund Equities Deposits & Cash Debt securities Hong Kong Japan Asia North America Europe Overall
15% 1% 16%
Memo item: Assets under management, HK$bn (Dec 2011)
11% 2% 1% 5% 3% 22%
34% 4% 8% 8% 8% 62%
Overall 60% 6% 9% 14% 11% 100%
264
Source: BofA Merrill Lynch Global Markets
Rules, regulations capital controls and taxation Article 112 of the Basic Law embodies Hong Kong’s laissez faire approach to free capital flows and commitment to the Currency Board system. At a market level, the Securities and Futures Commission (SFC) represents an independent nongovernmental body charged with regulating the securities and futures market. The main body of legislation that underpins the SFC is the Securities and Futures Ordinance established in 2003. In addition to regulating a broad range of markets, the SFC also regulates investment products offered to the public, listed companies and the Hong Kong Exchanges and Clearing Limited.
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Government issued and denominated HKD debt is not subject to taxation in the form of capital gains, stamp duty or withholding tax on interest income. This is also the case for eligible multilateral organizations that issue HKD debt. In the case of corporate bonds, there is a profit tax of 16.5% applicable to corporations.
Clearing and settlement Section 4 of the Clearing and Settlements Systems Ordinance (CSSO) gives designation and oversight to the HKMA. As such, the HKMA oversees a variety of settlement systems: Central Moneymarkets Unit (CMU), HKD Clearing House Automated Transfer System (CHATS), Continuous Linked Settlement (CLS), Euro Clearing House, USD Clearing House and the Renminbi Clearing House automated transfer systems. The CMU was created in 1990 and provides clearing and settlement for Exchange Fund Bills, Notes and other HKD debt securities. It is also linked to the HKD Real Time Gross Settlement System (RTGS) that provides end-of-day delivery versus payment (DvP) to members and this has been extended to USD, EUR and RMB RTGS systems, facilitating delivery versus payment (DvP) capability for debt securities in these currencies as well as overnight repo facilities for USD and EUR payment systems in Hong Kong. As such, overseas investors can opt to settle through Euroclear, Clearstream or CMU if they have an account. A task force known as the Pan-Asian CSD Alliance has been set up among a group of Asian central banks and central security depositories and Euroclear to improve the cross-border post-trade infrastructure in Asia. Table 31: Summary of Hong Kong bond markets and products Instrument Exchange Fund Bills
Issuer Currency Principal Tenor Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Form Amount outstanding (as of Jun 2012) Secondary Market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism Major players Trading hours Bidders Regulations Restrictions on Foreign Investment Custodian Withholding Tax Capital gains Tax Entry/Exit Tax Primary Auctions Auction Style Average Issue Size Minimum Amount of Tender
Exchange Fund Notes
Hong Kong Monetary Authority HKD HKD500,000 91, 182 and 364 days Issued at discount Zero Act/365 Bullet Registered HKD587,447mn
Hong Kong Monetary Authority HKD HKD50,000 2, 3, 5, 7 and 10 years Semi-annual Fixed Act/365 Bullet Registered HKD69,000mn
OTC Yield T+0/ T+1 (after 11:00 Hong Kong) HKD16.251mn 2bp 3bp HKD1bn Central Money Markets Unit (CMU) Only eligible market makers 9:00-11:30 and 14:00-17:00 (Hong Kong) Open to individual and institutional investors but only through recognized dealers only
OTC Price T+0/ T+1 (after 11:00 Hong Kong) HKD658mn 3bp 5bp HKD200mn (for 2y-5y); HKD100mn (for 5y+) Central Money Markets Unit (CMU) Only eligible market makers 9:00-11:30 and 14:00-17:00 (Hong Kong) Open to individual and institutional investors but only through recognized dealers, stock exchange participants, or through Central Clearing and Settlement System
No restrictions Central Money Markets Unit (CMU) None None None
No restrictions Central Money Markets Unit (CMU) None None None
Competitive tender on a bid-price basis or non-competitive tender HKD5-40bn HKD500,000
Competitive tender on a bid-price basis or non-competitive tender HKD0.6-1.2bn HKD50,000
Source: BofA Merrill Lynch Global Research
39
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India Overview Albert Leung + 7137
Local investors are the dominant players in the Indian bond market, with foreign investors largely closed off to the market and subject to limits. In recent years the government has increased the limits significantly, especially in infrastructure bonds and incrementally broadening the investor base in government bond market. The restrictions mean foreign investors are involved mainly in the offshore non-deliverable swap market where they can take views about the future path of monetary policy, inflation and growth. Liquidity in the non-deliverable OIS market has improved significantly in recent years.
Monetary policy Background. The Reserve Bank of India (RBI) sets policy rate eight times a year, with repo and reverse repo being the key benchmark policy rates. Currently, the repo rate at 8% is 100bp above the reverse repo rate at 7%. The overnight rate (floating leg of the IRS fixing) is slightly above the repo rate since banks are short liquidity on aggregate. This manner by which RBI conducts liquidity management is known as the Liquidity Adjustment Facility. Table 32: India ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Baa3 Ba1 Ba1 Ba2 Ba2 Ba2 Ba2 Ba2 Ba2 Ba2 Ba2 Ba2 Ba2
BBB-u BBB-u BBBBBBBBBBBBBB+ BB+ BB+ BB+ BB+ BBBBBB
BBBBBBBBBBBBBBBBBBBBBBB+ BB+ BB+ BB+ BB+ BBB-
Source: Bloomberg, BofA Merrill Lynch Global Research; Note: * indicates negative outlook change; ** indicates positive outlook change
Chart 19: Key WPI components for India Manufactured
65.0%
products Fuel
14.9%
Primary
20.1%
articles 0.0%
50.0% Weights in WPI
Source: Ministry of Industry, India
40
100.0%
Policy framework. The central bank has a multiple indicator approach, which means it monitors a number of indicators, including interest rates, inflation, money supply, credit, exchange rate, trade, capital flows and fiscal position. The repo rate signals the monetary policy stance. In a tightening cycle the overnight is likely to be anchored slightly above the repo rate. But in a rate cut cycle, the overnight rate can go to as low as the reverse repo rate. The RBI’s main objectives include maintaining price stability and ensuring an adequate flow of credit to the productive sectors. Base rate and other key rates. Repo is the rate for banks that apply overnight loans from the RBI. Reverse repo is the rate banks get by placing surplus liquidity to the RBI overnight. Eligible securities to be used as collateral to obtain overnight funding from RBI include gold, cash and other securities, such as government bonds. If a bank runs out of eligible collateral, it can resort to the Marginal Standing Facility (MSF) at the RBI, up to 2% of book, where the borrowing rate would be 1% above the repo rate. Open market operations. The RBI can announce OMO anytime when it deems bond yields are too high, or use it as a means to provide liquidity to the banking system when it is short of liquidity. Lending and deposit facility. Repo and reserve repo rates are introduced as part of the Liquidity Adjustment Facility (LAF) to act as a signal for the money markets and are tools for liquidity management. When the RBI needs to absorb excess liquidity, it can choose to raise the cash reserve ratio by curtailing the lending capacity of the banks. Other alternatives include using the statutory liquidity ratio (SLR) to adjust the proportion of net demand and time liabilities to hold stipulated government securities for banks, or by selling and issuing more government securities through OMO. Reserve requirements. The RBI has a cash reserve ratio (CRR) requirement for banks. This refers to the proportion of customer deposits and notes that each commercial bank must hold as minimum reserves.
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions
Fiscal policy
Bonds
India has one of the highest fiscal deficits (% GDP) among Asia countries with the central government targeting a deficit of 5.1% GDP, but our economist thinks it is very likely to be higher. For now RBI is helping to support the bond market and inject liquidity via OMO and the recent measure to increase the foreign institutional investor (FII) government debt quota by $5bn to $20bn. However, structural reform remains the key, which we think is most likely needed to bring inflation lower and attract foreign investment of government securities (GSec).
Quote: Yield to maturity Settlement: T+1 Basis: 30/360 Coupon frequency: Semi-annual
IRS Fixing: OIS – O/N MIBOR; NDOIS – O/N MIFOR
Bond market
Coupon frequency: quarterly, floating/fixed Act/365
India’s government bond issuance totaled INR5.09Tln INR for the April 2011/March 2012 fiscal year. Foreign investors are subject to limits. Foreign investors can now buy up to US$20bn in government securities and US$40bn in corporate bonds. Bonds trade through two platforms: 1) the NDS OM order matching system managed by the Clearance Corporation of India Limited (CCIL), where 80-85% of the market volumes go through; and 2) an interbank broker market. Foreign institutional investors cannot trade through the NDS OM system; they must trade through an onshore licensed broker.
CCS Fixing: 6m USD LIBOR or 6M MIFOR Coupon frequency: Semi-annual USD day count Act/360, local Act/365
Money market. The main instrument in the money market is call money. Treasury bills are issued by the RBI on behalf of the government. Other instruments increasing rapidly in volume of issuance include certificates of deposit (CD) issued by banks, with tenors of less than a year, and development finance institutions, with tenors of 1-3 years. There is also a growing commercial paper (CP) market, which is a discount instrument issued by corporates to raise short-term funds. Treasury bills. The RBI issues Treasury bills on behalf of the government with tenors of 91, 181 and 364 days. The 91d bills are issued every Wednesday, with the other two tenors auctioned on alternate Wednesdays. They are zero-coupon instruments issued at a discount to face value and are the main money market instrument in India.
Chart 21: Bid-to-cover moving average of past five auctions for India government bonds
Chart 20: Maturity Profile of India government bonds (INRbn)
4.00
3.0
BTC Mov ing Av erage
Maturing India Gov ernment bonds (INRbn) 2.5
3.50
2.0 3.00
1.5 2.50
1.0 2.00
0.5
20-Jul-12
29-Jun-12
1-Jun-12
18-May-12
3-Apr-12
27-Apr-12
2041
17-Feb-12
2036
20-Jan-12
2032
30-Dec-11
2027
25-Nov-11
2024
28-Oct-11
2021
9-Sep-11
2018
18-Aug-11
2015
22-Jul-11
2012
1-Jul-11
1.50
0.0
Source: BofA Merrill Lynch Global Research, RBI. Source: BofA Merrill Lynch Global Research, RBI.
41
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages INR Curncy ALLQ FX rates OTC INR - Market monitor RBIN - Reserve Bank of India RBIM - India government bonds INMO - Government borrowing program
Reuters pages IN/RBI – Reserve Bank of India page IN/BENCH – Benchmark bonds, bills, fixes IN/FINMDA – Money market association
Useful official websites Reserve Bank of India (RBI) www.rbi.org.in Ministry of Finance www.finmin.nic.in Ministry of Commerce http://commerce.nic.in/
Government bonds (Gsec). The RBI issues bonds on behalf of the government, which are used primarily to finance the government budget deficit. Maturities range between 2 and 30 years. The bonds are issued as securities bearing a fixed coupon paid semi-annually. Primary dealers underwrite these issues with a minimum underwriting commitment (MUC), which provides a buffer to the market since the RBI cannot participate in the primary market. At the end of August 2012, the market totaled INR28.42tn. The RBI also conducts liquidity injecting OMO via the secondary market for government bonds, or by changing the schedule for primary auctions when needed. Through these actions the RBI can often have an important impact on the bond market. For example, when liquidity is tight and the RBI steps in to buy bonds, the bond market is likely to find some support from these operations. Public sector undertaking (PSU) bonds. Public sector corporations issue these bonds in which the federal or state governments have a majority stake. Maturities are typically 2-10 years and some of the issues have an explicit government guarantee from the state or federal government.
Directorate General of Foreign Trade http://www.dgft.gov.in/
Auction and placement mechanism. Treasury bills are issued via auctions, although government securities can also be issued on tap or through OMO. The auctions are normally French or Dutch, with the main difference between the two being the fact that all winning bidders are filled at the cut price/yield in the Dutch auction rather than their individual bids. Most PSU bonds are issued via private placements.
Securities and Exchange Board of India http://www.sebi.gov.in
Derivatives market
Ministry of Statistics and Program Implementation http://mospi.nic.in/Mospi_New/site/home.aspx
Useful market websites National Stock Exchange of India http://www.nseindia.com/ The Clearing Corporation of India www.ccilindia.com Association of Mutual Funds in India www.amfiindia.com Fixed Income Money Markets and Derivatives Association www.fimmda.org
42
Interest rate swaps (IRS). The main yield curve is the onshore overnight indexed swap (OIS) curve. These trade at tenors up to five years, benchmarked against the Mumbai Interbank Offer Rate (MIBOR), which is published by the National Stock Exchange. Tenors beyond five years tend to be illiquid and traded irregularly. For offshore investors, the non-deliverable OIS is reasonably liquid, also out to 5y tenors. At times, there is a spread between onshore OIS and offshore NDOIS rates because of differences in flows, which cannot automatically be arbitraged because of the degree of market segmentation. Daily volumes in the onshore OIS market average about INR100bn.
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Table 33: Summary statistics of India derivative products and their markets Avg daily trading volume
Product
Interest rate swaps OIS 1-year INR50bio 5-year INR30bio 10-year INR500mio Interest rate swaps MIFOR 2-year INR2bio 5-year INR1bio 10-year Very rarely ND Interest rate swaps 1-year INR20bio 5-year INR25bio 10-year INR500mio Cross-currency swaps Market prices out of mifor curve
Avg transaction size
Bid-Ask spread
Reuters reference notes
USD5k USD10k USD5k
2-3bp 2-3bp 5-7bp
NSERO Index NSERO Index NSERO Index
USD2k USD5k USD5k
20-25bp 20-30bp 30-40bp
MIFOR= MIFOR= MIFOR=
USD5k USD10k USD5k
2-3bp 2-3bp 5-7bp
IRSWN1 Curncy IRSWN5 Curncy IRSWN10 Curncy
NA
NA
NA
Source: BofA Merrill Lynch Global Research
FX market Since 1993 India has been following a managed float exchange rate regime that reflects market demand and supply conditions. While the RBI does not institute a fixed target or preannounced band, the value of the rupee is tracked using the real effective exchange rate (REER), based on the currencies of India’s major trading partners (USD, EUR, GBP, JPY, CNY and HKD). As such, RBI’s stated policy is to intervene only to contain too much volatility. The RBI announces a daily reference rate for the INR against the USD, EUR, GBP and JPY. It also monitors exchange rate movements carefully, and at times of excessive market fluctuation, intervenes to maintain external competitiveness. The rupee is fully convertible on the current account. INR purchase can be executed with necessary document proofs. However, INR is only partially convertible on the capital account. It is not convertible on the capital account unless approval issued by central bank for capital account transactions. Table 34: India FX Market Vital Statistics and Characteristics Avg daily Avg FX Tradable trading trading Bid-Ask Reuters products product volume spread Reference Key facts size INR Onshore Spot INR Spot Forwards Options
USD5bn
INR USD4-5bn Forwards FX Options USD50100mn
INR 0.005USD 3-10mn 0.03 INR 0.02USD 5-20mn 0.05 USD15mn 0.4-1.0 vol
INR = D2 ▪ Trading hours: 9:00 -17:00 (Mumbai) INRF= ▪ Forwards on INR are available and liquid up to 1 yr INRVOL ▪ FX Options on INR are available till tenor of 5 years and are liquid for tenor shorter than 2 years.
INR Offshore Forwards
NDF
USD1.52.0bn
USD 5-20mn
INR0.020.10
PNDF PNDG
Options
NDO
USD350400mn
USD 10-30mn
0.4-1.0 vol
TTDE
▪ INR is non-deliverable. ▪ Offshore entities can access the market through NDF. ▪ Dollar settled NDO on INR are available till tenor of 5 years and are liquid for tenor shorter than 2 years.
Source: BofA Merrill Lynch Global Research
43
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Investor base Foreign holdings of government bonds have stagnated over the past 12 months; total holdings are at around INR230bn, close to 1% of the total outstanding. The weak INR is probably part of the reason why ownership has not increased this year. Among local investors, fund managers, insurance companies and banks are the major investors in government bonds.
Rules, regulations capital controls taxation Foreign investors -- institutional and qualified non-institutional -- can invest in debt instruments. Currently, the limits are US$20bn for government bonds and US$40bn for corporate bonds. Of the US$20bn in GSec, US$5bn must be invested in bonds with a remaining maturity of more than five years. FII are currently liable for withholding tax of 15-20% depending on the residency of the institution. If fixed-income assets are held for less than a year, a short-term capital gains tax of 10% is also levied. However, if the resident country of the FII has completed a tax treaty with India, it may be exempt from many of these taxes. In addition to fixed-income assets, P-notes are also exempt from these taxes, but only SEBI registered FII are allowed to invest via P-notes.
Clearing and settlement The Clearance Corporation of India Limited is the central counterparty for all transactions in GSec. Trades are settled on a delivery versus payment (DVP) basis, and the CCIL guarantees all trades using the Settlement Guarantee Fund, which is financed out of margins paid by all market participants.
Chart 22: Foreign holdings of India government bonds 270 240
Foreign Holdings of India Gov Bonds (INR bn) % of foreign holding of India Gov Bonds
1.0%
210
0.8%
180 150
0.6%
120
0.4%
90 60
0.2%
30
0.0%
0 Mar07
Mar08
Mar09
Source: BofA Merrill Lynch Global Research
44
1.2%
Mar10
Mar11
Mar12
Table 35: Local institutional base as of March 2012 Holders Holdings in INRbn Commercial Banks Bank-Primary Dealers Non-Bank PDs Insurance Companies Mutual Funds Co-operative Banks Financial Institutions Corporates FIIs Provident Funds RBI Others Total Source: BofA Merrill Lynch Global Research
8301 2249 23 4823 39 682 85 316 201 1705 3297 1160 22880
% of total 36.28 9.83 0.10 21.08 0.17 2.98 0.37 1.38 0.88 7.45 14.41 5.07 100
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Table 36: Summary of India bond markets and products Instrument Treasury bills (ITB) Issuer Currency Principal Tenor Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Form Amount outstanding Secondary Market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism Major players Trading hours Bidders Regulations Restrictions on Foreign Investment
Treasury bonds (IGB)
Government of India INR INR25,000 91, 182, 364 days Issued at discount Zero Actual/365 Bullet Registered INR2.04tn (as of Jun 2012)
Government of India INR INR10,000 2-30 years Fixed Semi-annual 30/360 Bullet Registered INR22.88tn (as of July 2012)
OTC and NSE trading OTC (yield to 2 decimals); NSE (yield to 4 decimals) T+1 INR2-3bn 2-3bp
OTC Clean price to 4 decimals
INR250mn Clearing Corporation of India Ltd (CCIL) Primary Dealers, banks 9:00-17:00 (Mumbai) Primary Dealers, banks
T+1 INR20-400bn 3-5bp, 1bp for liquid benchmark bonds 3-5bp, 1bp for liquid benchmark bonds INR50mn Clearing Corporation of India Ltd (CCIL) Primary Dealers, banks 9:00-17:00 (Mumbai) Primary Dealers, banks, non residents
Only SEBI registered FII can invest. Investment limit is INR10bn. Local custodian required for foreign investors Foreigners subject to max 20% withholding tax and 30% on interest income, unless reduced by preferential tax treaty FIIs are subject to 30% (short-term) and 10% (long-term) capital gains tax
Only SEBI registered FII can invest. Investment limit is INR10bn. Local custodian required for foreign investors Foreigners subject to max 20% withholding tax and 30% on interest income, unless reduced by preferential tax treaty FIIs are subject to 30% (short-term) and 10% (long-term) capital gains tax
Primary Auctions Auction Style
Multiple price auction method
Average Issue Size Minimum Amount of Tender
INR80-150bn INR25,000
Multiple price auction method for existing issues and yield based auction method for new issuances INR10-50bn INR10,000
Custodian Withholding Tax Capital gains Tax
Source: BofA Merrill Lynch Global Research
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Indonesia Overview Albert Leung + 7137
Indonesia represents one of Asia’s key local bond markets due to its larger market size, higher relative yield and recent investment grade status. Total outstanding local government bonds are estimated at IDR799tn, of which 29.5% (IDR236tn) was held by foreign investors as of August 2012. Despite this, hedging opportunities are restricted because the IRS market is illiquid, leaving short-dated nondeliverable forward FX as a proxy hedge against sudden capital reversal and bond market dislocation. Tight USD liquidity onshore dragged the IDR earlier in 2012, although the situation stabilized after Bank Indonesia (BI) USD Time Deposit auctions. FX reserves were at US$106bn as of June.
Monetary policy Background. De Javasche Bank (DJB) was established in 1828 by the Government of Nederlands-Indische as a bank to issue and circulate currencies. In 1953, the Act of Bank Indonesia declared the establishment of Bank Indonesia (BI) to replace DJB as the central bank, with three main tasks: monetary policy, banking and the payment system. Table 37: Indonesia ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Baa3 Ba1 Ba2** Ba2 Ba3 Ba3 B1 B2 B2 -
BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB BB B+ BBB
BBBBB+ BB+ BB BB BBBBBBB+ B+ B BB-
The board’s decision-making process emphasizes deliberations. When deliberations fail to produce an agreement, the governor will exercise his authority to decide for the board. Policy framework. Bank Indonesia has an inflation-targeting framework (ITF) that was adopted formally in July 2005. This replaced the previous monetary policy using base money as the monetary policy target. Under the ITF, BI announces future inflation targets for specific periods and responds to potential inflation overshoot or undershoot with the instruments at its disposal. Essentially, BI sets a policy rate known as the BI rate, which serves as the primary instrument for influencing economic activity with the overriding objective of achieving the desired inflation level. The current inflation target for 2012 is 4.5% +/- 1% for headline inflation.
Note: * indicates negative outlook change; ** indicates positive outlook change. Source: Bloomberg, BofA Merrill Lynch Global Research
Chart 23: Key CPI components of Indo Housing, Electricity , Gas & Fuel
25%
Food
20%
Transp, Comm & Finance
19%
Processed Food, Bevg, Tobacco
Open market operations. To enhance OMO effectiveness, BI launched twicedaily announcements of liquidity conditions in the banking system. This involves total liquidity and excess reserves projections. The main tool includes monthly auctions of Bank Indonesia Certificates (SBIs), which have 3m and 6m tenors. Other monetary operations tools include FASBI, overnight repo, fine tune operations (contraction and expansion), and sharia SBIs.
8%
Clothing
7%
Others
4% 0%
5%
10%
Source: BofA Merrill Lynch Global Research
46
Base rate. The overnight rate is BI’s policy rate. The lower limit of the benchmark rate (deposit facility) is also key because this rate (FASBI) represents the prevailing rate when commercial banks place money market funds overnight with BI. Lowering the rate would encourage banks to transact with one another, and vice versa.
17%
Edu, Recreation & Sports
15%
20%
BI’s roles were further fine-tuned in subsequent years, with the additional single objective to achieve and maintain the stability of the rupiah value set in 1999. The Board of Governors consists of current Governor Darmin Nasution and six deputy governors. Members of the board are appointed for five-year terms and may be reappointed to the same position for no more than one subsequent term. The Board of Governors meets at least once a month to deliberate and decide on general policy on monetary affairs, and at least once a week to evaluate policy implementation or to decide on other strategic and principle policies.
25%
30%
Lending and deposit facilities. The FASBI rate applies to deposits with BI. For borrowing from BI, the ceiling rate (BI rate +50bp) applies for individual banks that experience liquidity shortages.
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Conventions Bonds Quote: Yield to maturity Settlement: Variable, usually T+2 or T+3 Basis: Act/365 Coupon frequency: Semi-annual or quarterly
CCS Fixing: 6m USD LIBOR Coupon frequency: Semi-annual, USD day count Act/360, local Act/360
Reserve requirement. The statutory reserve requirement for commercial banks is 8% of third-party deposits, while the secondary reserve requirement (government bonds, BI certificates) is 2.5%. The reserve requirement was raised in 2010 to control credit growth and excess liquidity, but has remained unchanged since 2011.
Economic drivers The key market drivers are monthly CPI, trade balance, money supply and credit growth. The Central Bureau of Statistics divides the CPI basket into seven main components: 1) food (19.57%); 2) processed food, beverages and tobacco 16.55%); 3) housing, electricity, gas and fuel (25.41%); 4) clothing (7.09%); 5) health (4.44%); 6) education, recreation and sports (7.81%); and 7) transportation, communication and finance (19.12%). As for external trade, Indonesia’s main exports fall into the non-oil and gas category (82.2%), and consist primarily of commodities-related products like palm oil, mining and coal. Domestic demand supports economic growth, with private consumption and investment expected to remain strong. Growth from the external side is expected to decline, with export growth still affected by weak world demand and lower international commodity prices. Strong domestic demand is expected to be high and lead to import growth.
Bond market Indonesia’s local government bond market represents the sixth largest in Asia exJapan with an estimated USD103.93bn in outstanding bonds. There are four broad categories of bonds: Treasury bonds, recap bonds (variable and fixed), Treasury bills (SBIs), and retail bonds. Bond trading occurs through two key platforms: 1) the more liquid Indonesian Government Securities Trading System (IGSTS) provided by the Indonesia Stock Exchange; and 2) the Fixed Income Trading System (FITS) via the Surabaya Stock Exchange. Apart from retail bonds, which are limited to Indonesian retail investors in the primary market, foreigners are allowed to participate in the primary and secondary markets of the other debt papers. The money market. OMO tools like SBIs, term deposits, repo and reverse repo, as well as standing facilities like the deposit facility, lending facility and repo SBI make up the money market. The shortest money market instrument in terms of tenor is interbank call money, which is announced twice a day for liquidity measures. There are similar instruments in the sharia version. The SBI bills and term deposits are the most actively traded and transacted among the OMO tools, the latter a rising influence since mid 2010. BI stopped issuing 1m SBIs in July 2010 and 3m SBIs in January 2011, so investors have been extending duration to the 6m and 9m parts of the curve. Term deposits were previously known as a fine-tune contraction. The other tools were not actively transacted, especially the repo, which was previously known as fine-tune expansion. SBI bills. Sertifikat Bank Indonesia is the central bank’s policy instrument for absorbing excess liquidity in the financial markets. In a rising interest rate environment and recovering confidence in the rupiah, SBIs became a very popular carry instrument for foreign investors also wanting to benefit from a strengthening rupiah. However, BI took issue with this distortion to its policy instrument, extended the holding period and stopped issuing 3m SBIs.
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Bloomberg pages
Currently, foreign investors have a six-month holding period for SBI purchases. This is problematic for the under-developed IRS market, as the 3m SBIs had represented the reference fix for the floating leg of the IRS.
IDR Curncy ALLQ FX rates OTC IDR – Market monitor EXNI – Local bond broker page
Treasury bills. SPNs were introduced in 2007 and initially planned to be an alternative investment instrument to SBIs. The main difference is the issuer. SBIs are central bank papers while SPNs are fiscal tools used for government funding. SPNs are issued in 1y tenors only, so they have not been able to gain much market attention compared to SBIs.
BIJA - Bank Indonesia FX and MM page BIPU - Bank Indonesia rates and bonds page JIBO – Jakarta Interbank Borrowing page
Reuters pages BIJA – Bank Indonesia page
Treasury bonds. Also known as Surat Utang Negara (SUNs), Treasury bonds are issued by the Ministry of Finance to fund the government’s budget deficit. However, these bonds originated from recapitalization bonds, which were issued during the Asian financial crisis to 35 troubled banks. There are two types of Treasury bonds: fixed-rate and variable. Maturities range from bills (3, 6 and 9 months) to bonds (1, 3, 5, 7, 10, 15, 20 and 30 years). Coupons are paid semi-annually above 10y tenors and annually for 7y and below.
BIFA – Bank Indonesia FX reserves BILINK – Bank Indonesia web links
Useful official websites Bank Indonesia (BI) www.bi.go.id Ministry of Finance www.depkeu.go.id Ministry of Industry and Trade www.kemenperin.go.id Debt Management Office http://www.dmo.or.id/en/index.php?section=1 Capital Market and Financial Institution Supervisory Board www.bapepam.go.id/ Indonesia State Pension Fund www.jamsostek.co.id/ Taspen Employee Pension Fund http://www.taspen.com/ Indonesia Deposit Insurance Corporation http://www.lps.go.id/
Useful market websites Indonesia Stock Exchange www.jsx.co.id Indonesia Exchange www.idx.co.id
Corporate debt. The corporate debt market is small but growing. Bond issuance is limited primarily to domestic entities. It consists of two types of instruments: state agency bonds and private corporate bonds issued by state-owned companies and domestic private companies, respectively. The maturity range for both is typically 58 years. Most bonds issued by private corporations are listed in the Indonesia Stock Exchange (IDX). The majority of secondary market trading is done via the Fixed Income Trading System bond trading platform. Foreign investors are allowed to participate in the corporate debt market with no investment limit. Auction and placement mechanism. Government bond auctions can be competitive, noncompetitive or a combination of both. Amounts to be allotted by competitive and noncompetitive bids are announced prior to auction. If competitive or noncompetitive bids exceed or fall below target amounts, then the split may be adjusted to accommodate demand. The Ministry of Finance makes prior announcements on pricing method, multiple or uniform. Under the multiple pricing method, allotments are at the price submitted by the individual bidder. Under the uniform pricing method, allotments are at the weighted average bidding price.
Chart 24: Maturity profile of Indonesia government bonds (IDRtn) 60
Indonesia GB maturing (IDRtn)
Chart 25: Outstanding government debt (IDRtn, as of 31 July 2012) IDR tn 900
IDR tn 50
750
50
40
600 40
30
450
20
300
30
10
150 20
0
10 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2031 2037 2041 Source: BofA Merrill Lynch Global Research, ADB
48
0 Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Govt Debt Securities Govt Debt Securities- Government bond SBI Govt Debt Securities-Treasury Bill (RHS) Source: BofA Merrill Lynch Global Research, CEIC, Indonesia DMO
Jul-12
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Auction dates are announced by BI’s money market Information Center (PIPU). Usually, indicative auction dates for bonds are announced about a month ahead of time, but details are announced a week prior to the auction date. Held twice a month, 28d SBI auctions take place during the first and third weeks. For 3m SBI, BI holds an auction in the first week of each month. It announces schedule changes via PIPU.
Derivatives market Interest rate swaps. The market is illiquid, underdeveloped and does not represent a viable hedging alternative for investors.
FX market The Indonesian rupiah is not fully convertible and can only be tradable on a nondeliverable basis in the offshore market. Indonesia has been following a managed float exchange rate regime since 1999. BI seeks to maintain a stable rupiah to achieve its goal of export-driven growth. The currency has been under depreciating pressure, and from time to time has displayed high beta characteristics relative to other Asian currencies. However, since bottoming out in April 2009, the IDR has been recovering, and the strong macro fundamentals and improvement in sovereign ratings suggest that the recovery is structural. BI intervenes occasionally in the FX market to check uneven variations in the exchange rate. To do that, it has been accumulating substantial exchange reserves to achieve stability. Regulations are also in place to curb speculative capital flows that may cause excessive currency volatility. Table 38: Vital statistics and characteristics of Indonesia's FX market Avg Avg daily trading Bid-Ask Reuters FX Tradable trading size spread reference Key facts products product volume IDR Onshore Spot IDR Spot
USD3-10mn
IDR5-20
IDR=
IDR Forwards
USD600mn USD5-20mn
IDR5-50
IDRF=
IDR Offshore Forwards
NDF
USD600- USD5-10mn 800mn
IDR5-30
PNDF PNDG
Options
NDO
USD100150mn
0.6-1.5 vol
TTDE
Forwards
USD1bn
USD1030mn
▪ Proper documentation required. ▪ Trading hours: 0800-1600 (Jakarta) -NA
▪ IDR is non-deliverable currency. ▪ Offshore entities can access the market through NDF. ▪ USD settled NDF on IDR are available to 10y and are liquid up to 2y. ▪ Dollar settled NDO on IDR are available to 5y and are liquid up to 1y
Source: BofA Merrill Lynch Global Research
Investor base Foreign investors surpassed banks to become the largest holders of outstanding Indonesian government debt in 2011, although in 2012 the percentage of foreign holding has dropped back because of concern over USD liquidity and the ability exit. But recently the situation has improved and foreigners net bought recap bonds again in July 2012. Foreign investors have been dominated by real money accounts, which allocate more than 60% of the holdings in tenors beyond 5y. The banks’ holding share has declined steadily from over 80% 10 years ago. The original use of recapitalization bonds has faded and banks have turned to lending with bond yields becoming less attractive.
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Banks can be divided broadly into two categories: state and private banks. Private banks tend to have a more even split between their investment and trading bond accounts, which makes them more active in the secondary market. State banks have a much higher allocation (above 70%) of bond holdings in their investment accounts, which makes them more passive as buy and hold investors and more active in the primary market. Insurance companies are dominated by Jamsostek and Taspen, the two state bodies, and account for 13.6% of the holding share. Their focus is largely in the back end, beyond 10y tenors. Jamsostek and Taspen play an active role in the primary market, adopting a buy to hold investment policy. Table 39: Local and foreign institutional base (as of 31 August 2012) Holdings (IDRbn) Total Govt Bond Outstanding Banks Bank Syariah Bank Indonesia Mutual Fund Insurance Company Foreign Holder Pension Fund Securities Company Others
% of total
803.1 290.6 4.6 31.6 47.2 109.0 233.2 34.6 0.6 56.3
100% 36% 1% 4% 6% 14% 29% 4% 0% 7%
Source: BofA Merrill Lynch Global Research
Rules, regulations capital controls and taxation The rules and regulations for the bond market are governed mainly by BI and BAPEPAM, the Capital Market and the Financial Institution Supervisory Board under the Ministry of Finance. BAPEPAM is responsible for granting licenses, setting rules and regulations, supervising market participants, and establishing capital market accounting standards. It has the authority to issue government debt securities with prior approval from the People's Legislative Assembly. BI stipulates and administers regulations regarding the issuance, sale and purchase of these debt instruments. Generally, there are no restrictions on foreign investors owning government or corporate bonds. However, in 2002, BI introduced measures restricting Indonesian banks from conducting the following IDR transactions with nonresidents:
Transferring IDR to offshore banks for any reason other than payments related to economic activities.
Providing credit, overdrafts or fund placements in IDR.
Purchases of securities in IDR issued by nonresidents.
Inter-office transactions in rupiah.
Equity participation in IDR.
Interest and capital gains on bonds coursed through the Indonesia Stock Exchange (IDX) are subject to a single final withholding tax of 20%. Interest and capital gains from bond transactions not reported to the IDX are subject to general income taxes (30% maximum) after a preliminary withholding tax of 15% is deducted. Both the interest income and capital gain tax liabilities can be mitigated contingent on tax treaties with Indonesia. Interest income tax of 20% or tax treaty rates is applicable in the case of SBI T-bills.
50
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Clearing and settlement Settlement is governed by the Capital Market Law and the BAPEPAM’s regulations. Settlement of all government bonds is scripless and conducted through the Scripless Securities Settlement System (BI-SSSS). Transactions are settled via delivery of securities. PT Kustodian Sentral Efek Indonesia (KSEI) conducts the clearing and settlement of corporate bonds through the Fixed Income Trading System. Settlement in the derivatives market is on a cash basis. The Indonesian Clearing and Guarantee Corporation (KPEI) acts as the counterparty for settling and liquidating an open position upon contract maturity. Table 40: Summary of Indonesia bond markets and products Instrument
Sovereign bonds
Fixed rate bonds (FR)
Issuer Currency Principal Tenor
Republic of Indonesia IDR
Republic of Indonesia IDR
2-30 years
2-30 years
Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Form Amount outstanding Secondary Market Trading
Fixed Semi-annual Actual/Actual Bullet Scripless IDR799tn (as of July 2012)
Fixed Semi-annual Actual/Actual Bullet Scripless
Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism Major players Trading hours Bidders
Regulations Restrictions on Foreign Investment Custodian Withholding Tax
Capital gains Tax
Entry/Exit Tax Primary Auctions Auction Style Average Issue Size Minimum Amount of Tender
Sertifikat Bank Indonesia (SBI; T-bills) Bank Indonesia IDR IDR100,000 (par) SBI (6m, 9m); T-bills (3m, 1y) Issued at discount Zero coupon Actual/360 Bullet Scripless
OTC or Indonesian Government Securities OTC or Indonesian Government Securities OTC Trading System (IGSTS) provided by the IDX. Trading System (IGSTS) provided by the IDX. Price Yield Yield Typically T+2 or T+3 Typically T+3 (or negotiated) Typically T+3 (or negotiated) USD200-500mn 2-7bp 2-3bp 2-5bp 3bp USD1-2mn Bank Indonesia Scripless Securities Bank Indonesia Scripless Securities Bank Indonesia Scripless Securities Settlement System (BI-SSS); DVP Settlement Settlement System (BI-SSS); DVP Settlement Settlement System (BI-SSS); DVP Settlement Banks, securities companies, money market Banks, securities companies, money market Banks, securities companies, money market brokers brokers brokers Mon-Thu: 9:30-noon and 13:30-17:00 Mon-Thu: 9:30-noon and 13:30-17:00 Mon-Thu: 9:30-noon and 13:30-17:00 Fri: 9:30-11:00 and 2:00-5:00 Fri: 9:30-11:00 and 2:00-5:00 Fri: 9:30-11:00 and 2:00-5:00 (Jakarta time) (Jakarta time) (Jakarta time) Auction Participants. Retail investors should Participating banks Auction Participants designated by the submit applications through Auction Ministry of Finance Participants designated by the Ministry of Finance Not restricted Local custodian required for individual investors Interest and capital gains on bonds coursed through the Indonesia Stock Exchange (IDX) are subject to a single, final withholding tax of 20%. Interest and capital gains from bond transactions not reported to the IDX are subject to general income taxes (30% maximum) after a preliminary withholding tax of 15% is deducted. None
Not restricted Local custodian required for individual investors Interest and capital gains on bonds coursed through the Indonesia Stock Exchange (IDX) are subject to a single, final withholding tax of 20%. Interest and capital gains from bond transactions not reported to the IDX are subject to general income taxes (30% maximum) after a preliminary withholding tax of 15% is deducted. None
Competitive tender using multiple price method or noncompetitive bid at weighted average competitive price. IDR7tn IDR10bn
Private placement by Government to banks participating in recapitalization. IDR7tn IDR10bn
Not restricted Local custodian required for individual investors Interest and capital gains on bonds coursed through the Indonesia Stock Exchange (IDX) are subject to a single, final withholding tax of 20%. Interest income tax of 20%, or tax treaty rates.
None Dutch-style yield auction, in which successful bidders are allotted securities at a uniform yield. IDR50bn
Source: BofA Merrill Lynch Global Research
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Korea Overview Albert Leung + 7137
Korea’s swap and bond market is one of the most liquid and well developed in the region. 3y KTB futures have excellent liquidity and are exempt from WHT, which is appealing to foreign investors who are large players in this product. Bond issuance is benign in 2012. Demand is outstripping supply, and KTB has been one of the major beneficiaries of real money and sovereign wealth fund asset reallocation. Foreign ownership of government bonds is at about 18%. Part of the inflow comes from regional central banks as they diversify their FX reserves.
Jaewoo Lee +82 2 3707 0465
Monetary policy Background. The Bank of Korea (BoK), established on 12 June 1950, performs the typical functions of a central bank, such as bank note issuance and monetary policy formulation. In addition, the BoK undertakes the operation and oversight of the payment and settlement systems, and manages the nation's foreign exchange reserves. It also monitors the financial system and evaluates its stability, publishing its findings for the parliament and general public.
Table 41: South Korea ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Aa3 A1 A1 A2 A2 A2 A3 A3 A3 A3 A3 Baa1 Baa1
A+ A+ A+ A+ A+ A+ A+ A+ A+ A+ A+ A A
AA AA AA AA AA AA AA AA AAAAAAA A
Policy framework. The BoK has had inflation-targeting as its monetary policy framework since 1998. It considers price stability as the most important monetary policy objective, while also taking into account economic growth and financial stability in implementing the monetary policy. The bank determines the inflation target in consultation with the government. The current inflation target is set at 3.0±1% yoy of annual average CPI inflation rate for the 2010 to 2012 period. Base rate. The base rate is the BoK’s operational target through which the bank influences the short and long-term market interest rates, and thus the real economic activities and inflation. The base rate is the reference rate used by the BoK in 7d repo transactions. The MPC sets the base rate each month at its policy meeting, and the BoK steers the overnight call rate toward the base rate level, which subsequently affects market interest rates.
Source: Bloomberg, BofA Merrill Lynch Global Research
Chart 26: Key CPI components of Korea Housing, Water, Electricity & Fuels
17%
Transport & Communication
17%
12%
Restaurants & Hotels
11%
Education 7%
Health 6%
Clothing & Footw ear
15%
Others 0% Source: BofA Merrill Lynch Global Research
52
Open market operations. The BoK conducts its monetary policy mainly through OMOs, by which it affects the level of reserves in the banking system and steers the overnight call rate toward the base rate. OMOs are conducted through outright or repo transactions of government securities and monetary stabilization bonds (MSB), and through commercial banks’ deposits in the monetary stabilization account (MSA). Outright transactions are conducted only limitedly, to adjust liquidity permanently and affect long-term market rates directly. Securities transactions thus focus on repo transactions, mostly with 7d maturities. MSA, introduced in 2010, is a term deposit facility used mainly to fine-tune the reserve levels and cope with unexpected changes in reserve supply and demand.
15%
Food & Beverages
10%
The BoK’s Monetary Policy Committee (MPC) is the policy-making body responsible for formulating the monetary and credit policies of the economy. The MPC consists of seven members, with the BoK governor serving as the chairman of the committee concurrently. The MPC holds a monthly policy-setting meeting, usually on the second Thursday or Friday. Resolutions at an MPC meeting are adopted by a simple majority when there are at least five members present. The committee’s decisions are announced immediately following the meeting on the BoK website, and the minutes of the monetary policy meetings are published two weeks after the meetings since September 2012 (used to be published six weeks after the meetings).
20%
Lending and deposit facilities. The BoK operates lending and deposit facilities to control the availability of banking institutions’ funds. Its lending and deposit facilities consist of aggregate credit ceiling loans, liquidity adjustment loans and deposits, intraday overdrafts, and special loans.
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Conventions Bonds Quote: Yield to maturity Settlement: T+1 Basis: Act/365 Coupon frequency: Semi-annual or quarterly
IRS Fixing: 91-day CD Coupon frequency: Quarterly fixed/floating Act/365
CCS Fixing: 6m USD LIBOR Coupon frequency: Semi-annual USD day count Act/360, local Act/365
For the aggregate credit ceiling loan, which was introduced in 1994, the BoK fixes a cap on its loans to domestic banks and fixes individual shares allocated to banks on the basis of performance-related parameters. For liquidity adjustment loans and deposits the BoK offers an unrestricted standing facility to control the volatility of the call rate. The loan and deposit interest rates are set at 100bp above and below the BoK base rate. Intraday overdrafts help tide over intraday shortages of settlement funds. Special loans are extended to augment the bank’s capital and financial market stability. Reserve requirement. The BoK imposes reserve requirements on the deposits and other liabilities of banking institutions. This system was introduced originally for the protection of depositors, but can also be used, if considered necessary, to control the funds available to banks through a reserve requirement ratio adjustment. Should an institution’s reserves fall short of its legal reserve requirements, which are computed monthly, it must pay the bank a penalty of 2% of the amount of the average deficiency during the applicable period.
Fiscal policy The key market drivers are monthly export numbers, monthly CPI inflation and industrial production. The inflation target set at an annual average target gives the BoK considerable flexibility, and BoK puts considerable weight on the growth outlook and the inflation target. As a very open economy, global developments feature prominently in BoK discussions of monetary policy, and the exchange rate is a key variable in that regard. The BoK tends to intervene actively in the FX market to smooth short-term volatility when capital inflows are strong.
Bond market Korea’s local government bond market (Korea Treasury Bonds, KTB) is the second largest in Asia with US$524bn in outstanding bonds, or 48.2% of GDP. In January 2011 the government re-imposed a 14% tax on interest income and a 20% capital gain on KTB holdings and monetary stabilization bonds in a bid to deter speculative inflows into the local fixed-income market. As of July 2012 foreign investors held 17.5% of the market in KTBs and MSBs. Korea treasury bonds. KTBs are issued monthly with benchmark issues at 3, 5, 10 and 20y points on the yield curve, of which 3y KTBs tend to be the most liquid part of the curve. KTB futures are traded actively at 3y and 10y tenors. With demand for duration from local investors such as insurance companies increasing, the Ministry of Strategy and Finance (MoSF) started issuing 30y KTBs in September 2012. Inflation-linked bonds. KTBi were first issued in 2007, with yield linked to the headline CPI. These bonds tend to be illiquid. Two issues (2017 and 2020) trade occasionally in the secondary market. The MoSF announced that it intends to step up KTBi issuance in a bid to improve market liquidity, and expects interest in inflation-linked bonds to improve given the backdrop of rising inflation. Special public bonds. Municipal governments, state corporations and financial institutions issue special public bonds, which typically have government guarantees with maturities of 2-9 years. Corporate bonds. With typical maturities of up to 5y, corporate bonds are issued by non-financial private companies through public offerings underwritten by financial institutions. Money market. Monetary stabilization bonds issued by the BoK form benchmark yields for short-term interest rates and are used by the BoK to mop up structural excess liquidity. The size of the outstanding MSB issues was 212tn KRW as of May 2012. MSB was initially issued as BoK sterilized its FX purchases from the market to
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GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
lean against appreciation pressures caused by capital inflows. Over the past year MSB size growth has slowed as FX inflows moderate. Banks have tended to access the money market for short-term funding by issuing certificates of deposit (CDs). However, issuance has trailed off since the Financial Supervisory Service (regulator) announced that from 2014 banks loan-to-deposit ratio would be limited to 100%. The 91-day CD rate is an important reference rate for the swap market, as it is the floating leg for interest rate swap contracts, including forward rate agreements (FRAs). Auction and placement mechanism. Korean treasury bonds are issued for financing government projects and social welfare schemes. KTB is a fixed-coupon bond with semi-annual interest payments and maturities of 3, 5, 10 and 20 years. KTBs are issued monthly according to the auction calendar announced at the beginning of the month. With respect to issuance of new benchmark KTBs, 3y KTBs are issued in June and December; 5y KTBs are issued in March and September; 10y KTBs are issued in June; and 20y KTBs are issued in December every year. KTBi, or inflation-linked treasury bonds, were introduced in March 2007 to secure a stable long-term funding base and reduce interest expenses. The KTBi removes inflation risk by adjusting the principal. The principal of KTBi securities has been guaranteed by the government since June 2010. Since June 2009 KTB auctions have followed the Dutch method, adopting a differential pricing auction method. Auctions are announced on the Wednesday immediately preceding. Only primary dealers are allowed to participate in the auction process. Individual and institutional investors, and domestic or foreign investors can participate in KTB auctions via the designated 20 primary dealers in the market. Noncompetitive Bids Option II was implemented in September 2006. Foreign investors are required to open a foreign currency investment account and a non-resident Korean currency investment account. They may appoint an onshore/local custodian to operate their account. The minimum investment amount is W1mn and the maximum is W1bn. KTBs are allotted at the highest stop out yield determined at the competitive auction. Delivery of allotted KTBs occurs the next day.
Derivatives market Interest rate swaps. The onshore IRS curve has good liquidity out to 10 years with the 91-day CD floating rate as the reference floating leg for IRS contracts, and has thin liquidity beyond 10 years up to 20 years. The main players in the market are local banks, local issuers of debt and foreign investors. Chart 27: Maturity profile of Korea Treasury Bonds (KRWbn) 70
KTB maturing (KRWbn)
60
Chart 28: Outstanding government debt (KRWtn, as of 31 July 2012) 400 350
KRW tn
300
50
250
40
200 150
30
100
20
50 0
10
Jul-00
Jul-02
Jul-04
Jul-06
Jul-08
0 2012
2014
2016
2018
Source: BofA Merrill Lynch Global Research, ADB
54
2021
2026
2028
KTB
2030 Source: BofA Merrill Lynch Global Research
NHB
MSB
Jul-10
Jul-12
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages KRW Curncy ALLQ – FX rates OTC KRW – Market monitor BOK – Bank of Korea KORMSB – Monetary stabilization bonds NDFB – Korea Treasury Bonds KSDA – Benchmark bond yields KBPM – Korea Bond Pricing and CD rates
Reuters pages BOK01 – BOK market interest rates KBP01 – Korea Bond Pricing & KMCC KFTC/MENU – SMBS FX fixing & volumes KRCD91=BOKK 91CD fixing MTMAV – Closing benchmark yields
Useful official websites Bank of Korea (BOK) www.bok.or.kr
Ministry of Strategy and Finance www.mosf.go.kr Korea Treasury Bonds http://ktb.mosf.go.kr/eng/ Ministry of Foreign Affairs and Trade www.mofat.go.kr Ministry of Commerce, Industry and Energy www.mke.go.kr Financial Supervisory Service English.fss.or.kr/fss/en/main.jsp Korea National Statistics Office www.kostat.go.kr National Pension Service www.nps.or.kr National Tax Service www.nts.go.kr
Useful market websites Korea Bond Web www.bondweb.co.kr
Korea Futures Exchange www.krx.co.kr
Forward rate agreements are used by corporates and investors to hedge against movements in the base rate set by the BoK, while longer tenors are used to hedge long-term assets or liabilities. Structured note issuers are particularly active in hedging duration risk and receive IRS beyond 5y tenors. This steady reception can keep the IRS curve below the KTB curve. Cross-currency swaps. Quoted out to 10 years at least. with liquidity being good out to five years, the cross currency swaps market is dominated by offshore debt issuers who receive the CCS to hedge against interest-rate risk, and by local exporters (including shipbuilding companies) that have future export receipts and receive the CCS curve. USD liquidity can come under stress during periods of global risk aversion and drive the basis between the CCS and IRS wide. The authorities have instituted a number of measures, including limits on domestic banks’ net foreign open positions, to contain foreign borrowing in an attempt to ease the potential for USD liquidity squeezes in the onshore market during periods of global turmoil. Forward rate agreements. Tenors up to 9x12 are available, but are rarely traded in the interbank market. FRAs are usually traded between clients and market makers. KTB futures. The three-year bond futures contract is one of the most liquid bond futures contracts in the world. Contracts expire March, June, September and December, with one contract size of W100mn. Each contract is made up of a basket of bonds (usually three KTBs), typically two 3y and one 5y KTB. Foreign investors continue to be major players in the 3y KTB futures market, as are local securities companies that tend to hold significant intra-day positions. The KTB futures market allows investors to express short duration views given the illiquid KTB repo market. Table 42: Summary statistics of Korea products and their markets Avg daily Avg Bid-Ask trading transaction Product Bloomberg reference volume size spread
Interest rate swaps 1-year KRW1-2tn 5-year KRW1-2tn 10-year KRW1-2tn ND Interest rate swaps 1-year KRW800bn 5-year KRW150bn 10-year KRW50bn Cross-currency swaps 1-year KRW100-150mn 5-year KRW100-150mn 10-year KRW100-150mn Swaptions 1x5 n/a 5x5 n/a
10-15k DV01 10-15k DV01 10-15k DV01
2bp 2bp 2bp
PYKRW PYKRW PYKRW
KRW 50bn KRW 20bn KRW 10bn
2bp 2bp 2bp
KSDA4 NA NA
10k DV01 10k DV01 10k DV01
10bp 10bp 10bp
PYKRW PYKRW PYKRW
KRW100bn KRW20bn
1.5 vol 1.5 vol
KWSP015 Curncy KWSP015 Curncy
Source: BofA Merrill Lynch Global Research
Korea Securities Dealer Association www.ksda.or.kr Korea Financial Investment Association http://www.kofia.or.kr Korea Capital Market Institute http://www.kcmi.re.kr
FX market The BoK maintains the principle that the exchange rate should be determined by the interaction of the demand for and supply of foreign exchange. However, the bank has been known to accumulate large amounts of international reserves, and on occasion under MoSF directive use reserves to moderate any large currency fluctuations not caused by underlying economic fundamentals. On the nominal effective exchange rate (NEER), the won has fallen significantly from its peak since late 2007, with the slide exacerbated by the Lehman crisis in 2008/2009. While some of the losses have been recovered, the appetite for a strong won appears to be lacking compared to previous years.
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Even though the KRW follows a free-float regime, the BoK has been intervening in the FX markets to keep the currency from excessive short-term movements. Other than announcing a base rate every month, the central bank can also opt to partake in OMO to adjust market liquidity, tightening or loosening lending and deposit facilities, as well as the reserve requirements ratio for domestic and foreign currencies. Table 43: Vital statistics and characteristics of Korea's FX market Avg daily Avg FX Tradable trading trading Bid-Ask Reuters products product volume spread reference Key facts size KRW Onshore Spot KRW Spot
USD6.0bn
USD3-10mn KRW 0.1-0.5
KFTC01
Forwards
KRW Forwards
USD10bn
USD10-30mn KRW 0.5-2.0
KFTC23
KRW Offshore Forwards
NDF
USD2.0bn
USD5-20mn KRW 0.3-2.0
PNDF PNDG
Options
NDO
USD1.0bn
USD30100mn
0.2-0.8 vol
TTDE
▪ Proper documentation required. ▪ Trading hours: 9:00-15:00 (Seoul) -
▪ KRW is non-deliverable currency. ▪ Offshore entities can access the market through NDF. ▪ Dollar settled NDF on KRW are available till tenors of 10y and liquid for tenors shorter than 1y. ▪ Dollar settled NDO on KRW are available till tenors of 5y and liquid for tenors shorter than 2y.
Source: BofA Merrill Lynch Global Research
Investor base Banks remain the largest local investors in KTBs, followed by pension funds and insurance companies. However, in recent years insurance companies have been increasing their share of the KTB market as they extend the duration of their assets, especially after the Financial Supervisory Service (FSS) reduced the recommended yield level for insurance products from 4.0% to 3.75%. Further reduction is possible with the recent strong rally in KTB after BoK started cutting rates. Table 44: Holders of KTB (KRWbn) Banks Pension Funds Insurance Securities Firms Investment Trust Others Total
Local institutional base Holding (KRWbn) % of total 148,381 82,909 72,458 23,509 17,668 3,987 348,912
43% 24% 21% 7% 5% 1% 100%
Source: BofA Merrill Lynch Global Research, Korea MoSF
Currently, foreigners own 17% of outstanding KTB and MSB. In recent months there has been very strong interest by foreign investors in the Korea bond market, from both traditional fund managers and sovereign wealth funds. First, this market is one of the most liquid bond markets in Asia. Second, anecdotally, sovereign wealth fund investors from countries such as Norway, Switzerland and Kazakhstan suggest this could be a secular trend to diversify into EM bonds from developed markets.
Rules, regulations capital controls and taxation In January 2011 the authorities reintroduced a withholding tax of 14% on interest income plus 1.4% local tax on nonresident investments in KTBs and MSBs, and a 27.5% net capital gains tax or 11% tax on gross sale proceeds, whichever is lower. Starting in 2015, the principal of inflation-linked bonds is to be taxed at a rate yet to be determined.
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Clearing and settlement The Korea Securities Depository (KSD), the country's sole central securities depository, conducts the clearing and settlement of securities. KSD is under the supervision of the Ministry of Strategy and Finance, the Financial Supervisory Commission and the Financial Supervisory Service. Securities purchases or sales by a nonresident investors are settled physically at the KSD or at a custodian bank. The original order is placed with a local broker or standing proxy. Transactions settle T+1 in most cases, but up to T+3 when a foreign investment is involved. The BoK administers the payments system. It uses a real-time gross settlement system known as the BoK Financial Wire Network (BOK-WIRE). Table 45: Summary of Korea bond markets and products Instrument Korean Treasury Bonds (KTB) Issuer Currency Principal Tenor Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Form Amount outstanding Secondary Market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism Major players Trading hours Bidders
Monetary stabilization bonds (MSB)
Inflation-linked KTB (KTBi) Ministry of Strategy and Finance (MoSF) KRW KRW10,000 (par)
3, 5, 10, 20 years Fixed Semi annually Act/365 Bullet Bearer KRW355tn (as of June 2012)
Bank of Korea KRW KRW10,000 (par) 14, 28, 63, 91, 140, 182, 362, 392, 546 days, 2 years Discount and coupon Quarterly (for those longer than 1 year) Act/365 Bullet Bearer KRW164tn (as of June 2012)
10 years Fixed Semi-annually Act/365 Bullet Bearer KRW6.4tn (as of June 2012)
Korea Stock Exchange (KSE) and OTC via securities firms. Yield (to 3 decimals) T+1 KRW5tn 1bp up to KRW30bn, 2-3bp off the run 1bp up to KRW30bn, 2-3bp off the run KRW10bn Korea Securities Depository (KSD) Banks, Pension Funds, Insurance, Securities Firms, Investment Trust 9:00-15:00 (Seoul) Resident and nonresident individual and institutional investors through custodian banks and foreign exchange banks.
Korea Stock Exchange (KSE) and OTC via securities firms. Yield (to 3 decimals) T+1 KRW3tn NA NA KRW10bn Korea Securities Depository (KSD) Banks, Pension Funds, Insurance, Securities Firms, Investment Trust 9:00-15:00 (Seoul) Resident and nonresident individual and institutional investors through custodian banks and foreign exchange banks.
OTC Yield (to 3 decimals) T+1 KRW10-20bn NA NA KRW10bn Korea Securities Depository (KSD) Banks, Pension Funds, Insurance, Securities Firms, Investment Trust 9:00-15:00 (Seoul) Resident and nonresident individual and institutional investors through custodian banks and foreign exchange banks.
No restrictions but foreign investors are required to register and obtain an Investment Registration Certificate (IRC) with the Financial Supervisory Board (FSB) Require appointment of a standing proxy for trading and designation of a local custodian 15.4% Foreign investors are subject to 27.5% tax of net capital gains or 11% of gross sale proceeds, whichever is lower. Tax may be further reduced by preferential tax treaty
No restrictions but foreign investors are required to register and obtain an Investment Registration Certificate (IRC) with the Financial Supervisory Board (FSB) Require appointment of a standing proxy for trading and designation of a local custodian 15.4% Foreign investors are subject to 27.5% tax of net capital gains or 11% of gross sale proceeds, whichever is lower. Tax may be further reduced by preferential tax treaty
Dutch style auction KRW10-50tn 10,000KRW
Mix of Dutch and conventional auctions KRW300bn/month 10,000KRW
Ministry of Strategy and Finance (MoSF) KRW KRW10,000 (par)
Regulations Restrictions on Foreign Investment No restrictions but foreign investors are required to register and obtain an Investment Registration Certificate (IRC) with the Financial Supervisory Board (FSB) Custodian Require appointment of a standing proxy for trading and designation of a local custodian Withholding Tax 15.4% Capital gains Tax Foreign investors are subject to 27.5% tax of net capital gains or 11% of gross sale proceeds, whichever is lower. Tax may be further reduced by preferential tax treaty Primary Auctions Auction Style Dutch style yield auction Average Issue Size KRW5-8tn Minimum Amount of Tender 10,000KRW Source: BofA Merrill Lynch Global Research
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Malaysia Overview Albert Leung + 7137
Malaysia’s bond market is the fourth largest in the region and one of the most accessible to foreigners with no withholding taxes or capital gains tax. It also offers thriving Islamic bond and money markets. As of July 2012, foreign holdings were estimated at 42% of an outstanding MYR291bn in Malaysia Government Securities. (MGS) These developments are a radical change from the capital controls imposed at the height of the Asian crisis and the USD/MYR peg that held until 21 July 2005.
Monetary policy Background. Bank Negara Malaysia (BNM) was established in 1959 and brought under legal revision in 2009. It is wholly owned by the government and reports to the finance minister. The bank has multiple roles, first and foremost conducting prudent monetary policy and low inflation, followed by financial stability. It is also charged with the development of the financial system and to act as a banker and adviser to the government. The current 10-member board of directors has been headed by Dr Zeti Aziz since May 2000. Table 46: Malaysia ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
A3 A3 A3 A3 A3 A3 A3 A3 A3 A3 A3 A3 A3
A A A+ A+ A+ A+ A+ A+ A+ A+ A+ A A
Policy framework. The Monetary Policy Committee meets every two months to decide on the policy interest rate; currently the overnight policy rate (OPR). In addition to the OPR, floor and ceiling rates are set to provide a policy corridor (±25bp). Thereafter, a policy statement is released at 6pm local time on the same day of the MPC meeting. The BNM does not have an explicit inflation target mandate, but evaluates the growth and inflation outlooks together. The central bank also exerts influence through statutory reserve requirements, the exchange rate, and some moral suasion on lending and credit conditions.
A A A A A+ A+ A+ A+ A+ A A AA-
Open market operations. BNM uses OMO twice a day via conventional and Islamic approaches to manage aggregate balances. Instruments include reserve requirements, repos, standing facilities, bill issuance, government operations and other BNM activities. Sterilization operations are conducted through a combination of BNM note issuance, money market tenders, repos and FX forward book intervention.
Source: Bloomberg, BofA Merrill Lynch Global Research
Lending and deposit facilities. Malaysia plans to impose new rules on the local interbank lending market. The goal is to ensure that the 12 lenders whose estimates are used to compile the Kuala Lumpur Interbank Offered Rate (KLIBOR) are required to lend funds to other banks at that day’s rate during a five-minute period beginning at 11am every day.
Chart 29: Key Malaysia CPI components 32%
Food & Beverages 23%
Housing, Water, Electricity & Fuels
21%
Transport & Communication
Recreation & Culture
5%
Furnishings, Household Equip & Maintenance
4%
Others
9% 0%
5% 10% 15% 20% 25% 30% 35%
Source: BofA Merrill Lynch Global Research
58
Fiscal policy
6%
Miscellaneous Goods & Services
Reserve requirements. BNM requires banking institutions to maintain reserves in their SRA at the bank, for the balances that are at least equal to the prescribed ratio. Currently, the statutory reserve requirement is 4%.
The key market drivers are monthly CPI, export data and industrial production. A long-term consideration is the Economic Transformation Plan (revised every five years), which has implications for debt issuance. Housing and fuel accounts for 23% of the CPI basket, though fuel subsidies and administered prices can delay energy inflation pass-through.
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions
Market participants also watch the capital account closely for signs of outflows. In addition, BNM supplies data on foreign purchases of local bonds with a twomonth lag, which is tracked as a lagging indicator of foreign demand for Malaysian local debt. More recently, the market has looked to potential increases in fiscal expenditures ahead of a possible general election later in the year.
Bonds Quote: Yield to maturity Settlement: Variable; typically T+1 or T+2 Basis: Act/Act Coupon frequency: Semi-annual
Bond market We expect Malaysia to issue RM91bn of Malaysia Government Securities and Malaysia Government Investment Issues (MGII) this year, representing a 7% increase in gross issuance versus 2011. Malaysia balances its financing needs between local and external debt issuance and the use of private placements. External Islamic issues, sukuks, are very popular.
IRS Fixing: 3m KLIBOR Coupon frequency: Quarterly, floating/fixed Act/365
CCS Fixing: 3m KLIBOR
Money market. The conventional money market consists of an interbank market and another market intermediated through discount houses. The key instruments are overnight and call money, T-bills, short-dated government securities, bankers’ acceptances, and negotiable certificates of deposit (NCDs) to a lesser extent. Interbank transactions are limited to overnight, 7d and 1m funding needs among commercial and merchant banks. The key benchmark money market rate is the 3m KLIBOR that is the polled average of 12 banks’ quotes announced each day at 11am local time. Tenors include 1, 2, 6, 9 and 12 months, but the 3m serves as the reference fix for the floating leg of the interest rate swap market.
Coupon frequency: Quarterly USD day count Act/360, local Act/365
The Islamic Interbank Money Market (IIMM) created in 1994 serves the Islamic banking system and has a full range of instruments: Mudarabah Interbank Investments, Wadiah Acceptance, Government Investment Issues, BNM-I notes, Sell and Buyback agreements, as well as Islamic versions of accepted bills, negotiable instruments, debt securities and BNM sukuks (SBNMI). For further details see http://iimm.bnm.gov.my/index.php?ch=4&pg=4&ac=22 Negotiable instruments of deposit (NIDs) and certificates of deposit. These money market instruments are issued by banks and authorized depository institutions, typically used for short-term repos, traded in a liquid secondary market, and not subject to withholding tax. Maturities range from 3 months to 10 years, though the short-dated paper is most actively traded.
Chart 30: Maturity profile of Malaysian government bonds (MYRbn) 45
350
MGS maturing (MYRbn)
40
Chart 31: Outstanding government debt (MYRbn, as of August 2012)
35 30 25 20 15 10
MYR bn
140
300
120
250
100
200
80
150
60
100
40
50
20
0
5
Aug-00
0 2012
2014
2016
2018
Source: BofA Merrill Lynch Global Research, ADB
2021
2025
2027
2030
2032
0 Aug-02
Aug-04 MGS
Aug-06 T-Bills (RHS)
Aug-08
Aug-10
Aug-12
GII (RHS)
Source: BofA Merrill Lynch Global Research, CEIC
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Malaysian Government Securities. MGS are fixed-rate, semi-annual coupon bonds with bullet repayment. The issuance is outlined in an annual calendar with issuance size announced a week prior. The tenors go out to 20 years with the 3, 5 and 10-year MGS the benchmark issues. Switch auctions are also conducted to maintain liquidity along the curve. BNM also introduced Callable MGS in 2006 (MGSC), giving the government the option to redeem issues at par with a five-day notice period to bondholders. Malaysian Government Investment Issues. MGIIs are long-term dividend paying sukuks intended for development financing. Maturities for these issues are 3, 5, 7 and 10 years. They are priced on the principle of Bai’ Al-Inah, where the government sells a specified portion of its assets and will later repurchase these assets at the original value plus profit at a later date. This profit is defined as a weighted average yield achieved in a competitive tender. BNM Treasury bills. BNM issues these government bills weekly at a discount through competitive auction with 3, 6 and 12-month maturities. Auctions are typically Thursday and issues Friday. T-bills are actively traded in the secondary market. BNM monetary notes. Created in 2006, these notes are designed to manage liquidity in the conventional and Islamic markets and replace previous BNM bills and negotiable notes. Maturities range from 3 weeks to 3 years and can be either coupon or discount based. The notes are issued twice a week and the calendar is released every two weeks. Corporate bonds and private debt. Two broad categories: Khazanah Bonds and Cagamas Papers. Khazanah represents the government’s investment arm, which usually issues zero-coupon paper under the Islamic principle of Murabahah with tenors ranging of 3, 5, 7 and 10 years. Cagamas bonds are unsecured bearer bonds issued by the national mortgage corporation created in 1986. In general, there are five types of issues, ranging from fixed-rate bonds (up to 10y maturity) to floating rate bonds (up to 10y maturity), with rates pegged to 3m and 6m KLIBOR and Cagamas Notes that are short-term, less than 12m maturity, issued at discount or with coupon. The other two types of Cagamas bonds are based on Islamic principles used to finance a variety of forms of housing debt, hire purchase debts and housing loans. Sanadat Mudharabah Cagamas bonds are issued under the Islamic principle of Mudharabah and are usually redeemable at par at maturity with tenors up to 10 years. Sanadat Cagamas bonds are issued under the Islamic principle of bai bithaman ajil and redeemable at par together with the dividend due at maturity date. Auction and placement mechanism. The BNM issues MGS and GII via competitive auction on behalf of the government to finance its development expenditure. MGS are long-term, fixed-rate, coupon-bearing bonds with bullet repayment of principal upon maturity. Coupon payments are made semi-annually. GII are long-term dividend-bearing sukuks issued by the government. The tender announcement detailing the size and exact date of the issue is at least five business days prior to the issue date through BNM’s Fully Automated System for Issuing/Tendering (FAST). “When issued” trading begins on the official release of the MGS auction results and ends when tender results are given.
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GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages
Derivatives market
MYR Curncy ALLQ – FX rates
Interest rate swaps. 3m KLIBOR provides the reference fixing for the floating leg of interest rate swaps. Tenors and liquidity range up to 10 years and are actively traded. Relative to futures, IRS provide a better interest rate hedging instrument. Foreign investor access is typically done through nondeliverable NDIRS as access to the onshore market is restricted to hedging underlying bond exposures
OTC MYR – Market monitor BNM – Bank Negara Malaysia page BNMB – Bank Negara bond page BNMF – Bank Negara money markets
Reuters pages NEGARA – Bank Negara Malaysia page BNM002 – Malaysia auction calendar KLIBOR= – KL Interbank Offered Rates
Useful official websites Bank Negara Malaysia (BNM) www.bnm.gov.my Treasury Malaysia www.treasury.gov.my National Economic Advisory Council www.neac.gov.my Employment Provident Fund www.kwsp.gov.my Bond Info Hub http://bondinfo.bnm.gov.my
Useful market websites Kuala Lumpur Stock Exchange www.klse.com.my Bursa Malaysia www.bursamalaysia.com Rating Agency Malaysia www.ram.com.my Securities Commission www.sc.com.my
Cross currency swaps. CCS are less liquid than the IRS, but tenor does extend to 10y. Onshore access for foreign investors is limited to bond hedging purposes. KILBOR futures. Liquidity remains wanting and turnover is low. KLIBOR futures are based on 3m KLIBOR and on the typical quarterly cycle: March, June, September and December. Contract size is RM1mn with the maximum number of net long or net short positions limited to 5,000 contracts for all months combined. MGS bond futures. There are 3y and 5y tenors, but poor liquidity makes them an unattractive hedging proposition. http://www.bursamalaysia.com/website/bm/derivatives/products/Financial_Derivat ives/fmg32.html Table 47: Summary statistics of Malaysia derivative products and their markets Average daily Average Bloomberg Product trading volume transaction size Bid-ask spread reference Interest rate swaps 1-year 5-year 10-year ND Interest rate swaps 1-year 5-year 10-year Cross-currency swaps onshore NA offshore NA NA
450mm 500mm 50mm
100mm 50mm 30mm
2bp 4bp 4bp
MYSW1Y Index MYSW5Y Index MYSW10Y Index
450mm 500mm 50mm
100mm 50mm 30mm
2bp 4bp 4bp
MRSWQO1 MRSWQO5 MRSWQO10
USD20mn USD20mn USD20mn
20bp 5y tenor 10bp 1-3y tenor 25bp 3y plus
NA NA NA
Source: BofA Merrill Lynch Global Research
FX market Malaysia has been operating as a managed float since July 2005, with the MYR being determined by market fundamentals. Promoting exchange rate stability remains a primary objective for BNM. The central bank monitors the nominal effective exchange rate against an undisclosed basket of currencies to ensure that the MYR remains close to its par value. The system allows for free flow of payments and transfers on the current account, but controls and restrictions are in place for the capital account. Trading in the MYR averages USD1.5–2.0bn daily in the spot market and USD1.0-1.5bn in the forwards market. Liquidity in the offshore markets for nondeliverable markets and options generally has been lower. However, greater liberalization in late 2010 has helped to bridge the spreads between onshore and offshore FX markets.
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Table 48: Vital statistics and characteristics of Malaysia's FX market Average daily Average FX Tradable trading trading Bid-ask Reuters products product volume spread reference Key facts size MYR Onshore Spot MYR Spot
Forwards
MYR Forwards
MYR Offshore Forwards NDF
Options
NDO
USD1.52.0bn
USD3-20mn MYR 0.0010.004
USD1.01.5bn
USD1050mn
USD1.5bn USD5-20mn
USD400500mn
USD1050mn
MYR=
MYR 0.00050.004
MYRF=
MYR 0.00100.0050
PNDF PNDG
0.4-1.0 vol
TTDE
▪ Proper documentation required. ▪ Trading hours: 0800-1700 (Malaysia) -NA
▪ MYR is a nondeliverable currency. ▪ Offshore entities can access the market through NDF ▪ Dollar settled NDF on MYR are available up to 10y tenors and are liquid for tenor shorter than 1y ▪ Dollar settled NDO on MYR are available up to 5y tenors and are liquid for tenors shorter than 2y
Source: BofA Merrill Lynch Global Research
Chart 32: The key local and foreign investors in the Malaysian government securities markets (MGS) 70%
Chart 33: Foreign ownership of MGS and MTB as % of total outstanding
% of total
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
60% 50% 40% 30% 20% 10% 0% Mar-05
Mar-06 EPF
Mar-07
Mar-09
Mar-10
Banks and Insurance companies
Source: BofA Merrill Lynch Global Research
62
Mar-08
Mar-11
Mar-12
Foreigners
% of total
Jan-05
Jan-07
Jan-09
Foreign holdings of MGS Source: BofA Merrill Lynch Global Research
Jan-11 Foreign holdings of MTB
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Investor base As of March 2012 the largest investors in outstanding Malaysian Government Bonds were financial institutions, the Employment Provident Fund (EPF) and foreigners. Higher frequency BNM data show foreign investors increasing their share of outstanding MGS to close to 40% as of March. The BNM data also show that financial institutions (banks) increased their absolute share, but relative to the size of issuance this share declined. The EPF is the biggest single buyer of bonds, though it has been charged with the mandate to lower its MGS holdings and allocate more overseas. The 2011 annual report showed that EPF held around RM125bn of MGS. We expect foreign holdings in MGS to continue to increase in percentage terms. The key reason is diversification of sovereign wealth fund/central bank reserves into Asia assets, a trend that should be structural. Malaysia benefits because its yield level is still reasonable (10y around 3.4% currently). Also it is one of the largest bond markets in Asia, along with China and Korea. Relative to those two markets Malaysia has the advantage, in that China’s bond market is not close to being fully open to foreign investors. In Korea, foreign bond investors still need to pay withholding tax depending on jurisdictions, while bond transactions are not yet Euroclearable and local custodians are required. For Malaysia, bond trades are Euroclearable and there is no withholding tax applied to either T-bill or MGS/GII transactions, with Malaysia being part of the Citigroup WGBI index. Table 49: Investor profile of Malaysian government debt Mar-12 % share 1.46 31.80 8.66 0.18 11.81 39.16 6.93
Public Sector Employees Provident Fund Insurance companies Central Bank of Malaysia Banking institutions Foreign holders Other
MYRbn 4.12 89.44 24.35 0.51 33.20 110.12 19.48
Mar-10
% share 1.86 39.40 7.85 1.04 19.48 21.75 8.61
MYRbn 4.73 100.38 20.01 2.66 49.64 55.42 21.95
Mar-07 % share 0.06 0.59 0.10 0.01 0.12 9.78 2.63
MYRbn 10.72 105.25 17.64 1.29 22.31 17.56 4.72
Source: BofA Merrill Lynch Global Research
Table 50: EPF holdings, growth and composition share as of December 2011 2011 2010 MGS Loans and bonds Equity Money market Property Total
% of total 26.5 34.2 35.6 3.2 0.4 100%
RMbn 124.57 160.69 167.21 14.94 1.82 469.23
growth 5% 12% 9% -38% -4% 100%
RMbn 119 143 154 24 1.9 441.9
growth 4% 8% 54% 4% 27% 100%
2009
RMbn 114 132 100 23 1.5 370.5
growth 3% 7% 14% 22% -4% 100%
Source: BofA Merrill Lynch Global Research
63
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Rules, regulations capital controls and taxation Foreign investors can access the onshore local fixed income market, and are required to have a local custodian. FX and interest hedging is allowed, but must match the underlying notional and maturity date of the asset. There is no withholding tax on interest income or capital gains.
Clearing and settlement Successful bids are allocated via the Real Time Electronic Transfer of Funds and Securities System (RENTAS) by lodging the securities with their appointed Authorized Depository Institution (ADIs). Settlement then takes place automatically through RENTAS on a delivery versus payment basis (DVP) All short-term and long-term government securities are auctioned through a variable rate multiple price auction format known as an English auction. Occasionally, a private placement is conducted for specific MGS issues to identified institutions per the approval of the Ministry of Finance. There are no restrictions on nonresidents investing in MGS or GII. MGS are available to retail investors in a minimum denomination of RM1,000, and in multiples of RM1,000. See the Malaysia Bond Info Hub for more details.
64
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Table 51: Summary of Malaysia bond markets and products Instrument
Malaysian Treasury Bills (MTB)
Issuer
Government of Malaysia, facilitated by BNM Government of Malaysia, facilitated by BNM. Government of Malaysia, facilitated by BNM
Malaysian Islamic Treasury Bills (MITB)
Malaysian Government Securities (MGS)
Islamic bonds based on Islamic principles (Bai’ Al-Inah) Currency
MYR
MYR
Principal
Conventional
Islamic
MYR Conventional
Tenor
91, 182, and 365 days
1 year
3 to 20 years
Interest rate/coupon
Issued at discount
Issued at discount
Fixed rate. Coupon rate is based on the
Coupon Payments
Zero coupon
Zero coupon
Semi-annual
weighted average yields of successful bids Day Count Calculation
---
---
Actual/Actual
Amortization Schedule
Bullet
Bullet
Bullet
Form
Scripless
Scripless
Scripless
Amount outstanding
MYR2.32bn
MYR2bn
MYR291bn
(as of July2012) Secondary Market Trading
OTC or money brokers
OTC or money brokers
OTC or money brokers
Quotation Convention
Discounted yields to two decimal places;
Discounted yields to two decimal places;
Price basis to two decimal places
trading based on bands of remaining tenure. trading based on bands of remaining tenure. 10 bands in total
10 bands in total
Settlement Period
T+1
T+1
T+2
Average Daily Turnover
MYR32.8mn
MYR8.63mn
MYR2.17bn
Bid/offer spread (0-5Y)
4bp
5bp
1.5bp
Bid/offer spread (5Y+)
NA
NA
1.5bp MYR20mn
Average trade size
MYR20mn
MYR20mn
Clearing Mechanism
DVP via RENTAS
DVP via RENTAS
DVP via RENTAS
Major players
Pension fund, insurance companies, asset
Pension fund, insurance companies, asset
Pension fund, insurance companies, asset
management companies, securities
management companies, securities
management companies, securities
companies and primary dealers
companies and primary dealers
companies and primary dealers
Trading hours
9:00-12:00 and 14:00-17:00
9:00-12:00 and 14:00-17:00
9:00-12:00 and 14:00-17:00
(Kuala Lumpur)
(Kuala Lumpur)
(Kuala Lumpur)
Bidders
Principal dealers appointed by BNM
Principal dealers appointed by BNM
Principal dealers appointed by BNM.
Restrictions on Foreign Investment
Not restricted
Not restricted
Not restricted
Custodian
Authorized Depository Institutions recognized Authorized Depository Institutions recognized Authorized Depository Institutions recognized
Regulations
by BNM
by BNM
Withholding Tax
Exempted
Exempted
by BNM Exempted
Capital gains Tax
Exempted
Exempted
Exempted
Entry/Exit Tax
None
None
None
Competitive tender on the basis of highest
Competitive auction on a yield basis
Primary Auctions Auction Style
Competitive auction on yield-bid basis
price tendered (or lowest yield) Average Issue Size
MYR100mn
MYR80mn
MYR3.5bn
Minimum Amount of Tender
8.5% of the issue (primary dealer)
6.5% of the issue (primary dealer)
8.5% of the issue (primary dealer)
Source: BofA Merrill Lynch Global Research
65
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Pakistan Overview Claudio Piron +65 6678 0401
The fixed income market in Pakistan did not start functioning on a free market basis until after 1990. Before that, the government borrowed at administratively determined rates by issuing on-tap instruments and captive funding by raising cash reserve requirements and statutory liquidity requirements. Long-term government paper called Federal Investment Bonds (FIBs) were introduced in 1992 and replaced with Pakistan Investment Bonds (PIBs) in 2000. The government debt consists of floating, permanent and unfunded debt. Market Treasury Bills (MTBs) and PIBs form the floating and permanent segment of debt while National Savings Schemes (NSS) forms the unfunded (on tap) segment of government debt. The first corporate bond instrument called Term Finance Certificates (TFCs) were issued in 1995. The corporate debt market has gained activity since 2000 when the SBP restricted institutional investment in NSS.
Monetary policy Table 52: Pakistan ratings profile Moody's
S&P
2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
BBBBCCC+ BB BB BB BB BBBBB+ B+
B3 B3 B3 B3 B2 B1 B1 B2 B2 B2 B3 Caa1 Caa1
Background. Pakistan’s monetary and currency functions were managed by the Reserve Bank of India (RBI) for the first 11 months following its partition from India. The State Bank of Pakistan (SBP) commenced operations in July 1948 and was nationalized in 1974. The SBP Act of 1956 forms the basis of its operations today. Financial sector reforms in 1994 gave the SBP greater autonomy. Policy framework. SBP seeks to maintain stable prices and stability of the financial system. It follows a monetary targeting framework with intermediate targets for M2. It also uses indirect tools like the cash reserve ratio and statutory liquidity requirement to influence the level of liquidity in the system. The monetary policy committee meets once every two months to review monetary policy. Open market operations. The SBP conducts OMOs to smooth liquidity in the system. MTBs are used often for OMOs.
Source: Bloomberg, BofA Merrill Lynch Global Research
Base rate. The discount rate serves as the State Bank of Pakistan’s chief policy signal and is the rate at which the central bank lends short-term credit to commercial banks. Lending and deposit facilities. The SBP now favors using repo and reverse repo facilities more than reserve requirements in managing money market liquidity. Repos are typically conducted for overnight to 4-week tenors. The SBP O/N reverse repo facility and overnight repo facility set the respective floor and ceiling interest rate corridor, which has been fixed at a width of 300bp since August 2009.
Chart 34: Key Pakistan CPI components 35%
Food & Non-alcoholic Beverages
10%
Transport & Communication 8%
Clothing & Footwear Furnishing & Household Equipment Maintenance
4%
Education
4% 10%
Others 0%
Source: BofA Merrill Lynch Global Research
66
Reserve requirements. SBP has used a cash reserve requirement since its creation, and banks have to meet two CRR settings: one that requires a minimum 4% of their time and demand liabilities (TDL) subject to CRR, and another that requires a weekly average of 5% of their TDL, subject to CRR. Banks are also required to keep a fraction of their assets (SLR) in the form of Treasury bills or other approved securities. This is set at 19% of total time and demand liabilities. Time deposits with 1y tenors and above do not require any CRR or SLR.
29%
Housing, Water, Electricity, Gas & Other Fuels
10%
20%
30%
40%
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions
Fiscal policy
Bonds
Pakistan’s markets are driven more by political event risk than macro trends. Headline inflation, which has run at double-digit rates since 2008, is a primary economic focus. Some of this is due to national and local floods in 2010 and 2011, respectively, which led to higher food prices (the food group has the greatest weight in the CPI basket at 38.5%).
Quote: Yield to maturity Settlement: T+2 Basis: Act/365 Coupon frequency: Semi-annual
Recently the current account has started to feel the pinch of global economic slowdown, with the deficit expanding to US$4.5bn in FY2012 compared to the US$0.2bn surplus recorded in FY2011. A deteriorating external account and the beginning of repayments to the IMF in 2012 led to the increased exchange rate volatility, with the PKR depreciating 9.9% in FY2012. However, recent news flow on potential realization of foreign flows from US is lending some stability to the PKR.
IRS Fixing: KIBOR Basis: Act/365
CCS Fixing: KIBOR
Bond market
Basis: Act/365
Pakistan’s fiscal deficit for FY2011 (June-July) was 5.9% of GDP. The figure is higher at 6.6% if including the PKR120bn in debt of the oil and gas companies. Similarly, the numbers for FY2012 suggest the fiscal deficit could be above 6% of GDP. The major fiscal drags on the economy since 2008 have been the debt servicing cost (20% of expenditures), the US$10bn losses from the floods in July 2010 and growing costs of combating terrorism. The government has announced its intention to cap the fiscal deficit at 4.7% of GDP in FY2013. In the first nine months of FY2012, the government borrowed PKR847bn from domestic sources, which was 21% higher than the comparable period last year. Total outstanding government debt from domestic sources has risen sharply and was PKR7.2tn in March 2012, which is up 1.8x the FY2009 level. Money market. Since Pakistan is a monetary-targeting regime, money supply determines the interest rate level. Interest rate signaling is done by changing the auction cutoff yields for the 6m MTBs. Market Treasury Bills. Introduced in 1991, MTBs are short-term, zero-coupon bonds issued at a discount and available for maturities of 3, 6 and 12 months. Non-competitive bids have been allowed since 2009. MTBs for replenishment are instruments with 6m maturity for government borrowing directly from the SBP. Outstanding MTBs as of 2010 totaled PKR2,399bn.
Chart 35: Maturity profile of Pakistan government bonds (PKRbn)
Chart 36: Outstanding Pakistan government bonds (PKRbn, as of end 2010)
PKR bn
300 Pakistan Inv estment Bonds maturing (PKRbn)
3000
250
2500
200
2000
150
1500
MTBs PIBs
1000
100
500
50
0 0 2012
2014
2016
2018
Source: SBP, BofA Merrill Lynch Global Research
2020
2022
2024
2028
2036
1999 20002001 2002 20032004 2005 20062007 2008 20092010 Source: SBP, BofA Merrill Lynch Global Research
67
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages OTC PKR – Market monitor SBPK – State Bank of Pakistan MOSB PKR – Most traded bonds
Pakistan Investment Bonds. PIBs were introduced in 2000 to assist the development of a benchmark yield curve and serve as a guide to the corporate bond market. PIBs are long-term bonds available for maturities of 3, 5, 10, 15, 20 and 30 years. Outstanding PIBs as of 2010 totaled PKR505bn.
PKSTAN Govt – USD sovereign bonds FMPK – Financial Market Association
Reuters pages SBPK01SBP – State Bank of Pakistan SBPK09 – SBP market operations KONIA – Karachi Overnight Index
Unfunded debt. This consists of the National Savings Schemes administered by the Central Directorate of National Savings (CDNS) division of the Ministry of Finance. These include Prize Bonds, Special Savings Certificate Registered Bonds, Defense Saving Certificate, Behbood Saving Certificate, Regular Income Certificate, etc. The bonds are available on a tap basis.
State Bank of Pakistan http://www.sbp.org.pk/
Corporate debt. The corporate bond market in Pakistan is beginning to develop. It largely consists of Term Finance Certificates (TFC) and Commercial Paper (CP). TFCs are available for fixed and floating rates. The Securities and Exchange Commission of Pakistan (SECP) regulates the issuance of TFCs.
Ministry of Finance http://www.finance.gov.pk/
Derivatives market
Useful official websites
Useful market websites Financial Markets Association of Pakistan http://www.fma.com.pk/
FX forwards. Liquid for maturity periods of less than a year. Interest rate and cross currency swaps. Pakistan has onshore IRS and CCS markets. But liquidity is very poor and the markets are less developed. Major participants include banks and corporates. Liquidity is mostly in the 1m to 3y maturities segment.
FX market The SBP periodically intervenes in the spot and forwards market to maintain the value of SBP according to what it deems appropriate. After being pegged to sterling until 1971, the PKR was pegged to the USD at PKR9.90 before switching to a managed floating rate system in 1982. SBP followed a two-tier exchange rate system in 1998-99 to reduce pressure on official reserves and prevent the economy from the adverse implications of sanctions imposed on Pakistan. Table 53: Vital statistics and characteristics of Pakistan's FX market Tradable FX products PKR Onshore Spot PKR Spot
Forwards
PKR Offshore Forwards
Avg daily trading volume
Bid-Ask spread
Reuters reference
USD435mn
0.05-0.10bp
PKR=
PKR Forwards USD200–250mn 1 day: 0.005bp, 1-3 months: 0.03bp, 6 months: 0.05bp
NDFs
Illiquid
Source: BofA Merrill Lynch Global Research
68
SBPK02 SBPK04
DBNDG
Key facts ▪Documentary proof required ▪Trading Hours: weekdays 9:00-16:30 (Pakistan Time); Saturday 9:00-13:30 ▪Supporting documents required ▪Hedging trade payables and receivables up to 12 months ▪ Forward booking against all types of imports has been temporarily suspended since July 2008 ▪ PKR is not a fully convertible and nondeliverable currency ▪ ISDA documentation is required
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Investor base Banks, development financial corporations (DFIs), provident funds, pension funds, mutual funds and corporates constitute the major local investors. Table 54: Holders of Pakistan government debt (Jun-10) Holder type PKRmn State Bank of Pakistan Deposit money banks Other financial institutions International institutions Foreign government and banks Others Federal govt debt: intra govt debt Total government debt
1164 1042 253 2183 1574 2040 138 8,395
% share 14% 12% 3% 26% 19% 24% 2% 100%
Source: CEIC, BofA Merrill Lynch Global Research
Rules, regulations, capital control and taxation Foreigners and residents are taxed on the interest income of their bond investments at 10%; this can be reduced subject to appropriate double-taxation treaties. Capital gains tax is imposed on 75% of the net gains from holding securities for more than one year at a rate of 35% for corporates and 20% for individuals and 25% for others.
Clearing and settlement A Subsidiary General Ledger Account (SGLA) is required by all bank and nonbank financial institutions to be held with the SBP for government and bank customer owned securities. Custody is managed through the SGLA. Government bonds are settled on a delivery versus payment basis. Table 55: Summary of Pakistan bond markets and products Instrument Pakistan Investment Bonds (PIBs) Issuer Currency Tenor Interest rate/coupon Coupon Payments Form Amount outstanding (as of 2010) Secondary Market Trading Major players Trading hours Regulations Withholding Tax Capital gains Tax Primary Auctions Auction Style Average Issue Size
Market Treasury Bills (MTBs)
Government of Pakistan PKR 3, 5, 10, 15, 20 and 30 years Semi-annual Semi-annual book entry PKR505bn
Government of Pakistan PKR 3, 6 and 12 months Zero-coupon Zero-coupon book entry PKR2399bn
Thin Banks 9:00-16:30 (Pakistan Time)
Relatively more active Banks 9:00-16:30 (Pakistan Time)
10% for residents and non-residents or lower subject to a tax treaty 35% for corporates and 20% for individuals and 25% for others on 75% of the LT gain
10% for residents and non-residents or lower subject to a tax treaty 35% for corporates and 20% for individuals and 25% for others on 75% of the LT gain
SBP and MoF decide cut off and target amounts PKR50bn
SBP and MoF decide cut off and target amounts PKR350bn
Source: BofA Merrill Lynch Global Research , CEIC, China Government Securities Depository Trust and Clearing Company LTD
69
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Philippines Overview Christy Tan +65 6591 0427
The size of the Philippines local currency bond market rose 5.8% yoy at the end of 2011. Currently, more than two-thirds of the outstanding value is in government bonds, with corporate bonds growing rapidly in recent years. While a 20% withholding tax may have dissuaded investors in the past, interest in local currency bonds has been growing since the S&P credit rating upgrade to doubleBB with a stable outlook in 2011.
Monetary policy Background. Bangko Sentral Ng Pilipinas (BSP) oversees monetary policy, with the primary objective of promoting and maintaining a low and stable inflation environment for balanced and sustainable economic growth. The central bank adopted this inflation-targeting framework in 2002.
Table 56: Philippines ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Ba2 Ba2 Ba3 Ba3 B1 B1 B1 B1 Ba2* Baa3* Baa3 Baa3 Baa3
BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BBB BBB BBB+ BBB+ BBB+
BBBBBBBB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BBBBBBBBB
To keep prices stable, the BSP uses a number of monetary policy instruments to adjust the liquidity level in the system. Some of the tools at its disposal include the use of open market operations, fixed-term deposits, standing facilities and the reserve requirements for banks to manage money supply within the system. The seven-member Monetary Policy Board meets every six weeks to discuss, review and decide on monetary policy directions. The policy interest rates are the overnight reverse repo rate and the repo rate. Base rates. The official interest rate in Philippines is the reverse repo rate (RRP), which is the overnight borrowing rate. There is also the overnight repurchase (RP) or lending rate. The Monetary Policy Board sets and adjusts key policy interest rates to achieve the country’s inflation target. Adjustments to these rates influence and affect short-term market interest rates.
* indicates negative outlook change; ** indicates positive outlook change.. Source: BofA Merrill Lynch Global Research
The policy rate was 3.75% as of July 2012, after the BSP implemented three rate cuts this year alone to cushion the economy against slower global growth in light of the deepening Eurozone crisis and slowdown in US and China. The move was also to protect the downside of the inflation target.
Chart 37: Key Philippines CPI components 39%
Food and Non Alcoholic Beverages
Restaurants & Misc Goods & Services
12%
Transport
8%
Education
3%
Furnishings, Household, Equip & Maintenance
3%
Others
12% 0%
10%
Source: BofA Merrill Lynch Global Research
70
Open market operations. OMO is a key component of monetary policy implementation. The BSP controls the liquidity by publicly buying or selling government securities from banks and financial institutions through repurchase, reverse repurchase transactions, outright transactions, and foreign exchange swaps. By controlling money supply, the central bank is able to exert some influence on the prices of goods and services to achieve its inflation objectives.
23%
Housing, Water, Electricity, Gas & Fuels
20%
Policy framework. The BSP uses the headline consumer price index (CPI) as the key monetary policy target. Consistent with the inflation-targeting framework, in July 2010 the Monetary Policy Board announced the BSP’s shift to a fixed inflation target of 4 ± 1% for 2012-2014. The Development Budget Coordination Committee (DBCC) approved the shift to a fixed medium-term inflation target from a variable annual inflation.
30%
40%
50%
Under repurchase/reverse repurchase agreements, the central bank purchases government securities from a bank with a commitment to sell them back at a specified future date at a predetermined rate. However, repos can only serve as temporary adjustments to the money supply given the short-term nature of repo agreements (max of 14 or 30 days).
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions Bonds Quote: Yield to maturity Settlement: T+1
Outright purchases are used to affect the money supply if a permanent adjustment is required. Outright transactions refer to the direct purchase or sale by the BSP of its holdings of government securities from or to financial institutions. Foreign exchange swaps are also used by the BSP under OMO.
Basis: Act/360 or 30/360 Coupon frequency: Semi-annual or quarterly
CCS Fixing: 6m USD LIBOR Coupon frequency: Semi-annual; USD day count Act/360, local Act/365
The Special Deposit Account (SDA) facility, which consists of fixed-term deposits by banks and trust entities of banks and nonbank financial institutions, can also be used as a liquidity management tool. SDAs have increased in popularity after the facility was expanded to include trust entities in April 2007. Funds in the SDAs also jumped 10% yoy in April 2012, as investors continued to search for high-yielding instruments due to the lack of major infrastructure and development projects in the country. In July 2012 the BSP tightened rules around the SDAs by requiring banks to indicate the nationality of depositors, and prohibiting foreign funds from investing in SDAs. This move was to ensure SDAs are not used as a haven for “hot money” and to curb currency speculation. The BSP subsequently reduced rates on SDAs, a move toward monetary easing. Rates were cut by 3.125bp across the board. Lending and deposit facilities. One monetary policy instrument is the BSP’s rediscounting facility, which allows banks to refinance loans that they extend to their clients, in order to help the banks meet temporary liquidity needs. Through this, the BSP is able to influence credit volume in the financial system. There are two types of rediscounting facilities available – the peso rediscounting facility and the exporters’ dollar and yen rediscount facility (EDYRF). Banks or financial institutions can obtain credit from the BSP using promissory notes or other loan papers of its borrowers as collateral. Reserve requirements. Managing reserves is key to liquidity management. Previously, the BSP had reserves in two forms: regular (or statutory) reserves and liquidity reserves. Up to 40% of statutory reserves that banks deposit with the BSP were paid interest of 4% per annum, while interest paid on liquidity reserves was based on the rate of comparable government securities, less half a percentage point. This policy was changed in February 2012 when the Monetary Policy Board decided to merge the statutory and liquidity reserves into a single set of reserves, and interest payments on bank reserves were terminated. At the same time, the BSP cut banks’ required reserves by 3 percentage points to the current 18%. Reserve requirements apply to peso demand, savings, time deposit and deposit substitutes (including long-term non-negotiable tax-exempt certificates of time deposit, or LTNCTDs) of universal banks (UBs) and commercial banks (KBs).
Economic drivers The key market drivers are monthly CPI, export/import figures, overseas remittances and budget deficit/surplus. CPI weights are as follows: food and nonalcoholic beverages (39.0%), housing and utilities (22.5%), and restaurants and miscellaneous goods and services (12.0%). The macroeconomic outlook for the Philippines is generally stable. The economy remains in a sweet spot that features strong growth, low interest rates and a stable currency buoyed by a positive current account. Fiscal conditions are improving with better tax collections and fiscal prudence, and public debt (56.7% of GDP in 2011) and external debt (27.5% of GDP in 2011) remain at healthy levels. Foreign reserves also grew to a stronger USD76.1bn at end-June 2012.
71
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bond market The Philippines government issues two kinds of government securities: Treasury bills and bonds. Treasury bills. T-bills are government securities issued by the Bureau of the Treasury (BTr) that mature in less than a year. These bills are typically offered in 91, 182 and 364-day tenors, have zero coupons and are sold at a discount from the face value. They can be traded in the secondary market before maturity. Fixed Rate Treasury Notes (FXTNs). Issued by the Bureau of the Treasury, these are interest-bearing notes with maturities longer than a year, for 2, 5, 7, 10, 15 and 25 years. Coupons are fixed and paid semi-annually. Retail Treasury Bonds (RTBs). These government bonds are issued primarily by the Bureau of the Treasury and cater to retail investors. Interest-bearing, the bonds are offered in 3 and 5-year tenors. Coupons are fixed and paid quarterly. Corporate debt. The corporate debt market is relatively small compared to the government bonds and limited to a handful of large local private corporations, such as San Miguel Brewery and Ayala Corporation. Typically, the bonds are issued in 2-7 year tenors. Coupons are usually floating with payments made quarterly. Corporate bonds are usually underwritten by financial institutions licensed by the Securities and Exchange Commission (SEC). Auction and placement mechanism. In the secondary market, investors can purchase government securities through any of the Government Securities Eligible Dealers (GSEDs) or financial institutions licensed by the Securities and Exchange Commission. However, they have no obligation to make markets, and many do not make two-way quotes. Purchase of FXTNs can be done through auctions in the primary market or OTC in the secondary market. Auctions are usually held biweekly on Tuesdays, with settlements on Thursdays.
Chart 38: Maturity profile of Philippine government bonds (PHPbn)
Chart 39: Maturity profile of issuance of Philippine government securities over time in PHPbn 2500
1,200 1,000
2000
800
1500
600
PHP bn
1000
400 500
200
[1-3] Source: BofA Merrill Lynch Global Research, Bureau of the Treasury
72
Source: BofA Merrill Lynch Global Research, ADB
[3-5]
[5-10]
[>10]
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
2036
2034
2032
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
Mar-06
0
-
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages
Derivatives market
PHP Curncy ALLQ – FX rates
Interest rate swaps. The market remains underdeveloped with poor liquidity. As such, it does not provide investors with a viable hedging instrument.
OTC PHP – Market monitor CBPH – Bangko Sentral ng Pililpinas page BTRP – Bureau of Treasury auction results FMPH – Fund Manager Association PDEX – Philippine Dealing & Exchange Corp.
Reuters pages BANGKO – Central bank page PDSPESO – FX market volumes and fixing
FX market The FX market in the Philippines is relatively small compared to others in the region, but has grown considerably in the last decade. Average daily turnover is about US$1.4-1.9bn. Most transactions are concentrated in FX spot transactions, with the FX forwards and swap markets expanding at a more gradual pace. Table 57: Vital statistics and characteristics of the Philippines' FX market
PHIBOR – Philippine Interbank Offered Rate
Average daily trading Average volume trading size
ASIANNDF= – Asia NDF markets and fixing
FX products
Tradable product
PDSMENU – Philippine Dealing System
PHP Onshore Spot
PHP Spot
USD8001200mn
USD3-10mn PHP 0.01-0.05
PDSPESO
Forwards
Forwards
USD600700mn
USD5-10mn PHP 0.02-0.40
PHPF=
PHP Offshore Forwards
NDF
USD600700mn
USD3-10mn PHP 0.02-0.10
PNDF PNDG
Options
NDO
USD50100mn
USD10-30mn
TTDE
PDSTSY – Treasury Reference rates
Useful official websites Central Bank of the Philippines (BSP) www.bsp.gov.ph Department of Finance www.dof.gov.ph
Bid-ask spread
Reuters reference Key facts
Bureau of the Treasury www.treasury.gov.ph Securities and Exchange Commission www.sec.gov.ph Department of Trade and Industry www.dti.gov.ph
0.5-1.0 vol
▪ Proper documentation required ▪ Trading hours: 9:00-12:00 and 14:30-16:00 (Manila) ▪ Forwards on PHP are available and liquid for tenors shorter than 3m ▪ PHP is a non-deliverable currency ▪ Offshore entities can access the market through NDF ▪ Dollar settled NDF on PHP are available up to 10y tenors and liquid for tenors shorter than 2y. ▪ Dollar settled NDO on PHP are available up to 5y tenors and liquid for tenors less than 2y
Source: BofA Merrill Lynch Global Research
National Statistics Office www.census.gov.ph
Investor base
Philippines Social Security System
The government, financial institutions and retail investors are more active in bond issues of short to medium-term maturities. Pension funds, insurance companies and other asset management companies tend to invest in bonds of longer maturities.
www.sss.gov.ph
Useful market websites Philippines Dealing and Exchange Corporation www.pdex.com.ph Money Market Association of the Philippines www.mart.com.ph
The Government Service Insurance System (GSIS) and Social Security System (SSS) are the largest state pension funds, and mandated by the Securities and Exchange Commission to adopt a conservative investment strategy focused on government debt and shares of leading local companies. The local mutual fund industry is one of the least developed in Asia and has a narrow investor base with only a few institutional investors in the local bond market. Licensed insurance firms such as Ayala Life Assurance; Philam Insurance and Sun Life Financial are also major investors in government bonds of longer tenors.
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Rules, regulations capital controls and taxation Foreign investors are free to invest in government securities. Capital inflows have been increasing, but the BSP announced that they are still at manageable levels. The central bank has not imposed any capital controls yet. Resident and nonresident investors are subject to a 20% withholding tax on interest income. However, there is no capital gains tax levied on government securities for all investors. The withholding tax on interest income can be reduced contingent on double taxation treaties.
Clearing and settlement Transactions are cleared through the Registry of Scripless Securities (RoSS), administered by the Bureau of the Treasury. Standard settlement for government securities is T+1. Deviation from the standard is possible if negotiated and agreed upon by both parties. Trading hours (Monday-Friday) are from 9:30am to noon, and from 2:30pm to 4:00pm.
Global peso notes The government has started to develop an offshore peso curve, which has seen very strong offshore demand even though the trading dynamics and liquidity of these issues have been somewhat limited. The global peso notes (GPN) trade pari passu to USD sovereign bonds and are governed by New York Law, but only sovereign USD bonds are deliverable into CDS. The GPN offers low cost funding for the sovereign and is linked to the USD bonds in terms of a credit event. The first global peso note was launched in September 2010 for USD1bn with an initial maturity of 10 years. A second 25-year bond was issued in January 2011 for USD1bn. A third is expected subject to market conditions. Though the face value currency is the Philippine peso, settlement is made in the US dollar in the offshore market. Investors bear interest rate and foreign exchange risks. The attraction of the bonds is that foreign investors are not subject to the onshore withholding taxes and the issuer benefits from not having to take on FX risk.
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Table 58: Summary of the Philippines bond markets and products Instrument Treasury bills (T-bills) Issuer Currency Principal Tenor Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Form Amount outstanding (as of April 2012) Secondary Market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5y) Bid/offer spread (5y+) Average trade size Clearing Mechanism Major players Trading hours Bidders
Regulations Restrictions on Foreign Investment
Custodian Withholding Tax Capital gains Tax Entry/Exit Tax Primary Auctions Auction Style
Average Issue Size Minimum Amount of Tender
Fixed Rate Treasury Notes (FXTNs)
Retail Treasury Bonds (RTBs)
Bureau of the Treasury PHP PHP10,000 91, 182 and 364 days Issued at discount Zero coupon Actual/360 Bullet Scripless PHP257,790mn
Bureau of the Treasury PHP PHP10,000 2,3,4,5,7,10,20 and 25 years Fixed Semi-annual 30/360 Bullet Scripless PHP1,140,146mn
Bureau of the Treasury PHP PHP5,000 3-10 years Fixed Quarterly 30/360 Bullet Scripless PHP615,640mn
OTC Yield (to 4 decimal places) T+1 (or negotiated) PHP2bn 15bp PHP50mn RoSS (Registry of Scripless Securities) Banks, government agencies, financial institutions and retail investors 9:00am-12:00pm and 2:00-4:00pm (Manila time) Bank and non-bank financial institutions licensed to deal in the primary market via Government Securities Eligible Dealers (GSEDs)
OTC Yield (to 4 decimal places) T+1 (or negotiated) PHP8bn 15bp 20bp PHP30mn RoSS (Registry of Scripless Securities) Banks, Pension funds, insurance companies, asset management funds 9:00am-12:00pm and 2:00-4:00pm (Manila time) Bank and non-bank financial institutions licensed to deal in the primary market via Government Securities Eligible Dealers (GSEDs)
OTC Yield (to 4 decimal places) T+1 (or negotiated) PHP1bn 15bp 20bp PHP30mn RoSS (Registry of Scripless Securities) Banks, Pension funds, insurance companies, asset management funds 9:00am-12:00pm and 2:00-4:00pm (Manila time) Individual investors through appointed underwriters. No restrictions on foreign investors.
No restrictions; however, purchases have to be financed through inward foreign exchange remittances or from withdrawals against foreign currency accounts. Registry of Scripless Securities (RoSS) Subject to 20% final withholding tax, applies to residents and nonresidents No capital gains tax on all government securities, for residents and nonresidents None
No restrictions; however, purchases have to be financed through inward foreign exchange remittances or from withdrawals against foreign currency accounts. Registry of Scripless Securities (RoSS) Subject to 20% final withholding tax, applies to residents and nonresidents No capital gains tax on all government securities, for residents and nonresidents None
No restrictions; however, purchases have to be financed through inward foreign exchange remittances or from withdrawals against foreign currency accounts. Registry of Scripless Securities (RoSS) Subject to 20% final withholding tax, applies to residents and nonresidents No capital gains tax on all government securities, for residents and nonresidents None
English auction (multiple price auction) via Government Securities Eligible Dealers (GSEDs) and through negotiated sale PHP3bn PHP10mn
Dutch auction via Government Securities Eligible Dealers (GSEDs) and through negotiated sale PHP2-4bn PHP10mn
Book building and public offering through appointed underwriters PHP20-40bn Variable up to PHP100,000
Source: BofA Merrill Lynch Global Research
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Singapore Overview Albert Leung + 7137
Singapore’s bond market is one of the fastest growing and most developed in Southeast Asia. Domestically, local currency government securities have grown significantly since the first Singapore Government Securities (SGS) were introduced in 1998. Daily average turnover of SGS (excluding T-bills) is around SGD1.29bn thus far in 2012.
Monetary policy Background. The Monetary Authority of Singapore (MAS) has been in charge of promoting sustained non-inflationary economic growth and developing Singapore into a sound and progressive financial hub since its inception in 1971. Other than conducting monetary policy for the country, the central bank also acts as the financial agent of the government and has the power to supervise and regulate the financial sector, as well as manage foreign reserves. Policy framework. Since 1981 Singapore’s monetary policy has been centered on managing the exchange rate through the basket band crawl (BBC). The nominal effective exchange rate (NEER) index is calculated by weighting the exchange rate with a basket of currencies of its major trade partners and competitors. The NEER can float within a band that is allowed to crawl to adjust with the policy requirements and fundamentals. This is done to mitigate shortterm volatility and prevent misalignment in the SGD.
Table 59: Singapore ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa
AAAu AAAu AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA
AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA
Monetary policy is reviewed semi-annually, in April and October, to ensure alignment with economic fundamentals and market economics, so as to maintain a low inflationary environment that is favorable for sustained economic growth in the short to medium term. Base rate. Singapore does not have a base rate. Open market operations. To ensure that the SGD stays within the prescribed policy band, the MAS tends to intervene in the FX market using spot or forward FX transactions. Intervention may be in the form of a purchase of SGD against the USD to stem any depreciation or to moderate the pace of appreciation by injecting more SGD into the market. While the frequency of FX intervention is not always disclosed, the Monetary Management Division typically reports the size of FX intervention and money market operations internally on a biweekly basis.
Source: BofA Merrill Lynch Global Research
Lending and deposit facilities. MAS operates a standing facility and intra-day liquidity facility. The former allows banks to obtain SGD liquidity using eligible foreign currencies or borrow SGD direct from the MAS. The intra-day liquidity facility is more for banks that need larger amount of funds.
Chart 40: Key Singapore CPI components 25%
Housing
16%
Recreation and Others
Fiscal policy
16%
Transport Education and Stationery
7% 6%
Health Care Others
8% 0%
5%
10%
Source: BofA Merrill Lynch Global Research
76
Reserve requirements. Banks are required to maintain a reserve requirement or minimum cash balance with the MAS as a proportion of their liabilities base.
22%
Food
15%
20%
25%
30%
The key market drivers are monthly CPI, industrial production and non-oil domestic exports. CPI weights are as follows: food (22.1%), housing (20%), utilities (3.6%) and fuel (2.4%). The macroeconomic outlook for Singapore is generally stable with a healthy fiscal balance, no foreign debt and high foreign exchange reserves. As an open economy, Singapore’s GDP is driven largely by manufacturing, financial services, gaming and tourism.
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions
Bond market
Bonds
With a prudent fiscal policy, Singapore has been enjoying extended periods of healthy budgetary surpluses. As such, the government does not need to finance any shortfalls in expenditures through the issuance of government bonds.
Quote: Yield to maturity Settlement: T+1 Basis: Act/365 (SGS bills) or Act/Act (SGS Notes)
The primary objective of developing the bond market is thus to deepen the domestic capital markets by providing a robust government yield curve as a pricing benchmark for private debt securities, and to foster the growth of an active secondary market to enhance risk management.
Coupon frequency: Semi-annual
IRS Fixing: 6m SOR Coupon frequency: Semi-annual; fixed/floating Act/365
There are three broad categories of bonds in Singapore, mainly SGS T-bills, SGS bonds and corporate bonds. Total outstanding local currency bonds breached SGD211bn in March 2012, with 60% in government securities.
CCS Fixing: 6m SOR Coupon frequency: Semi-annual USD day count Act/360,
Money market. Singapore has a sizable repo market to support market-making activities of the primary dealers. This enables primary dealers to make long/short positions such as buying one bond and selling another to take advantage of yield curve arbitrage opportunities. Typical transactions are about S$25mn, traded 9:00-15:30 (Singapore) with a settlement of T+1.
local Act/365
SGS T-bills. SGS T-bills are sold at a discount and offered at 3m and 1y, with a minimum denomination of S$1,000 (par value). 3m T-bills are issued weekly while 1y T-bills are issued based on an annual calendar (see the SGS website), announced each September for the following year. Typical issue size is around SGD2.3-3.7bn. SGS Bonds. SGS Bonds are usually of longer duration, with tenors ranging 2-20 years. Bonds are denominated in nominal amounts of S$1,000 (par value) with fixed-rate coupons issued semi-annually. Average issuance sizes are usually within SGD2-3bn and bond auctions are based on an annual calendar, typically announced each September for the following year (see the SGS website).
Chart 41: Maturity profile of Singapore government bonds (SGDbn) 14
Chart 42: Outstanding local currency bonds by type (SGDbn) 90
SGS maturing (SGDbn)
SGD bn
80
12
70 60
10
50 40
8
30 6
20 10
4
0 Jun-05
2
Jun-06
Jun-07
Jun-08 SGS T-bills
0 2012
2014
2016
2018
2020
2022
2027
2042
Jun-09
Jun-10
Jun-11
Jun-12
SGS bonds
Source: BofA Merrill Lynch Global Research, CEIC, ADB
Source: BofA Merrill Lynch Global Research, ADB
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Bloomberg pages SGD Curncy ALLQ – FX rates OTC SGD SIGB – Monetary Authority of Singapore page MOSBSGD – Most traded bonds ABSI – Association of Banks in Singapore
Reuters pages MAS01 to MAS06 – Issuance, auctions, results SGDDFIX=ABSG – SOR fixing SIBOR= SIBOR fixing ABSIRFIX1 – ABS Fixings Index
Useful official websites Monetary Authority of Singapore (MAS) www.mas.gov.sg Ministry of Finance www.mof.gov.sg Ministry of Trade and Industry www.mti.gov.sg Singapore Government Securities www.sgs.gov.sg Central Provident Fund www.cpf.gov.sg
Useful market websites Singapore Stock Exchange
Corporate debt. Most corporate bonds in Singapore are issued by governmentlinked companies and statutory boards, such as Temasek Holdings, Keppel Corp, etc. The three biggest issuers are the Housing Development Board (HDB), Public Utilities Board (PUB) and Land Transport Authority. The corporate bond market has been experiencing robust growth, increasing 30.9% yoy in 2010, with total bonds outstanding reaching S$97bn. Auction and placement mechanism. All SGS securities are auctioned using a uniform price auction. Successful bids, whether competitive or noncompetitive, will be allotted at the same uniform yield, which is the highest accepted yield (cutoff yield) of successful competitive bids submitted at the auction. All entities and individuals, including nonresidents, are free to bid on the auction. However, applications have to be submitted through MAS-certified primary dealers. In all SGS auctions, 40% of the total issuance amount is reserved for noncompetitive bids, one in which the bidder does not specify a price in percentage yield. For competitive bids, successful placement will depend on the price quoted. A lower yield represents a more competitive bid, as it is an indication of a lower interest rate accepted.
Derivatives Interest rate swaps. Singapore is the second largest interest rate derivatives market in Asia, according to the latest BIS survey. Last year, average daily turnover in OTC interest rate swaps reached SGD78bn, a 37% yoy increase (Bloomberg swap tickers are SDSWx with x standing for tenors of the IRS). Average ticket sizes are about SGD20mn, with tenors varying 1-15 years and actively traded from 8:30-17:00 (Singapore). Fixing is based on 6m SOR with T+1 settlement. The 6m SOR fixing means there is no zero bound on interest rates, which recently caused IRS yields to turn negative based on the FX implied interest rate fixing. Table 60: Summary statistics of Singapore derivative products and their markets
www.sgx.com Singapore Foreign Exchange Market Committee www.sfemc.org Investment Management Association of Singapore http://www.imas.org.sg
Product
Average daily
Average
trading volume
transaction size
Bid-ask spread
Bloomberg reference ABSIRFIX
Interest rate swaps 1-year
SGD500mn
5K DVO1
2bp
5-year
SGD200mn
10K DVO1
2bp
NA
10-year
SGD100mn
10K DVO1
2bp
NA
SGD200-300mn
SGD50mn
3-5bp
NA
5y tenor
5y tenor
Cross-currency swaps
Swaptions 1x5
NA
SGD50mn
2 vol
SDSP015 Curncy
5x5
NA
SGD5mn
2 vol
SDSP055 Curncy
Source: BofA Merrill Lynch Global Research
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FX market Singapore is the world’s fourth largest foreign currency exchange center, and the second largest in Asia behind Tokyo, making up more than 5% of total global turnover. Trading in the SGD averages about USD6-7bn daily in the spot market, and USD3-4bn in the forwards market. Like India, Singapore has two deliverable forwards markets: onshore and offshore. They share similar characteristics but the trading in the offshore forwards market pales in comparison to that in the onshore market. This favorable growth is likely to be sustained in this key regional financial hub, as greater economic activity is focused in emerging Asia. We maintain this view even though foreign exchange transaction trading volume slowed globally in 1Q 2012 after peaking at $4.7tn in October 2011, according to the latest BIS report. Table 61: Vital statistics and characteristics of Singapore’s FX market FX products
Tradable product
Avg daily trading volume
Avg trading size
Bid-ask Reuters spread reference Key facts
SGD Onshore Spot
SGD Spot
USD6-7bn USD3-10mn
SGD
SGD=D2 ▪ BofAML can trade SGD in the
0.0002-
spot market
0.0006 Forwards
Forwards
USD3-4bn
USD10-
SGD
50mn
0.00002-
PYSGD
▪ Forwards are available up to 10y tenors and are liquid for
0.0005
tenors shorter than 1y
SGD Offshore Forwards
Forwards
USD1bn
USD10-
SGD
50mn
0.00002-
PYOS
10y tenors and are liquid for
0.0005 Options
FX options USD500mn
USD3050mn
0.2-0.8vol
▪ Forwards are available up to tenors shorter than 1y
TTDE
▪ Options are available up to 10y tenors and are liquid for tenors shorter than 2y
Source: BofA Merrill Lynch Global Research
Investor base The Central Provident Fund is a major holder of Singapore bonds. Foreigners can access the Singapore bond market without needing pre-approval and there is no capital gain or income taxes on the bond investments. Generally, primary dealers, insurance companies, fund managers and finance companies are the key bond holders. Operationally, primary dealers provide liquidity into the SGS market by quoting two-way prices under all market conditions, and underwrite issuances of debt securities during SGS auctions. Currently, there are 13 banks certified as primary dealers with the MAS. Primary dealers also play a critical role by providing accurate and timely feedback to the central bank, and in turn assisting in the development of the SGS market in Singapore.
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The secondary market is dominated by banks, merchant banks and stock-broking firms that also participate actively in the SGS market by buying and selling securities, either as a principal or agent. Beginning June 2011, retail investors are also allowed to trade SGS on the Singapore Exchange (SGX). This provides an additional avenue for retail investors to diversify into safe but higher-yielding alternatives to bank deposits. Though there is no official estimate, we estimate that foreign ownership is approximately 20-25% of outstanding bonds.
Rules, regulations, capital controls and taxation Singapore is an open market economy with no capital controls. All entities and individuals, including nonresidents, are free to purchase government debt securities in Singapore, without any restrictions. Funds can also be freely remitted in and out of Singapore. Resident and nonresident investors are exempted from interest income tax and there is no capital gains tax. Bonds issued under the Qualifying Debt Securities (QDS) scheme are granted concessionary tax treatment, and there is no stamp duty imposed on any securities. Financial institutions and corporations enjoy a 10% concessionary tax on interest income.
Clearing and settlement Transactions are cleared on a delivery versus payment basis over the MAS Electronic Payment System (MEPS+) and MAS’ SGS book-entry clearing system. Trading of SGS securities is from 9:00-11:30 and 2:00-16:30 (Singapore) with a T+1 settlement date convention.
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Table 62: Summary of Singapore bond markets and products Instrument
Singapore Government Securities Bills (SGS Bills)
Singapore Government Securities Bonds (SGS Bonds)
Issuer
Monetary Authority of Singapore
Monetary Authority of Singapore
Currency
SGD
SGD
Principal
SGD1,000 (par)
SGD1,000 (par)
Tenor
3 months to 1 year
2, 5, 10,15 and 20 years
Interest rate/coupon
Issued at discount
Fixed Semi-annual
Coupon Payments
Zero coupon
Day Count Calculation
Actual/365
Actual/Actual
Amortization Schedule
Bullet
Bullet
Form
Registered
Registered
Amount outstanding
SGD59.6bn (as of June 2012)
SGD83.1bn (as of June 2012)
Trading
OTC (SGS Bills not listed on Singapore Exchange)
OTC (SGS Bills not listed on Singapore Exchange)
Quotation Convention
Yield
Yield
Settlement Period
T+1
T+1
Secondary Market
Average Daily Turnover
SGD1.568mn
SGD1,071mn
Bid/offer spread (0-5Y)
5bp
3bp
Bid/offer spread (5Y+)
NA
3bp
Average trade size
SGD5mn for on the runs (benchmarks) and off the runs
SGD5mn for on the runs (benchmarks) and off the runs
Clearing Mechanism
MAS Electronic Payment System (MEPS+)
MAS Electronic Payment System (MEPS+)
Major players
Banks, merchant banks, stock-broking firms
Banks, merchant banks, stock-broking firms
Trading hours Bidders
9:00-11:30 and 14:00-16:30
9:00-11:30 and 14:00-16:30
(Singapore time)
(Singapore time)
All entities or individuals, including nonresidents, may
All entities or individuals, including nonresidents, may
participate. Applications have to be submitted through an
participate. Applications have to be submitted through an
approved SGS primary dealer
approved SGS primary dealer
(As of Jun2012) Restrictions on Foreign Investment
No restrictions; foreign investors can freely remit funds in and No restrictions; foreign investors can freely remit funds in and out of Singapore
out of Singapore
Custodian
SGX central depository (CDP)
SGX' central depository (CDP)
Interest Income Tax
Individuals are exempted from interest income tax, but
Individuals are exempted from interest income tax, but
institutions and corporations are taxed at a 10%
institutions and corporations are taxed at a 10%
concessionary rate, for residents and nonresidents.
concessionary rate, for residents and nonresidents.
Capital gains Tax
No capital gains tax on government securities, for residents No capital gains tax on government securities, for residents and non-residents.
and nonresidents.
Entry/Exit Tax
None
None
Primary Auctions Auction Style
Uniform pricing; successful competitive and noncompetitive Uniform pricing; successful competitive and noncompetitive bidders will be allotted securities at a uniform yield, which is bidders will be allotted securities at a uniform yield, which is the cut-off yield of successful competitive bids submitted at
the cut-off yield of successful competitive bids submitted at
the auction.
the auction.
Average Issue Size
SGD2.3-3.7bn
SGD2-3bn (benchmark issues)
Minimum Amount of Tender
SGD1,000
SGD1,000
Source: BofA Merrill Lynch Global Research
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Sri Lanka Overview Claudio Piron +65 6678 0401
Sri Lanka’s government and corporate bond markets started operating actively in the early 1990s. The earliest instruments issued were non-marketable rupee loans and short-term Treasury bills. Since the financial sector reforms and restructuring in the late 1990s, the market has widened and deepened considerably. The Treasury bond was introduced in 1997 to meet the government’s medium and long-term financing needs. Foreign currency-denominated bonds were issued in 2001. Inflation-linked bonds were introduced in 2005, and the market was opened to foreign investors in 2006. The increase in Treasury bond maturities has aided the establishment of a medium-term yield curve and provided a benchmark for the corporate bond market.
Monetary policy Background. Following the political independence of Sri Lanka in 1948, the Central Bank of Ceylon was established in 1949 by the Monetary Law Act (MLA) and commenced operations on 28 August 1950. It was renamed the Central Bank of Sri Lanka (CBSL) in 1985. The objectives outlined in the MLA consisted of stabilizing prices and the exchange rate, and economic development objectives such as increasing production and employment.
Table 63: Sri Lanka ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005
-
B+ BBBBB+ B+ BBBBBB-
Policy framework. The MLA was amended in 2002 and redefined the central bank’s objectives into 1) maintaining economic and price stability, and 2) maintaining financial system stability with a view to encourage and promote the development of the productive resources of the country.
BBBBB+ B+ B+ BBBBBB-
The Central Bank of Sri Lanka (CBSL) uses monetary policy to maintain low inflation for sustainable long-term economic growth. It seeks to maintain a stable macroeconomic environment, a strong regulatory framework and a sound financial system. This is done by checking threats to the financial system through market surveillance and financial institution oversight of the payments system.
Source: Bloomberg, BofA Merrill Lynch Global Research
The MLA confers corporate status to the monetary board. An eight-member Monetary Policy Committee (MPC) was established in 2001 to assist the monetary board in formulating monetary policy. The MPC meets once a month to review monetary policy in light of the latest economic developments. Open market operations. The CBSL uses OMOs actively to manage liquidity. The interest rate corridor is bound by the repo rate on the lower end and the reverse repo rate on the upper end. This functions as a guide for overnight interest rates in the money market.
Chart 43: Key Sri Lanka CPI components 41%
Food & Non-alcoholic Beverages
17%
Transport & Communication Education
4%
Furnishing & Household Equipment
4%
Health
3% 11%
Others 0%
10%
Source: BofA Merrill Lynch Global Research
82
Daily auctions by way of repo transactions are conducted to absorb excess liquidity, and reverse repurchase transactions are conducted to inject liquidity. The standing facility is available to participating institutions faced with temporary shortage of or excess liquidity at rates defined by the bounds of the interest rate corridor. The CSBL conducts outright transactions by Treasury bill sales to absorb excess liquidity and outright purchases to inject liquidity.
24%
Housing, Water, Electricity
20%
30%
40%
50%
Base rate. The key benchmark policy rates are represented by the repo and reverse repo rates, which provide the respective floor and ceiling for the policy interest rate corridor.
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions
Lending and deposit facilities. The repo and reverse repo rates represent the key overnight deposit and lending rates for the money market. SLIBOR is Sri Lanka’s interbank lending rate, calculated daily by the CBSL according to rates supplied by local commercial banks.
Bonds Quote: Yield to maturity Settlement: T+2 Basis: Act/365
Reserve requirements. The statutory reserve requirement (SRR), or the proportion of the deposit liabilities that commercial banks are required to keep as cash with the central bank, is used occasionally to influence money supply.
Coupon frequency: Semi-annual
IRS Fixing: 6m SLIBOR
Economic drivers Sri Lanka came out of a long and protracted civil war in 2009, and the priority was to stabilize the economy, consolidate the budget deficit and bring inflation down. Sri Lanka has a US$2.5bn Stand-By Arrangement with the IMF that is aimed at consolidating macroeconomic stability while providing financial assistance to help the economy adjust to the post-conflict phase. Recent trends reveal that inflation is falling on a sustainable basis, while budget performance is also improving sharply. The external current account is being supported not only by the loan from the IMF, but by increasing inflows of foreign investment, including from the wider Sri Lanka Diaspora. Food accounts for the overwhelming macro driver of inflation at 41% of the basket. Above and beyond this, the current account deficit also has an important bearing on the currency.
Bond market The Public Debt Department (PDD) of the CBSL handles the government’s debt management and financing needs. The Domestic Debt Management Committee of the PDD meets every month to prepare the short-term and long-term borrowing plans after considering the government’s cash flow needs, the market conditions and monetary developments. The government’s rising fiscal deficit has led to a significant increase in outstanding Treasury bonds, from LKR0.2tn in 2000 to LKR1.8tn in 2011. The broad categories of bonds in Sri Lanka are T-bills, T-bonds, rupee loans and Sri Lanka Development Bonds (SLDB). Money market. Sri Lanka has an active interbank call money and Treasury bill market. The secondary market for Treasury bills is very active and includes outright sales and purchases, and repo and reverse repo transactions. Chart 44: Maturity profile of Sri Lanka government bonds (LKRbn) 400
Chart 45: Outstanding government debt (LKRbn) 2,000
LKR bn
Sri Lanka GB maturing (LKRbn)
350
1,500 300
1,000
250 200
500
150
0
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
50 0 2012
2014
2016
Source: CEIC, BofA Merrill Lynch Global Research
2018
2020
2023
2032
Rupee Loans
Sri Lanka dev elopment bonds
Treasury bills
Treasury bonds
Source: CEIC, BofA Merrill Lynch Global Research
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GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages
Other short-term money market instruments like certificates of deposit and commercial paper are not fully developed. Access to foreign investors is restricted.
OTC LKR – Market monitor CBSL - Central Bank page SLBF - Sri Lanka Primary Dealers’ Association
T-bills. Bills are issued on a discount basis with payment of interest upfront, and redeemable at par. The T-bills are available for 91, 182 and 364-day tenors. The minimum bid amount is LKR5mn and in multiples of LKR1mn.
Reuters pages CENSL1 – Central bank page LKPLDFIX – Sri Lanka implied forward fixings
T-bonds. Redeemable at par, T-bonds are conventional and inflation-linked bonds. Tenors for conventional bonds run 2-20 years. Coupon payments for conventional bonds are fixed and paid semi-annually. Inflation-linked bonds have 3y tenors and the coupon payment is linked with the Consumer Price Index. The minimum bid amount is LKR5mn and in multiples of LKR1mn. Average ticket size is US$1mn and bid-ask spread is 25bp. The average daily volume is US$10mn.
SLIBOR – Sri Lanka Interbank Offered Rates
Useful official websites Central Bank of Sri Lanka www.cbsl.gov.lk Ministry of Finance and Planning
Rupee loans. These are LKR-denominated bonds issued on a tap basis at par with the interest rate being determined administratively. Tenors for these bonds run 2-30 years. Coupon payments are fixed and paid semi-annually. The minimum bid amount is LKR100. Only Sri Lankan citizens are eligible to hold these bonds.
www.treasury.gov.lk Ministry of Industry and Commerce www.industry.gov.lk Department of Census and Statistics www.statistics.gov.lk
Sri Lanka development bonds. These are USD-denominated bonds issued for 2 and 3-year tenors. The interest rate is paid semi-annually and computed on a variable rate based on 6m LIBOR plus a fixed margin. They are redeemable at par. The income tax paid in Sri Lanka is reimbursed by the government.
Useful market websites Colombo Stock Exchange www.cse.lk
International sovereign bonds. Launched in 2007, the CBSL has auctioned five issues of these USD-denominated bonds. Tenors are 5 and 10 years and average issue size is around USD1bn.
Employees’ Provident Fund www.epf.lk
Auction and placement mechanism. The government conducts 3-4 Treasury bond auctions in a month depending on its financing requirement. Auction dates are announced two days prior to the auction. The PDD informs all participants in the Central Depository System (CDS) about the bonds available for auction to foreign investors.
Chart 47: Ownership of foreign debt of Sri Lanka (LKRbn)
Chart 46: Sri Lanka has allowed the LKR to be more market determined since February 2012 140
1,000
135 130
800
125
600
120
400
115 110
200
105
0
100 Jan-11
Jul-11
Jan-12 USD-LKR
Source: CEIC, BofA Merrill Lynch Global Research
84
Jul-12
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Multilateral Source: CEIC, BofA Merrill Lynch Global Research
Bilateral
Financial Markets
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Treasury bills are auctioned every Wednesday, with auction dates announced on the Monday before the auction. All investors are required to submit their bids before 11am on the auction date through primary dealers who bid competitively on a multiple price basis. Successful bidders are informed within two hours of the deadline for the submission of bids.
Derivatives market Forward market. Onshore deliverable forwards are available for hedging FX exposure subject to documentary proof of trade or Treasury bond investment. The overall liquidity of the market is poor, with the most liquid segment being less than six months. The bid-ask spread is LKR 0.08 and average ticket size is US$1mn. The average daily volume is US$50mn. Foreign currency spot and forward transactions have to be channeled through licensed commercial banks having an authorized dealer license from the CBSL. The NDF and IRS markets exist but are highly illiquid. Also there is no local CCS market.
FX market Sri Lanka follows a managed float exchange rate regime. After experimenting with a dual exchange rate regime in 1967-94, FX controls were loosened gradually and a uniform exchange rate was introduced that was managed against a basket of currencies. The LKR is fully convertible on the current account, but only partly convertible on the capital account. The CBSL intervenes in the FX market daily to curb excessive volatility in the LKR. The FX market can be classified as a client or retail market, and an interbank or wholesale market. The main participants in the interbank market are commercial banks that act as authorized dealers in the foreign exchange. The commercial banks that act as authorized dealers buy and sell foreign exchange from their customers in the retail market. FX transactions take place through the spot market and the forward market. Foreign trade/service-related transactions are freely permitted. However, capital account transactions require approval from the Exchange Control Department. Table 64: Vital statistics and characteristics of Sri Lanka's FX market
LKR Onshore Spot
Forwards
LKR Offshore Forwards
Tradable FX products
Avg daily trading volume
Bid-ask spread
Reuters reference
LKR Spot
USD 50m
LKR 0.08
LKR=
LKR Forwards
USD 50m
LKR 0.20-0.35
LKRF=
NDFs
Highly Irregular
DBNDG
Key facts ▪ No restrictions on local trade/service related and stock market transactions. ▪ Capital account transactions require prior approval from Exchange Control ▪ Trading Hours: 9:00-17:00 (Sri Lanka) ▪ Documentary evidence required ▪ Forwards are allowed for hedging against stock market-related transactions up to four days from the date of purchase. Settlements must be routed through SIERAs ▪ LKR is non-deliverable ▪ ISDA documentation is required.
Source: BofA Merrill Lynch Global Research
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Investor base The primary market for Treasury bills and Treasury bonds is dominated by authorized dealers, primary dealers, insurance companies and mutual funds. There are 11 primary dealers appointed by the CBSL that bid competitively in the auctions and are responsible for providing liquidity to the secondary market by quoting bid and offer yields for the government securities. The Employees Provident Fund is the largest holder of Treasury bonds. Foreign holdings of T-bills and bonds are both estimated under 10% of outstanding amounts. Foreign investors can purchase up to 12.5% of total outstanding government bonds and T-bills. Table 65: Ownership breakdown of local Treasury bonds and bills (as of December 2011) Ownership of Ownership of bills (LKRbn) % of total bonds (LKRbn) % of total Central bank Commercial banks Departmental and other official Employees Provident Fund Insurance & Finance Other Provident Funds Private & Other Savings institutions Total
170 186
29% 31%
6
1%
0 11 1 158 59 591
0% 2% 0% 27% 10%
Central bank Commercial banks Departmental and other official Employees Provident Fund Insurance & Finance Other Provident Funds Private & Other Savings institutions Total
0 207
0% 11%
37
2%
927 34 8 360 246 1,819
51% 2% 0% 20% 14%
Source: BofA Merrill Lynch Global Research, CEIC
Rules, regulations capital controls and taxation Foreign investors and nonresidents can hold up to 10% of the total conventional Treasury bonds and Treasury bills outstanding. Foreign investors are required to register with licensed commercial banks or primary dealers at the Central Depository System maintained by the PDD. They are allowed to enter repo and reverse repo transactions, with eligible investors only using T-bills as collateral. To invest in T-bonds, foreign investors are required to open a rupee account called a Treasury Bond Investment External Rupee Account with a licensed commercial bank (LCB). The LCB opens a security account with CDS on behalf of the investor and is allowed to trade Treasury bills and Treasury bonds freely in the secondary market. 3 For Treasury bills and Treasury bonds, a 10% withholding tax on interest income is collected at the primary issue. No stamp duty is payable. For rupee loans, a 10% withholding tax on interest income will be deducted from coupon payments. For Sri Lanka Development Bonds, income tax paid in Sri Lanka will be reimbursed.
Clearing and settlement Securities are scripless and settled electronically. Transactions are cleared on a delivery versus payment (DVP) basis over the Real Time Gross Settlement System (RTGS). Settlement of successful bids takes place on T+2 days from the auction date. Investors are required to maintain accounts with commercial banks or primary dealers for the cash settlement of their transactions. In the secondary market, primary dealers and commercial banks quote their bid daily and offer prices for government securities. Investors can select from the best deals.
3
86
CBSL PDD T-bill Investor Guide, CBSL PDD T-bond Investor Guide.
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Table 66: Summary of Sri Lanka bond markets and products Treasury bills
Treasury bonds
Rupee loans
Sri Lanka Development Bonds
Tenor
Democratic Socialist Republic of Sri Lanka 91, 182 and 364 days
Democratic Socialist Republic of Sri Lanka 2-30 years
Democratic Socialist Republic of Sri Lanka. Bank of Ceylon is paying Agent 2 and 3 years
Currency Issuance Method
Sri Lanka rupees (LKR) Auction basis
Democratic Socialist Republic of Sri Lanka Conventional bonds: 2,3,4,5,6,10,15 and 20 years; inflation-linked bonds 3 years Sri Lanka rupees (LKR) Auction basis
Auction system Bidding at Auctions
Through competitive bidding price By primary dealers
Eligible Investors
Sri Lankan citizens (no restriction on purchase of bonds). Foreign country funds, mutual funds or regional funds, Corporate bodies incorporated outside Sri Lankan and citizens of foreign states (10% of the total conventional Treasury bills outstanding is available for foreign investors) Bills are issued on a discount basis with payment of interest upfront.
Issuer
Interest Payment
Minimum Amount of a Bid at Primary Auction Minimum unit of an investment Method of Sale in the Primary Market Interest Rate Redemption Taxation
Secondary Market Trading
Sri Lanka rupees (LKR) US dollars (USD) Tap basis and open until fully subscribed Auction basis or decision to close by the issuer Through competitive bidding price Through competitive bidding margin By primary dealers Directly by individuals/institutions or Designated agents appointed by the through primary dealers Central Bank of Sri Lanka Foreign citizens and entities, Nonresident Sri Lankan citizens (no restriction on Sri Lankan citizens Sri Lankans, Sri Lankan dual citizens, purchase of bonds). Foreign country authorized dealers, primary dealers, and funds, mutual funds or regional funds, specified companies that have entered Corporate bodies incorporated outside Sri Lankan and citizens of foreign into agreements with the Board of states (10% of the total conventional Investment of Sri Lanka and insurance companies registered under the Treasury Bonds outstanding is available for foreign investors) Regulation of Insurance Industry Act Conventional bonds: fixed and semi- Fixed and semi-annual coupon Interest paid semi-annually and annual coupon payments. Inflationpayments computed on variable rate based on 6linked bonds: coupon payments based month LIBOR plus a fixed margin on Consumer Price Index Rupees 5mn (Rs. 5,000,000/=) and in Rupees 100 (Rs. 100/=) Minimum investment at the auction is multiples of Rupees 1mn (Rs. USD100,000/=. In the secondary market 1,000,000) minimum investment is USD 10,000/=.
Rupees 5mn (Rs. 5,000,000/=) and in multiples of Rupees 1mn (Rs. 1,000,000/=) [Is this the best way to list currency?] 1 Rupee (Re. 1/=) 1 Rupee (Re. 1/=) Offered weekly via competitive auctions Offered via competitive auctions to to primary dealers on multiple price bases primary dealers Market determined Market determined Face value of the bill will be paid at Face value will be paid at maturity. maturity 10% withholding tax on interest to 10% withholding tax on interest to resident and 15% to nonresident resident and 15% to nonresident collected at the primary issue. No collected at the primary issue. No stamp duty. stamp duty. Through primary dealers or Licensed Through primary dealers or Licensed Commercial Banks. Commercial Banks.
Issued on tap basis at par Administratively determined Securities are redeemed at par upon maturity. 10% withholding tax on interest to resident and 15% to nonresident collected at the primary issue. No stamp duty. By registration at the PDD
Offered via competitive auctions to designated agents Securities are redeemed at par upon maturity. Income tax paid in Sri Lanka will be reimbursed by the issuer. Through designated agents by registration at the PDD
Source: CBSL, BofA Merrill Lynch Global Research
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Taiwan Overview Albert Leung + 7137
Taiwan offers a liquid investment grade bond market, but access to foreign investors is cumbersome and foreign participation is small compared to other Asia markets. In November 2010 and January 2011 the government reduced onshore access to foreign investors to 30% of their total investment portfolio in government bonds. Additionally, the reserve requirement on nonresident local currency accounts was raised to 90% of balances on 30 December 2010, implying no interest paid. Locally, banks account for some 40% of ownership, followed by the insurance sector at around 25%.
Monetary policy
Table 67: Taiwan Ratings Profile (Long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Aa3 Aa3 Aa3 Aa3 Aa3 Aa3 Aa3 Aa3 Aa3 Aa3 Aa3 Aa3 Aa3
AA-u AA-u AAAAAAAAAAAAAAAAAAAA AA+
AAAAAA AA AA AA AA AA AA AA AA AA -
Background. Originally inaugurated in Canton, the Central Bank of China (CBC), transferred to Taipei in 1949, resumed operations in 1961 and modernized to its present form in 1979 via the Central Bank of China Act. The CBC’s responsibilities include ensuring financial stability, sound banking, stable domestic prices and external currency valuation, and fostering economic development. At an operational level, the bank is involved with monetary management, treasury agents, clearance and settlement, and FX management. Legally, the CBC comes under the Executive Yuan (the Executive body of the government), which together with the president also appoints the board of directors. There are 15 directors, including representatives from the Ministry of Finance and Ministry of Economic Affairs that are not subject to the five-year term limit. The board of directors meets at the end of each quarter to decide on policy. Current Governor Fai-Nan Perng has been at his post since 1998. Policy framework. The CBC’s primary policy tool is its discount window, which operates on two levels. The first is the discount rate that is used as a policy signal and an avenue for banks to access discounted loans by using eligible banker’s acceptances, trade acceptances and promissory notes. The traditional tightening and easing cycle is represented by quarterly increments of 12.5bp.
Source: BofA Merrill Lynch Global Research
The second discount window tool is short-term accommodations, where a bank can compensate for a reserve deficiency by drawing on promissory notes made payable to the CBC. The promissory notes can be secured on a collateral and non-collateralized basis. Short-term accommodations are made for a maximum 10 days and cannot be for more than 10% of the bank’s required reserves.
Chart 48: Key Taiwan CPI components
Reserve requirement hikes are another tool open to the CBC; however, this is seldom used, with the CBC using OMO more. The bank does not have an inflation target or single policy target, but it does announce an M2 target range for each year; 2.5-6.5% has been set for 2012.
Edu & Ent
17%
Food
26%
Housing
28%
Others
29% 0%
10%
20%
Source: BofA Merrill Lynch Global Research
88
30%
Base rate. The benchmark policy rate is the rediscount rate, the discount rate on 10-day loans to banks. The overnight rate refers to the rate at which banks borrow and lend to each other.
40%
Open market operations. OMOs represent the most important tool for the CBC and are actively used to manage reserve levels and interbank call-loan interest rates. The instruments used in the OMOs include government bills and bonds, and negotiable certificates of deposit (NCDs) issued by the CBC. These NCDs can be issued outright or transacted on a repo basis to manage excess liquidity.
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions
Typically, the CBC issues NCDs of 1, 3 and 6-month tenors daily and adjusts the rates paid on NCDs by around 7bp for every 12.5bp hike in the discount rate. Outstanding NCDs were estimated at TWD6.7tn as of July 2012. Occasionally the CBC will auction NCDs of 1 or 2-year tenors as a means to absorb excess liquidity more aggressively.
Bonds Quote: Yield to maturity Settlement: Variable; typically T+1 or T+2 Basis: Act/365 Coupon frequency: Semi-annual
IRS Fixing: 90-day CP rate Coupon frequency: Quarterly, floating/fixed Act/365
CCS
Reserve requirements. The blended required reserve ratio (weighted average of different type of deposits) is around 5.5% currently.
Fixing: 6m USD LIBOR Coupon frequency: Semi-annual USD day count Act/360, local Act/365
Lending and deposit facilities. As above, banks can cover reserve shortfall by borrowing from the CBC at the discount rate. Banks can also borrow without collateral, but a higher lending rate will apply. For deposits, CBC issues NCDs regularly.
Fiscal policy Taiwan is often viewed as a regional leading indicator for the export and techoriented export cycle. This reflects Taiwan’s high-tech export profile and the fact that it is one of the first to release export orders, trade and industrial production data for the region. Despite the leading nature of Taiwan’s economic data, the swap curve is very much driven by US rates and the US economic cycle.
Bond market Taiwan’s local fixed income market ranges in maturity from 2-30 years. Typically the issuance is evenly distributed along the 5-20 year part of the curve. We expect gross issuance to be TWD730bn in 2012, with the pace of issuance evenly distributed through the year. Money market. Treasury bills, commercial paper, bankers’ acceptances and NCDs are the four key instruments of the money market. In terms of outstanding size and issuance, commercial paper dominates the market, followed by NCDs, Treasury bills and bankers’ acceptances.
Chart 49: Maturity profile of Taiwan government bonds (TWDbn)
Chart 50: Outstanding government bonds and bills (TWDbn) TWD bn 5000
10
4500
9
4000
8
400
3500
7
350
3000
6
2500
5
2000
4
250
1500
3
200
1000
2
500
1
500 Taiw an GB maturing (TWDbn)
450
300
150
0
100
Jun-05
0 Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
50 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2040 2042 Source: CEIC, Taiwan CBC, BofA Merrill Lynch Global Research
Treasury bills
Negotiable certificates of deposits
Gov ernement bonds
Bankers acceptances (RHS)
Source: CEIC, Taiwan CBC, BofA Merrill Lynch Global Research
89
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Bloomberg pages TWD Curncy ALLQ FX rates TWD OTC – Market monitor CBRC – Central bank page NTMM – Taiwan money market rates TDON – Interbank and overnight rates MOSB TWD – Most traded bonds TWDI – Taiwan Interbank Money Center TFEX – Taipei Forex Inc.
Reuters pages CBCINDEX – Central bank page TAIFX1 – Taipei Forex Inc. TWCP= – Primary market CP fixing TWCPE – Secondary market CP fixing TWFRA – Taiwan FRAs
Useful official websites Central Bank of Taiwan (CBC) www.cbc.gov.tw Ministry of Finance www.mof.gov.tw National Treasury Agency www.nta.gov.tw Ministry of Economic Affairs www.moea.gov.tw Council for Economic Planning & Development www.cepd.gov.tw Financial Supervisory Commission www.fscey.gov.tw
Useful market websites GreTai Securities Market www.otc.org.tw Taiwan Depository and Clearing Corporation
www.tdcc.com.tw
Commercial paper (CP). Corporates issue commercial paper for underlying business (trade) or non-business (finance) activities, and may require a bank guarantee, though this restriction is exempt from Ministry of Finance preapproval. CP rates are fixed in the secondary market at 11am among 22 contributors (see Reuters page TWCPBA), from 10 days to 180 days. The threemonth fixing rate is the reference rate fix for the floating leg of the IRS market; it is calculated by taking the average of the mid-rates after excluding the bottom and upper quartiles. The CP tenors range from 1 week to 1 year and are issued at discounts. Negotiable certificates of deposits. NCDs issued by commercial banks are estimated at TWD231bn outstanding, net of the TWD6.7tn central bank NCD issuance noted above. Typically commercial banks issue up to 12-month tenors. The most important NCD issuance is the TWD100bn, 364-day issued by the CBC in the first week of each month. Any changes in the total size or issuance yield could be interpreted as a signal for a change in monetary policy. Table 68: Composition of Government debt Central government Local government Total bonds outstanding
Debt (TWDmn)
% of total
4,689,616 134,745 4,824,361
97% 3% 100%
Source: CEIC, Taiwan CBC, BofA Merrill Lynch Global Research
Local government bonds. Benchmark tenors are provided by the 5, 10 and 20year issues, all of which were issued four times in 2010. The outstanding maturity structure is focused between 2012 and 2016, accounting for 44% of the outstanding TWD4.3tn in government bonds. These bonds are auctioned monthly with a fixed coupon and bullet payment based on a scheduled quarterly issuance by the CBC. Trading volumes are very active and estimated at TWD116tn in 2012, according to Gretai Securities. Auctions and placement mechanism. An issuance calendar is released at the beginning of each year specifying the tenors of bonds scheduled to be issued. The actual issue size for each quarter is then specified on the 23rd of the month preceding the quarter. The CBC commissions central government bond dealers to participate in the government bond auctions and placements. To encourage active bidding and reduce the funding cost of the Treasury, the CBC switched to a single yield auction method for auctioning CGBs in July 2004. Competitive bids must be expressed as a yield. The minimum bid size is TWD100mn, and thereafter in multiples of TWD10mn. The bids are accepted in ascending order of bidding yield. To be accepted, the bidding yield must be lower than the maximum acceptable yield set by the Ministry of Finance. All successful bidders are required to settle awarded securities at the highest accepted yield at the auction. An electronic bidding system has been in place since March 2001. Auction results are published on the CBC and Ministry of Finance websites.
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Generally, Taiwan bonds trade in a very narrow range, as the absence of fresh foreign investors together with the CBC likely to stay on hold for now means major opportunities do not exist. With the spread between 10y Taiwan Government Bond (TGB) and 10y UST now merely 30-40bp compared to well over 200bp pre-Lehman, investing overseas to search for higher yields may become a less attractive option. However, the overall size of TGB market, especially for the long tenor ones, is still not big enough for the pension funds. As a result, we do not expect the narrower TGB vs UST spread to necessarily lead to stronger TGB.
Derivatives market Interest rates swaps. IRS provide a very liquid hedging market out to 15 years, with the greatest liquidity up to 5 years. The 90-day CP rate provides the reference for the floating leg of the swap. Offshore investors are unable to access the onshore IRS market, but can hedge effectively through the liquid nondeliverable IRS. The divergence between the bond-swap spread can be considerable at the back end due to corporate liability and asset manager portfolio hedging demand. Cross currency swaps. CCS are another very liquid hedging market that extends to 10 years and offers the most liquidity up to 5 years. Again, offshore investors are unable to access the onshore CCS market and are limited in hedging ability in the nondeliverable CCS market due to its illiquidity. Bond futures. A 10-year bond futures contract is offered by the Taiwan Futures Exchange based on a TWD5mn face value and 3% coupon. Deliverable bonds are those cheapest to deliver and include book-entry government bonds that are maturing in not less than 8 years and 6 months. Delivery months are the standard futures quarters, but unfortunately the contracts are not liquid and actively traded. There also exists a 30-day CP interest rate futures market with a face value of TWD100mn, and cash settled with settlement price based on the volume weighted average price. Table 69: Summary statistics of Taiwan derivative products and their markets Avg daily Avg Bloomberg Prod. trading volume transaction size Bid-Ask spread reference Interest rate swaps 1-year
TWD8bn
TWD1bn
1bp
5-year
TWD5bn
TWD300mn
2bp
NTSW01 Curncy NTSW05 Curncy
10-year
TWD1bn
TWD300mn
5bp
NTSW010 Curncy
ND Interest rate swaps 1-year
TWD5bn
TWD2bn
2bp
TRSWNI1 Curncy
5-year
TWD2bn
TWD500bn
3bp
TRSWNI5 Curncy
10-year
TWD500mn
TWD250bn
5bp
TRSWNI10 Curncy
USD50-100mn Bonds page 0#ZATSY=
Useful websites South Africa Reserve Bank http://www.reservebank.co.za National Treasury http://www.treasury.gov.za Central Statistics Office http://www.statssa.gov.za Financial Services Board (FSB) http://www.fsb.co.za Johannesburg Securities Exchange (JSE) / Bond Exchange of South Africa (BESA) http://www.jse.co.za Strate (central securities depository) http://www.strate.co.za
Fixed coupon debt. The remaining 69% of debt has a fixed coupon. Government bonds are normally referenced by their serial numbers. For example, the most liquid bond on the curve is the 13.5 of 2015 is R157. The R186 (10.5 of 2026) is the next most liquid issue. However, liquidity is high across the curve with bidoffer around 2-3bp for up to USD15-30K DV01. Auction and placement mechanism. The average maturity of domestic debt is around 10 years for fixed bonds and slightly higher at 12 years for inflation-linked bonds. The Treasury plans to issue US$18bn on average in long-term debt over the next two years. The Treasury does not issue new bonds frequently, but it introduced two new long-end bonds and plans three new inflation-linked bonds in the current fiscal year. An unusual feature of the bond market is that certain bonds, such as the R157, R186 and R2048, have their maturities split over three years as the Treasury attempts to improve liquidity and manage refinancing risk by reintroducing these bonds. The government’s risk management framework sets benchmarks for the composition of debt in order to reduce risks due to fluctuations in interest rates and inflation. Specifically, foreign debt is capped at 20% of total debt and the composition of domestic debt is aimed to consist of 70% fixed and 30% non-fixed bonds. However, the share of non-fixed rate debt increased from 26.3% in 2007/08 to 36.3% in 2011/12, as the government increased T-bill and inflationlinked bond issuance to finance the borrowing requirement due to the onset of the global crisis. Issuance in non-fixed rate debt should decline to meet the benchmark. Bond auctions are held by the SARB through primary dealers every Tuesday and announced on the preceding Wednesday. Auctions are uniform yield Dutch, and the results are displayed on the SARB website. CPI linkers are auctioned twice per month on Fridays. T-bill auctions take place weekly and are offered in 91, 182, 273 and 364-day tenors. In addition, noncompetitive auctions are conducted in fixed rate bonds, which provide primary dealers a 48-hour option of taking up an additional 30% of their allocation at the auction clearing yield. Switch auctions are also conducted regularly, in which short-term bonds are exchanged for longer-term bonds. Table 106: Summary statistics of South Africa derivative products and their markets Product Interest rate swaps 1-year 5-year 10-year
Avg daily trading volume
Avg transaction Size
Bid-Ask spread
Bloomberg/Reuters reference
USD50-100K DV01 USD100K DV01 USD100-200K DV01
USD10-20K DV01 USD10-20K DV01 USD10-20K DV01
3-4bp 3-4bp 4-5bp
SASW1/ZARVIEW SASW5/ZARVIEW SASW10/ZARVIEW
USD100mn
USD25mn
5-6bp
SABS/ICAPZAR
Basis swaps Source: BofA Merrill Lynch Global Research
Derivatives market South Africa is probably the most liquid and sophisticated EM local currency derivatives market in the European time zone. The market for IRS, FRAs and forward swaps is very liquid, particularly up to 10y. IRS and FRAs trade in tickets from USD5-50K DV01 with average Street ticket between USD10-20K. There is a reasonably active FRA market all the way to the 21x24 tenor and the IRS market goes all the way to 30 years with an unusually big list of local players active in the very long end of the curve.
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There is also an active interest rates vol market up to 3y. The FX vol market is available with vanilla and exotic instruments against EUR and USD. The JSE (BESA merged into JSE in 2009), the central exchange authority for bonds, also deals with financial and commodities futures and options. It also provides three widely used bond indices: ALBI, an all-bond index containing the top 20 vanilla bonds by liquidity and market capitalization; GOVI, the top 10 government bonds within ALBI; and OTHI, the remaining bonds from ALBI. CPI bond indices also now exist, and CILI is the composite across issuers.
FX market The South African rand (ZAR) was introduced in 1961 and is today a fully convertible and deliverable currency. The stated policy of both the SARB and Treasury is to opportunistically increase the level of foreign exchange reserves during periods of Rand strength. This policy is to help mitigate rand strength, lower volatility and raise the level of reserves, which at USD42bn are only 11% of GDP. The SARB uses foreign-exchange swap transactions to drain rand liquidity from the market on a temporary basis. These swaps can be conducted for maturities of up to 12 months and can be conducted for normal liquidity management or to sterilize foreign exchange purchases. When the swaps mature, the US dollars are returned to the SARB which, in turn, delivers the rand to the counterparties. The bank might opt to roll these swaps for future maturities when they mature. However, shorterdated swaps are also conducted in the opposite direction; that is, to inject liquidity. In the past, SARB was seen buying foreign currency against ZAR to counterweight investment inflow. However, outright interventions are rare and SARB follows a less active approach compared to other countries in EEMEA to intervene in the market. The average daily spot turnover ranges around USD7-8bn, much of which is against USD. A typical ticket size is around USD30mn with a bid-ask of ZAR 0.05. It is one of the top three liquid EM currencies (ex-Asia) with options, FX forwards and swaps all liquid out to 1y. In forwards and swaps, the average ticket size is between USD50-100mn with a bid-ask spread of ZAR 0.03-0.05 and daily volume of USD1bn for forwards and USD9bn for swaps. In options, daily volume averages around USD0.3bn and the typical ticket size is USD20mn. Options are available up to five years but liquid only up to one year. Trading hours are 07:0017:00 GMT, and liquidity drops considerably outside of London hours. Table 107: Vital statistics and characteristics of South Africa’s FX market Avg daily Avg Bloomber FX Tradable trading trading Bid-Ask g/Reuters products product volume size spread reference Key facts ZAR Spot Forwards
Options
ZAR Spot USD7-8bn USD30mn ZAR 0.05 ZAR/ZAR=> ▪ Mainly trades against USD. Forwards & USD1bn for USD50mn ZAR 0.03SAFS/ ▪ Liquid up to 1 year. Swaps forwards, for forwards; 0.05 ZAR=> USD9bn for USD100mn swaps up to 1y 0.75 vol USDZARV / ▪ Options available till tenors of FX Options USD0.3bn USD20mn ZAR=> 5y but are liquid up to 1y.
Source: BofA Merrill Lynch Global Research
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Investor base South Africa’s domestic institutional investor base (public and private pension funds, unit trusts, and insurance) is the largest in EEMEA in absolute terms, as well as in percentage of GDP. Total AUM amounted to USD578bn by the end of 1Q12, or 150% of GDP, equally dominated by pension funds and insurers, with each accounting for about 40% of total assets. The growth in the overall sector has been led by unit trusts, with growth averaging 28% yoy from 2003 to 2007, followed by pension funds (16%) and insurance companies (13%). South African institutional investors favor equity over fixed income in their asset allocation. In 1Q 2012, equity instruments registered 50% of AUM by pension funds, unit trusts and insurance. Pension funds’ allocation to equity has been on a gradual upward trend since 2003 at the expense of fixed income securities. Institutional investor holdings of fixed income securities have remained at 23% of total assets since 2Q 2011. The pension system continues to be dominated by non-contributory means-tested government grants financed by general revenues. Occupational retirement plans are limited to those employed in the formal sector. South Africa’s economic structure is such that unemployment levels are elevated and many people lack access to an affordable retirement funding plan. To alleviate this concern, the government is hoping to introduce a mandatory earnings-related contributory system to complement redistributive social assistance. This opens up the scope for expansion of the institutional investor base in South Africa, though admittedly the pension reforms and efforts to boost comparably very low labor participation rates will likely be a long process. The government has also continued its gradual relaxation of exchange controls on domestic investors. As part of a package of measures to respond to surging portfolio inflows and to concretize the announcements made by the minister in the 2010 MTBP, the National Treasury announced a 5 percentage point increase in the limit to the percentage amount that institutional investors can invest offshore (now 25% for retirement funds).
Chart 90: Distribution of government securities holdings Financial Institutions Rest of World
70%
Domestic gov t. bonds held by non-residents (ZAR bn) Domestic gov t. bonds held by non-residents (% of total, rhs)
Institutional Inv estors
60%
300
35
50%
250
30
40%
200
30%
150
20%
100
10%
50
5
0%
0
0
2007
2008
Source: BofA Merrill Lynch Global Research, SARB
146
Chart 91: Foreign holdings of S. African local currency government bonds
2009
2010
2011
2007
25 20 15 10
2008
2009
Source: BofA Merrill Lynch Global Research, Haver, SARB
2010
2011
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Short-term debt in the form of T-bills is primarily held by local commercial banks, which held 76% of the total amount of bill issuance in 2011/12. Only 1% of T-bills was held by international investors. In contrast, long-term debt holdings are dominated by institutional investors, primarily pension funds among them. However, the share of pension funds in ownership of domestic bonds has decreased from 47.2% in 2007 to 33% in 2011, while that of foreign investors rose from 10.6% to 29.1% over the same period. Domestic financial institutions hold around 24% of outstanding debt in bonds.
Rules, regulations, capital control and taxation Foreign investors are not specifically subject to any exchange control restrictions on the convertibility and repatriation of their local sale proceeds. Income and capital are freely repatriated to foreign investors. There is no withholding tax on interest payments.
Clearing and settlement JSE is the central exchange authority for bonds and clearing/settlement occurs via Strate. All government bonds and most others are listed on it. Table 108: Summary of South Africa bond markets and products Instrument Treasury bills Issuer Currency Principal Tenor Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Form Amount outstanding (as of July 2012) Secondary Market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism Major players Trading hours Bidders
Regulations Restrictions on Foreign Investment Custodian Withholding Tax Capital gains Tax Entry/Exit Tax Primary Auctions Auction Style Average Issue Size Minimum Amount of Tender
Government bonds
Inflation-linked bonds
South African Treasury ZAR ZAR10,000 (par) 91, 182, 273 and 364 days Issued at discount Zero Act/365 Bullet Scripless ZAR158bn
South African Treasury ZAR ZAR1,000,000 (par) Up to 35 years Fixed Semi-annual Act/365 Bullet Scripless ZAR849bn
South African Treasury ZAR ZAR1,000,000 (par) Up to 22 years CPI-linked Semi-annual Act/365 Bullet Scripless ZAR146bn
OTC and Stock Exchange Yield T+3 USD0.5bn 1-3bp NA USD3-6mn Strate Primary dealers 9:00-17:00 (South Africa) All entities or individuals, including nonresidents, may participate. Mostly local banks, investment funds, corporates.
OTC and Stock Exchange Yield T+3 USD2bn 2-3bp 2-3bp USD3-6mn Strate, Euroclear Primary dealers 9:00-17:00 (South Africa) All entities or individuals, including nonresidents, may participate. Mostly local banks, investment funds, corporates.
OTC and Stock Exchange Yield T+3 USD0.1-0.2bn 2-3bp 2-3bp USD25-50mn Strate, Euroclear Primary dealers 9:00-17:00 (South Africa) All entities or individuals, including nonresidents, may participate. Mostly local banks, investment funds, corporates.
No restrictions Yes None None None
No restrictions Yes None None None
No restrictions Yes None None None
Competitive tender in a Dutch auction format via Competitive tender in a Dutch auction format via Competitive tender in a Dutch auction format via primary dealers and non-competitive tender primary dealers and non-competitive tender primary dealers and non-competitive tender ZAR0.5-1bn ZAR2-3bn ZAR0.5bn None None None
Source: BofA Merrill Lynch Global Research
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Turkey Overview Arko Sen +44 20 7995 1576
Despite growing headwinds for global growth, Turkish economic activity has held up relatively well and has bounced back from its 1Q 2012 trough. MENA partially offsets the weakening Eurozone demand for Turkish exports, stable TRY and interest rates keep business and consumer sentiment positive, and the labor market remains in good shape. We see room for a policy response if Europe deteriorates, particularly on the fiscal side. Though it remains large, the current account continues to adjust given lower oil prices and economic rebalancing, but we expect the latter to hit rock bottom by 4Q 2012. Moody’s upgrade put an investment grade rating back on the horizon as soon as 2013.
Turker Hamzaoglu +44 20 7996 2417 Jean-Michel Saliba +44 20 7995 8568
Monetary policy Background. Following the 2001 crisis, Central Bank of Turkey (CBT) law was amended significantly that April to ensure the CBT’s independence, prevent fiscal financing and make price stability the primary objective. The CBT will support the government’s growth and employment policies, provided it is not in conflict with its price stability objective. The Monetary Policy Committee (MPC) was established, chaired by the governor and composed of vice governors, a board member and a member to be appointed on the governor’s recommendation.
Table 109: Turkey ratings profile (long-term local currency) Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Ba1 Ba2 Ba2 Ba3 Ba3 Ba3 Ba3 Ba3 B1 B1 B1 B1 B1
BB BB BB BBBBBBBBBBBBB+ BBB+
Policy framework. The CBT adopted an inflation-targeting regime in 2006 after implicit inflation-targeting during 2002-05. The inflation target is set jointly by the government and the CBT and is currently 5% for 2012, 2013 and 2014.
BB+ BB+ BB+ BB+ BBBBBBBBB+ B B B B
The CBT has judged since late 2010 that it was appropriate to preserve an unorthodox flexible monetary policy, with flexibility provided by the interest rate corridor coupled with effective liquidity management. The 2012 monetary policy framework introduced a regime-switching model that the CBT uses to tighten or ease liquidity conditions and its blended cost of funding on a discretionary, daily basis. On “exceptional” days, FX daily selling auctions may amount to more than US$50mn, direct FX intervention will be in the cards and there will be no daily TRY 1-week repo auctions at the fixed policy rate, but any 1-month repo auctions are unaffected.
Source: Bloomberg, BofA Merrill Lynch Global Research
On “normal” days, any FX daily selling auctions will be limited to US$50mn; there will be no direct FX intervention; daily TRY 1-week repo auctions will take place at the fixed policy rate, with size at the CBT’s discretion, though the minimummaximum size is pre-announced monthly following MPC meetings; and competitive weekly 1-month Dutch repo auctions will take place on Fridays, the upper limit of which is pre-announced monthly following MPC meetings. Chart 92: Key CPI components for Turkey Furnishings
7.4
Housing
16.4
Transport
16.7
Food
26.2 0
10
Source: BofA Merrill Lynch Global Research
148
Base rate. Monthly, the CBT sets the benchmark policy rate, which was shifted from the overnight borrowing rate to the one-week repo rate in May 2010. Banks bid for the amount they want to borrow at the fixed rate during normal days while 1-week repo funding is withheld during exceptional days.
20
30
Minutes are published within five working days of the meeting, while inflation and financial stability reports are issued quarterly and bi-annually, respectively. In addition to the policy rate and the monthly funding parameters announced during the MPC meeting, other tools such as the overnight interest rate corridor and reserve requirement rates (RRRs) have been used by the CBT.
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Typical conventions
Open market operations. The CBT may, with an aim to effectively manage the liquidity in the system, conduct open market operations such as issuance of central bank bills, outright purchase and sale of securities, repo and reverse repo, lending and borrowing securities and lending and borrowing of TRY deposits, and act as an intermediary in these operations.
Bonds Quote: Yield to maturity Settlement: T+0 or T+1 Basis: Act/Act (Act/365 for zero coupon) Coupon frequency: Semi-annual for 5y and 10y,
Lending and deposit facilities. The overnight deposit rate and overnight lending rate, which form the overnight interest rate corridor, are the main lending and deposit facilities. The CBT also maintains an overnight borrowing facility for primary dealers via repo transactions at a rate 50bp lower than the ceiling of the overnight corridor. Additionally, there is the late liquidity window where the CBT provides unlimited liquidity lending/borrowing facility to the banks between 16:0016:30 against collateral.
quarterly for 3y
IRS Fixing: 3m TRLIB3M Coupon frequency: Quarterly fixed Act/360, quarterly floating Act/360
The CBT announces repo auction amounts at 10am local time, and in case of an unforeseen excessive liquidity shortage, intra-day traditional 1-week repo auctions may be also announced. The CBT also operates FX deposit/lending facilities, with the lending rate cut last effective August 2011 and the maturity of borrowing raised from 1 week to 1 month effective January 2012. The CBT resumed its intermediary role in the FX deposit markets in November 2011 to enhance liquidity in the interbank FX market.
CCS Fixing: 3m US LIBOR Coupon frequency: Quarterly fixed Act/360, quarterly floating Act/360
Reserve requirements. Reserve requirement rates have been used actively since 4Q 2010, first as part of the CBT’s exit strategy. In that context of ample global liquidity, a low policy rate, a wider interest rate corridor to the downside and high required reserve ratios were assessed as an appropriate policy mix. Furthermore, RRRs became differentiated according to maturity to encourage the extension of the maturities of TRY deposits. However, a deteriorating global risk appetite subsequently led the CBT to cut FX RRRs in June 2011, cut TRY RRRs in October and November 2011, as the overnight rate corridor was hiked higher, and allow banks to hold a portion of TRY reserve requirements in FX (moved gradually from 0% to 60% maximum) and gold (moved gradually from 0% to 30%). TRY and FX required reserves have not been remunerated since October 2010 and December 2008, respectively.
Fiscal policy The budget is on an accrual basis, and submitted to the parliament by the end of October and approved by year-end. The annual budgets are in line with the threeyear framework announced in the medium-term program. The realizations are announced monthly, in detail. The Treasury announces the financing of the budget by an annual borrowing program prior to the start of the year. Chart 93: Maturity profile of outstanding Turkey government securities in TRYbn 100
Chart 94: Outstanding Turkish debt types by category
Gov ernment bonds
T U R KGB Gov t
TRY 388.8bn
80
o/w floating
60
TRY 111.7bn
o/w zero-cpn
40
TRY 75.0bn
( Bonds page 0#TRTSYA=IS
Useful websites Central Bank of Turkey http://www.tcmb.gov.tr/ Turkey Treasury http://www.treasury.gov.tr Turkey Statistics Office http://www.turkstat.gov.tr Banking Supervision Authority http://www.bddk.org.tr Istanbul Stock Exchange http://www.ise.org
Short-term or floating rate debt. Zero-coupon bonds with less than 2y maturities constitute around 20% of debt and are very liquid. FRNs take up 28%. After ramping up issuance of CPI bonds in 2009, the proportion has fallen since. Inflation-linked bonds constitute around 18% of outstanding debt. Fixed coupon debt. The remaining 34% of debt has a fixed coupon with maturity greater than 2y. Overall fixed coupon (including zero-coupon) issuance accounted for 77% of total in 1H 2012. Normal ticket size is around USD2-3K DV01. The benchmark 2y bond, currently Mar-14s, is typically the most liquid instrument. The benchmark bonds are typically issued in January, April, July and October, and can be reissued in two consecutive months following the first issuance. The other liquid instruments include the previously issued 2y benchmarks, the 5y benchmark and the 10y note, currently Jan-22s. Auction and placement mechanism. The average maturity of domestic debt is just below the 3y mark, currently sitting at 35 months. The duration of TRYdenominated securities (excluding non-cash and CPI-linked) was 14.8 months as of May 2012. The Treasury follows the benchmark borrowing strategy introduced in 2006, whereby it aims to borrow at the same maturities on a regular basis. While the 2y fixed rate coupon bonds are issued every month, 5y and 10y bonds are issued in the months with relatively high debt redemption. The Treasury aims to increase the average maturity of domestic borrowing and boost the market liquidity of all debt securities along the yield curve by sticking to this strategy. A three-month rolling borrowing program and auctions, detailing financing targets and securities, are announced on the last working day of each month. Related auction details are provided prior to the auction at least one day in advance. In line with the benchmark strategy, fixed coupon bonds can have 2, 5 or 10y maturities with quarterly or semi-annual coupons. FRNs have maturity of 5 or 7y and coupons based on weighted average compound rate in the TRY-denominated zero-coupon bond auctions over the previous three months before each coupon period. CPI bonds extend out to 10y and have a semi-annual coupon. The structure is based on the Canadian format. Auctions are conducted by the CBT and details are posted on the Treasury website. Retail and corporate investors can participate in auctions through branches of the CBT, banks or brokers. Banks can bid through the Electronic Fund Transfer system (EFT) while brokers bid through the Takasbank Electronic Transfer System (TETS). Auctions are Dutch style average price. Only public institutions and primary dealers can take part in the noncompetitive auction; only the latter can take part in switch and buyback auctions. Table 110: Summary statistics of Turkey derivative products and their markets Product Cross currency swaps 1-year 2-year 5-year
Avg daily trading volume
Avg transaction size
Bid-Ask spread
Bloomberg/Reuters reference
USD200mn USD150mn USD50mn
USD2K DV01 USD4K DV01 USD5K DV01
5bp 5bp 5bp
TYUSSW1/ICAPTRY TYUSSW2/ICAPTRY TYUSSW5/ICAPTRY
Illiquid
Illiquid
40bp
TYBS/ICAPTRY
Basis swaps Source: BofA Merrill Lynch Global Research
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Derivatives market With the exception of the 2y zero-coupon paper, the most liquid instruments in Turkey are cross currency swaps (vs 3m USD), with bid-offer of 5bp in size of 2-5K DV01. CCS are particularly liquid out to 5y but less so up to 10y. Average daily turnover is around USD400mn. FRAs and single currency IRS are not very liquid, but improving, with bid-offer typically around 40bp. The IRS fixes against the 3m TRLIBOR. There is also an interest rates vol market with the active market up to 1y expiries, but trading activity is fairly light. In the FX vol market investors have access to vanilla and exotic instruments against both EU R and USD.
FX market The lira (TRY) is one of the most liquid currencies in EEMEA, with average daily volume of USD10-12bn and average ticket size of USD10-20mn. USD/TRY dominates trading but EUR/TRY is traded actively as well. Forwards, options and FX swaps are all liquid. Forwards and swaps can be quoted out to 5y but are most liquid out to 1y. Daily volumes average around USD3-4bn with average ticket size of USD50mn up to 6mn and 20mn up to 1y. In options, daily volumes average around USD0.5bn with a typical ticket size around USD25mn and good liquidity up to 1y. TRY is at its most liquid between 07:00-15:00 GMT, Monday to Friday. Trading out of hours usually involves wider spreads. TRY is fully convertible and deliverable, and has floated freely since the crawling peg was abandoned in February 2001. The currency was redenominated in January 2005 by dropping six zeros after a period of price stability. The CBT conducts regular FX interventions, at times in the form of daily auctions to sell irregular amounts of USDTRY. Recently, the CBT has opted to tame the volatility in the currency by limiting TRY liquidity to banks on a daily basis and forcing them to convert their FX to TRY to meet required reserves. CBT also retains the option to adjust the share of required reserves to be kept in FX and the reserves option coefficients at its policy meetings to boost its FX reserves. Table 111: Vital statistics and characteristics of Turkey’s FX market Bloomber Avg daily Avg FX Tradable trading trading Bid-Ask g/Reuters products product volume spread reference Key facts size TRY Spot
Forwards
Options
TRY Spot
USD1012bn
USD1020mn
TRY 0.005 TRY/CBTA ▪ Mainly trades against USD. ▪ EUR/TRY also actively traded, as well as crosses vs ZAR or ILS. Forwards & USD1.5-2bn USD50mn 3bp up to TYFS/CBTA ▪ Liquid up to 1y. up to 6m; 6m; 5bp up Swaps 20mn up to to 1y 1y 0.5 vol USDTRYV / ▪ Options available till tenors of FX Options USD0.5bn USD25mn CBTA 5y but are liquid up to 1y.
Source: BofA Merrill Lynch Global Research
Investor base The fixed income market is dominated by the banking sector, which has held 55-60% of the debt since 2008. After the banks, corporate investors and nonresidents matter most. The domestic non-banking sector holds around 25% of debt while nonresidents hold another 18%. Turkish domestic institutional investors (private pension funds, mutual funds and life) had TRY48bn of AUM as of 2011, or 3.9% of GDP.
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Chart 96: Foreign holdings of Turkish local currency government bonds
Chart 95: Distribution of government securities holdings 70%
Financial Institutions Rest of World
Institutional Inv estors 80
60%
Domestic gov t. debt securities held by non-residents (TRY bn) Domestic gov t. debt securities held by non-residents (% of total, rhs) 20
70
50% 40%
60 50
15
30%
40
10
20%
30
10%
20 10
5
0%
0
0
Jan-06
Jan-07
Jan-08
Jan-09
Source: BofA Merrill Lynch Global Research, Ministry of Finance
Jan-10
Jan-11
Jan-12
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Source: BofA Merrill Lynch Global Research, Bloomberg
While this represents around a 45% increase since 2005 in absolute terms, in percent of GDP there has been only a minimal expansion (AUM was at 4.9% in 2005). Mutual funds and pensions dominate the domestic institutional investor base, accounting for around 69% and 26% of total AUM as of 2009. The former has experienced very volatile growth rates in recent years, but the latter has displayed average growth of around 60% since 2006. Turkey is clearly taking baby steps for now, but the low base suggests potential for rapid growth in the sector. In our view, the growth will likely be led by the private pension funds, while the mutual funds could face some headwinds in the low interest rate environment. Both pension and mutual funds predominantly invest in fixed income securities. The share of fixed income instruments in the AUM of pension funds has dwarfed that of equities (72% vs 12% as of end-2011, respectively). Similarly, mutual funds had only 3.1% of AUM in equities, or TRY945mn (USD510mn) as of end2011. The peak was in 1993 when the share of equity investments in mutual funds’ AUM reached 18%. Before the 2001 crisis, the share of equity allocations in total averaged around 12% between 1997 and 2000. The private pension system was introduced in 2003, serving as a complementary scheme to the mandatory social security PAYG system. As it is voluntary for both employers and employees, investment in pension funds remains fairly low relative to investments in mutual funds. There are two different types of mutual funds in the Turkish market. Type A funds must invest at least 25% of their assets in equities issued by Turkish companies, while there are no investment restrictions on Type B funds. Type B dominate the mutual funds sector in terms of net asset value (95% of total), with most of the portfolio in fixed income (24% of AUM as of end 2010) or reverse repo (47% of AUM as of end 2011).
Rules, regulations, capital control and taxation Turkey’s financial market is highly liberalized, with regulatory bodies improving steadily since 2001. There are no restrictions on capital flows. There is a withholding tax (WHT) on interest income and capital gains on domestic notes issued after January 2006, which stands at 10% for real persons and 0% for institutions.
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Clearing and settlement Bonds trade OTC and on the Istanbul Stock Exchange. Best prices at any time are posted on TRTSY=IS page on Reuters. Settlement can be T+0 or T+1 if executed after 14:00. Outright sales and repo/reverse repo transactions take place from 9.30-12:00 and 13:00-17:00 every day. Table 112: Summary of Turkey bond markets and products Instrument Treasury bills (zero-coupon up to 2y)
Government bonds
Inflation-linked bonds Turkish Treasury TRY TRY100 (par) 5 to 10 years Indexed to CPI Semi-annual
Act/365 Discount Scripless TRY75bn
Turkish Treasury TRY TRY100 (par) 2, 5, 7 and10 years Fixed / Floating Quarterly for 3y fixed bonds and floating bonds issued since 2007; semi-annual otherwise Act/Act Bullet Scripless TRY242bn
OTC and Stock Exchange Yield T+0 (T+1 if executed after 14:00) USD200mn 5bp NA USD2K DV01 Istanbul Stock Exchange (ISE) Primary dealers 9:30 – 12:00 and 13:00-17:00 (Turkey) All entities or individuals, including nonresidents, may participate. Mostly local banks, investment funds, corporates.
OTC and Stock Exchange Yield / clean or dirty price T+0 (T+1 if executed after 14:00) USD450mn 5bp 5bp USD2-3K DV01 Istanbul Stock Exchange (ISE) Primary dealers 9:30 – 12:00 and 13:00-17:00 (Turkey) All entities or individuals, including nonresidents, may participate. Mostly local banks, investment funds, corporates.
OTC and Stock Exchange Clean or dirty price T+0 (T+1 if executed after 14:00) USD100mn 3bp 3bp USD4K DV01 Istanbul Stock Exchange (ISE) Primary dealers 9:30 – 12:00 and 13:00-17:00 (Turkey) All entities or individuals, including nonresidents, may participate. Mostly local banks, investment funds, corporates.
Issuer Currency Principal Tenor Interest rate/coupon Coupon Payments
Turkish Treasury TRY TRY100 (par) Up to 2 years Issued at discount Zero
Day Count Calculation Amortization Schedule Form Amount outstanding (as of July 2012) Secondary Market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism Major players Trading hours Bidders
Regulations Restrictions on Foreign Investment Custodian Withholding Tax
Capital gains Tax
Entry/Exit Tax Primary Auctions Auction Style Average Issue Size Minimum Amount of Tender
Act/Act Bullet Scripless TRY68bn
No restrictions No restrictions No restrictions Yes Yes Yes Withholding tax on interest income and capital Withholding tax on interest income and capital Withholding tax on interest income and gains on domestic notes issued after Jan 2006 is gains on domestic notes issued after Jan 2006 is capital gains on domestic notes issued after 10% for real persons and 0% for institutions. 10% for real persons and 0% for institutions. Jan 2006 is 10% for real persons and 0% for institutions. Withholding tax on interest income and capital Withholding tax on interest income and capital Withholding tax on interest income and gains on domestic notes issued after Jan 2006 is gains on domestic notes issued after Jan 2006 is capital gains on domestic notes issued after 10% for real persons and 0% for institutions. 10% for real persons and 0% for institutions. Jan 2006 is 10% for real persons and 0% for institutions. None None None Competitive tender in a Dutch style average price or non-competitive tender TRY2-3bn None
Competitive tender in a Dutch style average price or non-competitive tender TRY2-4bn None
Competitive tender in a Dutch style average price or non-competitive tender TRY2-3bn None
Source: BofA Merrill Lynch Global Research
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Latin America countries
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Argentina Overview Jane Brauer
Argentina’s bond market has undergone several drastic changes over the last 10 years. After the sovereign default in 2002 and the restructuring that followed in 2005 (67% haircut of face value), the country again became a player in the international emerging debt markets, with foreign investors active in the Argentine bond market. Nevertheless, liquidity declined substantially compared to the end of the 1990s as the government negotiated with holdouts from the restructuring and started de-leveraging debt by focusing on the internal market. Pension funds, nationalized in 2008, play a significant role. They have been rolling over the debt services received into new government debt, but mainly keeping the percentage of the total portfolio in government debt unchanged in recent years. The Fondo de Garantía de Sustentabilidad (FGS) is a closed fund, as it has only received about US$2bn in net inflows since inception in October 2008. The FGS discloses its portfolio with several months of delay.
Table 113: Argentina local debt ratings profile Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
B3 B3 B3 B3 B3 B3 B3 B3 B3 B3 Ca Ca -
Bu Bu B BBB+ B+ BSD SD SD SD BB BBBBBBBBBBBBBBBBBB-
B B B BBB B BBCC C C* BB+ BB+ BB+ BB+ -
Source: BofA Merrill Lynch Global Research, Bloomberg
Chart 97: Key CPI Component of Argentina 37.9%
Food Transport
16.6%
Monetary policy Background. In the past monetary misconduct and inflation have resulted in substantial, periodic currency devaluations in Argentina. From 1970 to 1990 policy makers failed to implement sufficient monetary policies to reduce inflation from the hyperinflation peak of 1989. To bring inflation down to single digits, in 1991 the Central Bank of the Argentine Republic (BCRA) created a currency peg, where the peso was pegged 1 for 1 to the dollar, with every peso backed by hard currency reserves. The model brought stability and growth during the 1990s, but an overvalued peso relative to Brazil and other trading partners led to a loss of competitiveness and a deterioration of fiscal and trade accounts. In 2002 the country defaulted on its sovereign debt and the dollar peg was abandoned. Since devaluating its currency, the BCRA has been managing the exchange rate while controlling monetary capital flows and inflation, with the aim of promoting economic growth. Policy framework. Unlike most central banks in the region, the BCRA does not target inflation. In the bank’s own assessment, low levels of financial intermediation and a highly dollarized economy limit its ability to target inflation via a key interest rate. Instead, the BCRA targets M2, a measure of money supply that includes currency in circulation and checking and savings accounts.
12.1%
Housing Clothes
Although the BCRA does not target a specific exchange rate level, it intervenes regularly in the FX market, maintaining a slow and steady speed of ARS depreciation, in order to promote export competitiveness. ARS is a nondeliverable currency and the central bank intervenes in the onshore and offshore forward markets, as well as in the spot market.
7.3% 5.6%
Health Other
20.5% 0%
10%
20%
Source: BofA Merrill Lynch Global Research
156
The government has been increasing debt with government agencies to finance its gap in recent years. It has been resorting to central bank financing and transfers for more than 3% of GDP per year since 2010. Total debt, excluding defaulted debt not exchanged in the 2005 and 2010 restructurings, amounted to USD178bn as of December 2011. Total public debt is 40% denominated in pesos and 60% in USD, 70% under local law and 30% under foreign law. Debt excluding government agencies holdings amounts to only 24% of GDP.
30%
40%
Base rate. The Badlar rate is the average rate among private banks for 30-35 day certificates of deposit of ARS1mn or higher. This is usually the market rate for borrowing and lending between private entities, and normally tracks the target repo rate. The central bank publishes Badlar daily.
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Conventions Bonds Quote: Dirty price Settlement: T+3 Basis: 30/360, act/365 Coupon frequency: Monthly, quarterly, semi annual
IRS Fixing: n/a Coupon frequency: n/a
CCS Fixing: n/a Coupon frequency: n/a
Open market operations. Given its monetary policy, the BCRA targets money supply based on M2. As a result, the central bank issues bills and notes – Lebacs (Letras del Banco Central) and Nobacs (Notas del Banco Central) – to control highpower monetary aggregates. The BCRA auctions securities on Tuesdays and settles T+1. Average size is ARS1bn and main participants are local banks, insurance companies and mutual funds. The size of the auction depends on the amount of sterilization required to meet monetary targets at any point in time. Foreigners are no longer permitted to own these notes because they are not Euroclearable. Lending and deposit facilities. The BCRA also uses repos and reverse repos with private and public banks to contract or expand the monetary base. The market for repo securities is based on sterilization paper issued by the BCRA – Lebac and Nobac – and performing Treasury bonds. The difference between the price at which the central bank sells and buys the bonds is the rate that financial institutions get for the repo. Reserve requirements. The central bank uses the reserve requirements as a discretionary tool to control liquidity and credit in the banking system. As of August 2012, the ratio was 19% of total short-term deposits. The BCRA has changed reserve requirements several times in the past, but they have remained stable in recent years.
Fiscal policy The fiscal position of Argentina has deteriorated significantly in recent years. We anticipate the federal government will likely post a primary deficit of 0.5% of GDP this year, which compares to a surplus of 3.1% of GDP in 2008. Given that Argentina has lost access to voluntary debt financing, this deficit and debt services are financed by ANSeS – the government pension fund – and increasingly by the BCRA. The government has used US$33.9bn of BCRA reserves in the 2006-2012 period, and it is increasingly relying on the BCRA peso issuance to finance the deficit, which will likely keep inflationary pressures strong.
Macro drivers INDEC has faced criticism since 2007, when official measures of growth and inflation began to diverge from private sector estimates with growth overestimated and inflation significantly underestimated. However, INDEC figures are still the official reference for inflation and GDP-linked securities and, as a result, are still followed closely by the market. The release that captures most of the attention is the monthly activity indicator EMAE, as it tracks the quarterly GDP data that feeds into the calculation of the GDP warrant payment. The CER inflation data have lost attention since the government has started to release very stable numbers (close, but below 10% yoy) several years ago, but it will likely recover its luster if/when this or the next administration starts to more closely reflect the true inflation pressures, as there is a sizable stock of CER-adjusted debt. In the meantime, to compensate for the very low official inflation reports, the market adjusts the prices of inflation-linked bonds via low prices, which produce high “real” yields, so that “real” yields plus reported CER inflation produce a fair bond yield. The quarterly Balance Cambiario, a cash-basis balance of payments released by the BCRA, also draws some attention, as it provides a measure of capital outflows, among other interesting data.
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Bond market This section provides an overview of the main Argentine local debt instruments, some of which have unique conventions. Below, we provide a summary table covering the key characteristics of each instrument traded. Local currency bonds are either linked to the officially reported inflation index, CER, or they have a floating coupon based on Badlar. In addition, there are USD-denominated local law Bodens, Bonars and Par and Discount bonds (Table 115). The most liquid USDdenominated local law bonds are the Boden 15 and Bonar X (2017). Bodens. A federal bond issued after the 2002 default to compensate banks for the asymmetric pesification of their balance sheets and the pesification of domestic bank accounts, as well as the FX impact on pensioners. The last Boden was issued in 2005, with reopenings through 2008. Bonars. The main source of current issuance, with auctions and reopenings since 2006 through local dealers. The last reopening was in 2009. Bocones. Primarily issued for pensioners and suppliers to the government, in part to compensate for reduced social security payments to pensioners. The longest Bocones capitalizes to 2013. Bogars. The product of a provincial debt exchange, issued through an SPV that captures tax co-participation payments from the provinces, but are not a direct obligation of any one province. These are inflation-linked. Bocan bonds (‘13s, ‘14s, ‘15s and ‘16s). These pay a coupon of Badlar plus a spread ranging from 275bp to 375bp. Pars and Discounts. ARS-denominated issues created from the 2005 exchange of defaulted debt. The Pars have low coupons and amortize, while the Discounts capitalize and amortize. Both are inflation-linked. Peso-denominated government bonds Face quote. The market convention is to quote the original face of a bond, regardless of the growth due to capitalization or inflation. Price quote. The market convention on all local bonds is to quote them on a “dirty price” basis. The dirty price is an all-in price. Dirty prices tend to grow because of the growth in the coupon, as well as the increase in the factor and inflation index. These prices will drop with coupon or amortization payments, by an amount that is close to that of the payment. Chart 99: Outstanding bonds by type
Chart 98: Maturity profile of Argentine Treasury bonds in ARSbn 12 Local Debt
Other
Ex ternal Debt
12%
10
ARS Inflation linkers 28%
8 6 4
ARS
Source: BofA Merrill Lynch Global Research
158
2045
2042
2039
2036
2033
2030
2027
2024
2021
50% 2018
0 2015
USD 2012
2
Source: BofA Merrill Lynch Global Research
10%
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Bloomberg pages BMLT OTC ARS OTC ARS FX OTC ARS FI
Reuters pages IAMCO1 ROFEX
Useful official websites Central bank http://www.bcra.gov.ar/ Finance ministry http://www.mecon.gov.ar/finanzas/ Statistics agency http://www.indec.gov.ar/ Pension regulator http://www.anses.gob.ar/
Currency of Settlement. All bonds with an ISIN can settle in any currency that Euroclear or Clearstream accepts. Peso bonds typically trade in pesos or USD. The most common transactions are in USD, clearing through Euroclear. The implied FX rate is the ratio ARS price/USD price. Clearing. Trading of ARS and USD bonds with offshore clients, is through Euroclear and settles mostly in USD. Some trades settle in ARS when an investor receives an ARS coupon or principal payment. ARS trading with onshore clients via MAE usually settle through Argenclear. Convertibility Restrictions of Payments. ARS coupon and principal payments are paid to Euroclear’s bank in a local ARS account. Foreigners can still freely convert coupon payments into USD at the official rate as of July 2012 but not amortization payments. Financial institutions, corporates and individuals are restricted on how much FX they can hold via capital ratios and monthly transfers. The government always verifies the origin of the money to prevent money laundering. The operation of the blue chip swap is required on amortizations on ARS-denominated bonds to bring the full ARS cash flows to a foreign currency. Repatriating ARS payments via a blue chip swap. For ARS amortization payments on ARS-denominated bonds, funds can be repatriated through a blue chip swap. In a blue chip swap transaction, a foreign investor buys a locally-listed security with the ARS cash flow and sells the same security offshore for foreign currency. The ratio of the two prices implies an exchange rate, which can be above or below the actual FX rate. This repatriation does entail risks, in the decoupling of the official exchange rate market and the executable foreign exchange level. The blue chip FX rate was over 50% higher than the official FX rate in 2012. Ex-dividend date. The ex-dividend date is typically four business days prior to the coupon payment date. With normal T+3 settlement, bonds that trade prior to the ex-dividend date have a right to receive the next coupon payment. Bonds that trade on or after that do not receive the next coupon. The bond must settle one day before a typical USD bond. Inflation-linked. The CER that applies to a coupon or principal payment is typically that of 10 days prior to the coupon payment date. Inflation index. The CER Index can be found on Bloomberg ARCECOES Index. The index is updated with daily future values for the month following the CPI announcement. The CER may also be found on the central bank website at http://www.bcra.gov.ar. The path is > Statistics > Monetary and Financial Variables > Main Variables. Base CER. The CER as of bond issuance date (10 days prior for Pre08, Pro12, Boden07, Boden 14, Par Peso, Quasi Par, Disc Peso and five days prior for Bogar 18). USD and EUR-denominated bonds Face quote. The market convention is to quote the original face of a bond, regardless of the growth due to capitalization. Price quote. The market convention on all external debt is to quote them on a clean price basis. However, local law bonds, even if denominated in USD, are quoted on a dirty price basis. Currency of Settlement. All bonds with an ISIN can settle in any currency that Euroclear or Clearstream accepts. The most common transactions are in USD, clearing through Euroclear. The implied FX rate is the ratio ARS price/USD price.
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Coupon and principal payments on local law USD bonds. All USD or EUR cash flows may be paid out in USD, provided those flows occur through Euroclear or a similar offshore entity. The local law Par and Discount bonds have identical coupons and principal payments as the New York Law bonds. The government has more capacity to change the payment terms of a local law bond than a New York law bond. For that reason, the local law bonds have much lower prices and are far less liquid than New York law bonds. GDP warrants The 2005 and 2010 exchange included GDP warrants as part of the exchange package. They were embedded into the bonds at the time of issue and were detached in November 2005. The GDP warrants, which expire in 2035, make annual payments on 15 December if annual GDP growth and cumulative real GDP growth in the prior year both exceed certain scheduled levels. The future payments of the foreign currency warrants are calculated in ARS and then converted from ARS to the respective currency at a future FX rate, but one year before the payment date. As the EUR declines relative to the USD, the future EUR payments will be larger. The equilibrium level in the prospectus is 1.25865, which is where the EUR/USD was when the government fixed the formulas for determining relative payments. From December 2006-2011, the ARS GDP warrant paid out ARS0.65, ARS1.38, ARS2.46, ARS3.72, 0.00, ARS5.98; the USD GDP-linked warrants paid out US$7.39 ($0.62, $1.32, $2.28, $3.17, $0.00 and $4.38); and the EUR warrants €6.75 (€0.66, €1.26, €1.99, €2.84, €0.00 and €4.19). There were no payments in 2010 because growth was under the 3.2% threshold. The warrants have a cap on total payments of 0.48 per currency unit. These securities produced the highest return of all EM debt assets from 2005-2011. Valued at $2 at the time of the 2005 exchange, in addition to the above dividend payouts, the price has risen over six-fold. Auction and placement mechanism The central bank issues bills and notes – Lebacs (Letras del Banco Central) and Nobacs (Notas del Banco Central) – to control high-power monetary aggregates. The BCRA auctions securities on Tuesdays and settles T+1. Average size is ARS1bn and main participants are local banks, insurance companies and mutual funds. The size of the auction depends on the amount of sterilization required to meet monetary targets at any point in time. Foreigners are no longer permitted to own these notes because they are not Euroclearable. The government places bonds directly with the nationalized Anses pension fund. The pension fund may trade or sell some of its holdings from time to time. The government does not borrow in the public local markets through actions, or offer banks and other financial institutions.
Derivative market The derivatives market in Argentina is very illiquid given the fluctuation of the FX and the lack of long term financing. The IRS market is restricted to the Badlar versus the fixed rate, but as of today the products have no pricing because inflation figures have been understated by the government.
FX market The peso is a heavily managed, nondeliverable floating currency. Companies in Argentina are required to convert foreign exchange inflows from exports into pesos within a short time frame. Devaluation and inflation spikes have caused rapid selloffs during certain periods when the BCRA sells USD positions to support its
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currency and prevent portfolio dollarization. The FX is artificially pegged to the country‘s competitiveness and inflation levels, which erodes local costs and exports in USD terms. FX devaluation is a result of inflation growth driven by governmental fiscal and monetary expansion to bolster demand and consumption. The peso is a nonconvertible currency. Average trading volume is about USD200mn per day. There is an onshore forward market with liquidity up to 12 months. Foreign investors gain exposure to ARS through the offshore market in non-deliverable forwards. There is a liquid curve for NDFs extending out to 12 months. The fixings for NDFs are determined by the Emerging Markets Trade Association (EMTA). The central bank releases a fixing for ARS as well. The EMTA rate is determined by a daily 1pm survey of ARS dealers, with results published at 5pm. The dealers quote the rate at which a bank or financial institution can convert ARS into USD5. The official ARS rate is relatively stable, but the blue chip rate is unofficial and varies widely. As of July 2012, the banks surveyed for ARS rates are providing the levels at which they can get USD at close to the official rate. A two-tiered exchange rate is possible, with the second USD/ARS rate being much higher. If ARS dealers in the EMTA survey of the ARS fixing were to quote the higher rate, the ARS rate would jump. For this reason, nondeliverable forwards, especially long-dated ones, are at a much higher level than the likely future official ARS. The implied yields from those forward ARS reflect convertibility risk and are greater than that found in the market.
Chart 100: Badlar rate
Chart 101: Blue chip rate and official ARS 7
25
6.5
20
Blue chip rate
Official ARS
Apr-10
Apr-11
6
15
5.5 5
10
4.5
5
4 3.5
Source: BofA Merrill Lynch Global Research, Bloomberg
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
0
3 Oct-09
Oct-10
Oct-11
Apr-12
Source: BofA Merrill Lynch Global Research, Bloomberg
5 Survey question: Each survey participant will be asked to provide a reasonable judgment of what is (or, in the case of an Unscheduled Holiday, would be) the current prevailing free market Argentine peso spot rate for a standard size Argentine peso/US dollar wholesale financial transaction for same-day settlement in the Buenos Aires marketplace on the Valuation Date. In arriving at this indicative quotation, survey participants will be directed to take such factors into consideration as they deem appropriate, and which factors may (but need not) include any or all of the following: the spot rate(s) implied in the offshore non-deliverable foreign exchange market for Argentine peso/US dollar transactions; the spot rate implied by any other financial market transactions, to the extent that such other financial markets are open for business; the spot rate used in connection with any commercial transactions for goods or services from offshore suppliers or providers; any existing rate for trade finance transactions; and any other existing unofficial rate for Argentine peso/US dollar transactions (commercial or otherwise).
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Table 114: Argentina’s FX market vital statistics and characteristics
FX product Onshore spot forward Offshore NDF
Tradable product
Avg daily trading volume
Avg trading size
Bid-Ask spread
ARS spot
USD200mn
USD1mn
ARS 0.001
ARS forward
USD400mn
USD1mn
ARS 0.005
ARS NDF
USD100mn
USD3mn
ARS 0.01
Reuters reference
Trading hours
USTARTD1=M 10.00-15.00 E n/a 10.00-15.00 n/a
8.30-16.00
Note: Proper documentation is required. Source: BofA Merrill Lynch Global Research
Investor base The pension funds were nationalized in 2008 when the pension system had about US$40bn in assets. The Anses portfolio has about 60% government debt. The Anses is an important source of demand and supply, and has a market impact as it rotates out of one bond into another. The local capital markets supply has been absorbed by insurance companies, which have been concentrating over 50% of their portfolios in government bonds.
Rules, regulations, capital control and taxation Central bank LEBACS and NOBACS are not Euroclearable anymore and holding is restricted to onshore investors. In addition, financial institutions, corporates and individuals are restricted on how much FX can hold via capital ratios and monthly transfers. There are many currency restrictions for local investors buying USD. Foreigners with ARS assets can receive dividends and repatriate their capital through the blue chip. As of July 2012, locals cannot save in USD, but they can hold USD obtained before July 2012 in a local bank and transfer those USD to an offshore bank.
Clearing and settlement With the exception of LEBACS and NOBACS, Treasury debt is done OTC and through the stock exchange. Treasury is cleared domestically and offshore through MAE, Argenclear and Euroclear.
Chart 102: Anses pension fund portfolio breakdown
Chart 103: Anses pension fund public debt holding in USDmn Others, 7,369,
Others Infrastructure
9%
Stocks
Cuasi Par
26%
ARS, 9,935,
8%
36%
financing 14%
Bonar 14, Time deposits
2,070, 7%
10% Government bonds and corporate bonds 59% Source: BofA Merrill Lynch Global Research
162
Bonar 16, 2,526, 9% Bonar 18, 2,964, 10% Source: BofA Merrill Lynch Global Research
Disco ARS 33, 3,515, 12%
Currency Market Quote Coupon Reset Capitalizing Amortizing Ticker Cpn Maturity Issue Date Frequency Coupon Payment Dates Amt Outstanding (bn) Governing Law ISIN
USD Domestic Dirty 6Mo Libor Flat. Max =3%. -Y ARGBOD 3 4/30/2013 10/30/2002 2 April 30, Oct 30 0.24 local ARARGE035709
USD Domestic Dirty Fixed --ARGBOD 7 10/3/2015 10/3/2005 2 April 3, Oct 3 5.82 local ARARGE03F144
Bonar VII
Bonar X
DISC USD
PAR USD
USD Domestic Dirty Fixed --ARGBON 7 9/12/2013 9/12/2006 2 Mar 12, Sep 12 2 local ARARGE03F342
USD Domestic Dirty Fixed --ARGBON 7 4/17/2017 4/17/2007 2 April 17, June 17 6.86 local ARARGE03F441
USD Domestic Clean Int Partly Cap to 2013 Y Y ARGENT 8.28 12/31/2033 11/29/2005 2 June 30, Dec 31 1.11 local ARARGE03E113
USD Domestic Clean Step Up Coupon -Y ARGENT 2.5 12/31/2038 11/29/2005 2 Mar 31, Sep 30 1.23 local ARARGE03E097
1 2 Se ptembe r 20 12
Table 115: USD/EUR-denominated outstanding bonds, governed by local law BODEN 13 BODEN 15
Source: BofA Merrill Lynch Global Research
Currency Market Quote Coupon Reset CER-linked inflation Badlar floater Base CER Capitalizing Amortizing Ticker Cpn Maturity Issue Date Frequency Coupon Payment Dates Amt Outstanding(bn) Governing Law ISIN
Pro 13
BOGAR 18
ARS Domestic Dirty Int Cap to 3/15/08 Y
ARS Domestic Dirty Int Cap To 1/3/06 Y
ARS Domestic Dirty Int Cap to 3/15/14 Y
ARS Domestic Dirty Int Cap To 10/02 Y
1.4671 Y Y ARGBOC 2 3/15/2014 3/15/2004 12 15th
1 Y Y ARGBOC 2 1/3/2016 2/3/2002 12 3rd
1.4657 Y Y ARGBOC 2 3/15/2024 3/15/2004 12 15th
1 Y Y ARGBOG 2 2/4/2018 2/4/2002 12 4th
1.5176 -Y ARGBON 2 9/30/2014 9/30/2004 2 Sep 30, Mar 31
1.4551 Y Y ARGENT 5.83 12/31/2033 6/30/2005 2 June 30, Dec 31
0.29 local ARARGE03B309
1.58 local ARARGE035162
1.93 local ARARGE03B219
11.82 local ARBNAC030255
4.65 local ARARGE03E931
10.47 local ARARGE03E121
Source: BofA Merrill Lynch Global Research
BODEN 14
DISC ARS
PAR ARS
BOCAN 14
BOCAN 15
ARS ARS Domestic Domestic Dirty Dirty Fixed Int Partly Cap to 2013 Y Y
ARS Domestic Dirty Step Up Coupon Y
ARS Domestic Dirty --
ARS Domestic Dirty --
1.4551 -Y ARGENT 1.18 12/31/2038 6/30/2005 2 Mar 31, Sep 30
Y -N N ARGBON BADLAR+275 1/30/2014 1/30/2009 4 30th
Y -N Y ARGBON BADLAR+300 9/10/2015 9/10/2009 4 10th
2.86 local ARARGE03E105
6.36 local ARARGE03G316
10.84 local ARARGE03G506
GEMs Pa pe r #1 0
Table 116: Argentine peso-denominated outstanding bonds PRE 9 PRO 12
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Brazil Overview David Beker +5511 2188 4371
The Brazilian fixed income market is the largest in Latin America. Liquidity varies across asset class, but the fact that the BRL is not a convertible currency and foreign portfolio inflows are subject to the IOF tax (financial operations) limits foreign participation in local fixed income.
Flavio de Andrade
Brazil is rich in natural resources including iron ore, soybeans and crude oil but exports are only about 11.9% of GDP. The key driver of the economy is private consumption, which represents 60.3% of Brazilian GDP.
Monetary policy Background. In 1999, after more than four years of adopting a fixed-exchange rate with a defined depreciation path, the government decided to let the BRL float. To help anchor the new regime, the central bank implemented an inflationtargeting model. Table 117: Brazil local debt ratings profile Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Baa2 Baa2 Baa3 Baa3 Ba1 Ba1 Ba2 Ba3 Ba3 B2 B2 B1 B1 B3 Caa1 -
ABBB+ BBB+ BBB+ BBB+ BBB BB+ BB BB BB BB BB+ BB BBBB+ BB+ BB
BBB BBB BBBBBBBBBBB+ BB BBBBB+ B B+ B+ B BBBB-
Source: Bloomberg, BofA Merrill Lynch Global Research
Chart 104: Key Brazil CPI components Food
23.2%
Transport
20.1%
Housing
14.8%
Healthcare
11.2%
Personal ex pend
10.2%
Other
20.5% 0%
10% 20% 30% 40%
Policy framework. The inflation target has declined over time, but has been at 4.5% with a 2% band since 2005. In 10 years of inflation-targeting, inflation fell within the target band in all years except 2001 and 2002. The bank targets consumer inflation using the IPCA index, which is calculated and released by the IBGE 6 biweekly (IPCA and IPCA-15). Base rate. The monetary policy committee (COPOM) holds eight meetings a year to decide the Selic target interest rate (BZSTSETA Index on Bloomberg). A short policy decision statement is released after each meeting, indicating whether the decision was unanimous or not; if it was not, the statement reveals the options being discussed. Starting in 2012, the statement reveals the votes for each board member. The bank also releases monetary policy meeting minutes on the Thursday of the week following each meeting, bringing a deeper discussion on the economic backdrop and the rates decision. The Brazilian Central Bank (BCB) publishes quarterly inflation reports, presenting its own forecast for the inflation and GDP paths within a two-year horizon. A feature of the COPOM outcome is that the BCB may also introduce a bias for the monetary policy, which would allow the bank to change interest rates between meetings. The last time the bank used a bias (up or down) was in March 2003. Open market operations. The BCB manages liquidity by doing repo operations (operações compromissadas) backed by local government bonds. These repo operations help the BCB to steer the effective Selic rate toward the target rate. Lending and deposit facilities. The BCB adopts a segregated system for remunerating required reserves. Reserves on cash deposits do not earn interest, while reserves on term and savings deposits earn the Selic and the savings rate, respectively. Banks that do not meet the reserve requirement can borrow from the BCB at the redesconto (discount) rate, currently set at Selic + 4%. Reserve requirements. Reserve requirements are an important monetary policy instrument. There are different reserve requirement brackets for cash and term deposits and for savings accounts. Reserve requirements were about 31% of total deposits in July 2012, one of the highest in the world.
Source: BofA Merrill Lynch Global Research 6
164
Statistics Agency (Instituto Brasileiro de Geografia e Estatistica).
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Conventions
FX policy. Brazil has a managed floating FX regime in which the BCB intervenes to smooth FX volatility, cushion FX movements, build up FX reserves and correct level distortions. The BCB is very transparent on the intervention mechanism, using spot, short-term forwards and swap auctions. When it decides on spot intervention, it conducts an auction through dealers with discretion on the amounts. In terms of the swaps, the bank auctions FX swaps 7 (sells dollars on a future date) or reverse FX swaps (buys dollars on a future date).
Bonds Quote: Yield to maturity Settlement: T+1: Basis: Bus/252 Coupon frequency: Semi-annual (compounded rate)
IRS (Interest rate future)
Fiscal policy
Fixing: DI
Brazil has pursued primary surplus fiscal targets since 1998 in order to create conditions for the debt to GDP ratio to decline over time. The primary surplus fiscal target for 2012 is 3.1% of GDP. As interest rates reach historically low levels, reducing debt interest expenses, focus on the overall budget result should increase. After ending 2002 at 60.4% of GDP, the net public debt declined to 36.4% by the end of 2011. Gross general government public debt moved from 76.7% of GDP to 54.2% of GDP in the same period.
Coupon frequency: bullet, daily settled
CCS Fixing: Cupom cambial x DI Coupon frequency: Act/360 on dollar leg, Bus/252 on BRL leg
The stock of federal public debt reached BRL1.97tn in June 2012, of which 41% was local nominal (plus BRL globals), 32% inflation-linked, 23% Selic 8-linked and only 4% EXD (minus BRL globals). This compares to 16% fixed rate debt, 47% Selic-linked debt and 24% FX-linked debt back in 2004. The government remains focused on bolstering its debt profile by replacing floating debt (Selic-linked) by fixed rate and inflation-linked bonds, extending maturities, creating benchmark bonds and improving liquidity in the secondary market.
Macro drivers Several releases tend to be market moving events. Besides the monetary policy decisions, market participants focus on the COPOM minutes and the analyst survey the BCB releases every Monday morning. The key inflation releases are the IPCA and IPCA-15 from the IBGE, though market participants also focus on the broad inflation numbers released by FGV (IGP-10, IGP-M and IGP-DI). On growth, market participants focus on retail sales, industrial production, monthly and quarterly GDP and job creation. Chart 106: Brazilian debt composition; total BRL 1971n (USD981bn)
Chart 105: Brazil – maturity profile (in USDbn) of local BRLdenominated debt (including BRL Global EXD) LTN
NTN_F
LFT
NTN_B
NTN-C
BRL Globals
200
Floating 23%
Inflation linker 33%
150 100
USD (EXD) 4%
50
BRL 40%
0 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 Source: National Treasury, BofA Merrill Lynch Global Research
Source: National Treasury, BofA Merrill Lynch Global Research
7 One leg is onshore dollar rates (cupom cambial) plus FX change and the other leg is CDI (interbank deposit rate). 8
Selic rate is the rate set by the Brazilian Central Bank in its monetary policy meetings (COPOM).
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Bond market In June 2012 total federal government domestic debt was BRL1882bn and 14bn of Global BRL, for a total of USD943bn. The main local currency debt instruments are LTN (zero discount bonds), NTN-F (fixed coupon bonds), NTN-B (IPCA inflation-linked bonds) and LFT (floating rate bonds). The NTN-Cs (IGPM inflation-linked bonds) are off the run and being replaced by NTN-Bs. The Treasury has also focused on replacing the floating rate LFTs for fixed-rate and inflation linkers. The day count convention of local bonds is [business days/252], and semi-annual coupons are compounded based on the annual coupon rate. For example, the NTN-Fs 10% coupon translates into a 4.88% payment each semester. In addition, the price to yield relation in Brazil is always expressed in terms of dirty price. LTN. The LTNs (Letras do Tesouro Nacional) are short-term (up to 5 years), zero-coupon bonds that make up 29% of local issued federal government debt. LTNs are issued in 6, 12, 24, 36 and 48-month maturities, with the January 2016 the longest available. The LTNs are traded mainly by locals; foreigners hold 15% of the outstanding BRL 542bn. NTN-F. The NTN-Fs (Notas do Tesouro Nacional serie F) are fixed rate bonds with 10% coupons and semi-annual payments. The longest NTN-F bond is the January 2023. The most liquid tenors are the 2017 and 2021, but we expect there may be a shift to the on the run 2018 and 2023. The NTN-F series represent 12% of all local issued federal government debt. The NTN-Fs are popular among foreign investors who hold 44% of the outstanding BRL 222bn. NTN-B. The NTN-Bs (Notas do tesouro nacional serie B) are IPCA inflation-linked bonds that pay a 6% semi-annual coupon and account for 30% of total outstanding local debt. The IPCA is the consumer price index calculated by the IBGE in which BCB inflation target is set. The NTN-Bs are denominated in VNA (valor nominal) and settled in BRL. The NTN-B VNA is an inflation indexed unit based on monthly IPCA variation, published by the Treasury the 15th day of each month. The longest NTN-B matures in August 2050. The liquid tenors are 2016, 2022, 2030 and 2050. LFT. The LTNs (Letras do Tesouro Nacional) are short-term (up to 6 years), floating rate, zero-coupon bonds, which make up 24% of local issued federal government debt. The total return is a function of the Selic rate and the discount of the bond, as the face amount of these bonds is capitalized daily at the effective Selic rate. The LTNs are traded mainly by locals; foreign investors hold a little over 1% of the outstanding amount. NTN-C. The NTN-Cs (Notas do tesouro nacional serie C) are IGPM inflationlinked bonds that pay a semi-annual coupon. They are not very liquid, accounting for only 3% of total outstanding local debt. The IGPM is the CPI calculated by Fundacao Getulio Vargas. The NTN-Cs are denominated in VNA (valor nominal) and settled in BRL. The NTN-C VNA is an inflation-indexed unit based on monthly IGPM variation, published by the Treasury the first day of each month. Even though the NTN-B and NTN-C VNAs carry they same name, they represent different units of measurement because they track different inflation indices. Auction and placement mechanism The Brazilian National Treasury is responsible for bond issuance. Besides announcing an annual borrowing plan between January and February each year,
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the Treasury announces a monthly schedule for bond auctions on the last Friday of the prior month. The schedule contains the date for each bond auction with specific bonds (including maturities) to be issued each day. The size of each offer is announced on the day of the auction. In addition to the traditional auctions, the Treasury also conducts exchange auctions and buyback auctions. Most domestic issuance is done on a competitive basis through auctions with multiple prices. The LFT and NTN-B issuance are exceptions, and placed via Dutch auctions.
Derivatives market PRExCDI futures The DI futures market in Brazil is the most liquid interest rate derivative market in LatAm. They are traded on the BM&FBovespa exchange in Brazil and reference the overnight interbank interest rate, the CDI (Certificado de Deposito Interbancario). The DI future rate tracks the effective interest rate between the trade date and the maturity of the contract on a 252-business-day basis. Contract maturities are available for the coming four months and for every quarter thereafter. The contract is quoted on a yield basis, but cash value of the position is given by the present value per contract (BRL100,000 notional), discounted by the most current traded interest rate. At the end of initial trade date the future is marked-to-market based on the settlement (closing) interest rate. After that, the cash value of the open position is indexed daily to reflect the actual overnight rate and at the end of each day the position is adjusted. The PnL is based on the updated value of the position against the settlement interest rate at the end of the trading session. This ensures that from the trade date until expiration, the DI futures reflect the exact difference between the traded fixed yield and the reported floating DI rate for the period between the trade date and maturity. The contract performs like a fixed for floating swaps.
Table 118: Summary statistics of Brazil derivative products and their markets Product Interest rate (Onshore) PRExDI Future
Average daily trading volume USD40bn
Option on DI futures
60k contracts
IDI options
600k contracts
Interest rate (Offshore) PRExDI offshore swap
USD1mn DV01
Average transaction size
Bid-ask spread
Fixings and other notes
2k contracts Jan 14, 1bp liquid tenors, 2- Monthly contracts, 5k contracts Jan 15 5bp less liquid January expirations are most liquid 5k contracts 0.5% vol Monthly contracts, January and July expirations most liquid 10k contracts 10pts per contract Monthly contracts, January and July expirations most liquid 25k DV01
1bp liquid tenors, 2- Matches subset of DI 5bp less liquid futures contracts, January and July expirations
Source: BofA Merrill Lynch Global Research, BM&F
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Bloomberg pages OTC BRL – Market monitor ODA – CT DI futures CDIE – Market implied rates BNLTN Govt – LTN bonds BNTNF Govt – NTN-F bonds BNTNB Govt – NTN-B bonds BMLT – LatAm local markets
Reuters pages
Useful official websites Central bank http://www.bcb.gov.br/ Finance Ministry http://www.fazenda.gov.br/ Statistics agency http://www.ibge.gov.br/home/ Pension association http://www.abrapp.org.br Bond auctions http://www.stn.fazenda.gov.br/divida_publica/leiloes.asp
Useful market websites BM&F – Futures, Commodities, Stock Exchange http://www.bmfbovespa.com.br/ Association of Capital Markets Operators (ANBIMA) http://portal.anbima.com.br/
All DI futures contracts mature in the first business day of the contract month. 9 Liquidity tends to be concentrated in the January contracts , as they match the maturities of the NTN-Fs. Bondholders tend to use the DI futures to switch from fixed to floating interest rate exposure. Bid-ask spreads are as narrow as 1bp up to Jan-14, and 2-5bp in the longer tenors (in up to 10k DV01). The day count convention for DI futures (and other Brazilian fixed income) is 252 business days. Offshore players that are not set up to trade locally use offshore PRExDI swaps to take positions in the onshore DI futures market. With the elevated IOF tax, the spread between onshore and offshore prices increased with offshore yields trading below onshore yields due to foreign net demand for receivers and the cost for dealers to replicate and hedge these instruments in the local market. Onshore-offshore spread 10 The onshore-offshore spread reflects the BRL convertibility risk (in and out), as the BRL is not a deliverable currency. The spread also reflects IOF taxes. In 2010, the government increased the IOF tax from 2% to 4% and then to 6%. As a result, the on-off spread increased as the cost for investing in Brazilian assets became higher vís-a-vís investing in Brazilian assets abroad. One example of this is the increase in spread between Global BRL bonds and the local NTN-F bonds, as well as the compression in NDF implied yields. Previously, when foreign investors traded offshore NDF and offshore yields, the banks providing liquidity used to hedge themselves onshore at the BM&FBovespa futures market. However, with the IOF tax on onshore FX derivatives positions, the onshore and offshore markets have become more disconnected. Cupom cambial and FX swaps The cupom cambial is an onshore dollar interest rate. There are two major instruments to trade the cupom cambial: cupom cambial futures (DDI) and the 11 cupom cambial forward rate agreement (FRC ). The DDI has exposure to moves in the local dollar rate and moves in the FX. The FRC, also known as the clean cupom cambial, has exposure to the dollar rate but not to FX moves. The FRC is made up of two DDI contracts, a receiving leg and a paying leg. One of the DDI contracts in the FRC is the front future to remove the FX exposure. The amount in the two DDI contracts are such that it has the same present value. Offered occasionally by the central, bank, the currency swaps consist of two legs: one is the FX change + the onshore dollar rate (cupom cambial), and the other leg is the CDI. When the central bank receives the FX change and the cupom cambial and pays the CDI, the swap is called reverse-FX swap. When the central bank receives the CDI and pays the FX change, the cupom cambial the swap is called FX swap. Interest rate options 12 The two key interest rate options traded in Brazil are the swaptions (option on DI future) and IDI options (1 day Bank Deposit Index). Brazil swaptions are more common among foreign investors, while locals concentrate their positions on IDI options (options on the cumulative value of the CDI between the trade date and the maturity of the option).
9
Contracts can be found at ODA Cmtdy CT on Bloomberg.
For more details see: Brazil: onshore-offshore spread 101 (http://research1.ml.com/C/?q=PJLqDX1ocgXltljEpgrEYA__&r=)
10
11
Contracts can be found at GDA Curncy CT on Bloomberg.
For more details see: What’s unique in LatAm swaptions? (http://research1.ml.com/C?q=Hgfm0ECzASUTVpttwucbzQ__&s=)
12
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FX market The BRL is not deliverable, but its daily volume including spot, futures and NDFs exceeds US$15bn, competing with the MXN as one of the most liquid currencies in the region. The BRL is traded during BM&FBovespa trading hours, and the dollar futures (particularly the front future) are one of the most liquid products on the exchange. BRL liquidity declines significantly in the off-hours market (over the counter), with the bid-offer widening. PTAX. The daily reference FX fixing rate. Under new methodology implemented in 2011, the BCB surveys all 14 FX dealers 13 four times a day to get BRL price quotes. The BCB conducts one survey, in any two minutes, from 10:00am to 10:10am, 11:00am to 11:10am, 12:00am to 12:10am, and 1:00pm to 1:10pm. Each foreign exchange dealer must give a quote with bid-offer for a BRL transaction in the interbank market. The BCB then excludes the outliers – the two highest and two lowest quotes – and calculates the average of the quotes. The calculated average is released after each quote. The daily PTAX is the average of all surveys. Under the old methodology, the PTAX was a volume weighted average of all BRL spot transactions during the day. Table 119: Brazil’s FX market vital statistics and characteristics FX product Onshore Spot Future Forwards Options
Tradable product BRL spot USD/BRL future-BM&F Forward Options BM&F/OTC
Avg daily trading volume
Avg trading size
Bid-ask spread
Reuters reference
Key facts
USD1.8bn USD15bn
USD5mn USD5mn
7pips 5pips
< 0#DOL:>
Settlement: T+2 Fixing PTAX
USD45mn USD1.25bn
USD5mn USD15mn
5pips (short) 0.3 – 0.5 vols
< BR/OPT5>
Fixing PTAX Fixing PTAX
3m 10 pips, 12m 50 pips 0.3 – 0.5 vols
< BRLNDFOR=>
Fixing PTAX
< BR/OPT5>
Fixing PTAX
Offshore NDF
Forward
USD4.5bn
USD10mn
NDO
Options
USD750mn
USD30mn
1 pip = 0.0001 BRL Source: BofA Merrill Lynch Global Research, BM&F
Chart 107: Monetary policy rate (Selic) declines to record lows
Chart 108: Brazil foreign reserves rise, $376bn in July 2012 400
17.5% SELIC policy target rate
350
Foreign reserv es (USD bn)
300
15.0%
250 200
12.5%
150 100
10.0%
50 0
7.5% Jan-06
Jan-08
Jan-10
Jan-12
Source: Banco Central do Brasil, BofA Merrill Lynch Global Research
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Source: BofA Merrill Lynch Global Research
Banco do Brasil, Bradesco, Itau Unibanco, HSBC, Credit Suisse, Citibank, Santander, JP Morgan, Bank of America Merrill Lynch, BTG Pactual, BNP Paribas, Banco Votorantim, Goldman Sachs, and Morgan Stanley.
13
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Investor base Foreign investors have increased their participation in the domestic debt market significantly in the last five years. In 2006 foreign investor participation in the domestic federal public debt was close to 2%, and increased to 7% in 2008 and 12.2% in June 2012. Following the recent growth, foreign participation in the NTN-Fs reached 12.2% of the outstanding amount in May 2012. The local mutual fund holdings in Brazil continue to grow at a fast pace, exceeding BRL2.1tn ($1tn) in May 2012, over 10% growth in the last 12 months. As of July 2012 local mutual funds held BRL864bn in government bonds. In GDP terms, assets under management from pension funds and mutual funds increased from 53% of GDP in 2005 to 64.7% of GDP in 2011 (49.8% of GDP for mutual funds and 14.9% of GDP for pension funds). On a regional basis, Brazil accounts for 66.5% of the total assets under management in LatAm. As the public and private pension system is small, its overall government securities holding is very small at 15.3% of total assets, or BRL91bn as of March 2012. The public pension system (closed) is by far the largest share of the nation’s overall retiree pool. The public system runs large deficits due to legacy benefit and early retirement age. As a result, the private system (open) is growing very rapidly, but is very small compared to other LatAm countries. Both open and closed pension funds offering defined-contribution or defined-benefit plans are overseen by Associação Brasileira das Entidades Fechadas de Previdência Complementar (ABRAPP).
Rules, regulations, capital control and taxation Taxation depends on the instruments, holding periods and origin of funds. The fiscal treatment regarding the income tax varies according to the origin of funds (from tax havens or not) and the type of investment. The IOF is a tax levied on 14 credit and fixed income transactions of locals and foreigners. The IOF treatment depends on the type and investment tenor. All investors incur an IOF charged on very short-term gains up to a 30-day holding period, based on a declining rate. Foreign investors are open to invest in Brazil but under resolution 2689 must register with the BCB. Foreign investor inflows to buy local fixed income are taxed with a 6% IOF when the transaction involves an inflow of foreign currency or switching from another asset class that does not incur the IOF. When buying longer-maturity bonds, investors dilute the tax burden over the duration of the bond. The outflows of foreign currency do not incur the IOF.
Table 120: History of IOF on FX 12-Mar-08 22-Oct-08 19-Sep-09 4-Oct-10 18-Oct-10 28-Mar-11 6-Apr-11 26-Jul-11 1-Dec-11 29-Feb-12 12-Mar-12 14-Jun-12 Portfolio Fixed income Equities Deposit margin on derivatives External loans 90 days 270 days 1 year 2 years 3 years 5 years Long BRL positions on FX derivatives*
1.5% 0% 0.38%
0% 0% 0.38%
2% 2% 0.38%
4% 2% 0.38%
6% 2% 6%
6% 2% 6%
6% 2% 6%
6% 2% 6%
6% 0% 6%
6% 0% 6%
6% 0% 6%
6% 0% 6%
5.38% 0.38% 0.38% 0.38% 0.38% 0.38% 0%
5.38% 0.38% 0.38% 0.38% 0.38% 0.38% 0%
5.38% 0% 0% 0% 0% 0% 0%
5.38% 0% 0% 0% 0% 0% 0%
5.38% 0% 0% 0% 0% 0% 0%
6% 6% 6% 0% 0% 0% 0%
6% 6% 6% 6% 0% 0% 0%
6% 6% 6% 6% 0% 0% 1%
6% 6% 6% 6% 0% 0% 1%
6% 6% 6% 6% 6% 0% 1%
6% 6% 6% 6% 6% 6% 1%
6% 6% 6% 6% 0% 0% 1%
Note: *On 16 March 2012, the government reduced the bracket from 1% to zero for export hedges. Source: Brazilian Central Bank, Finance Ministry, BofA Merrill Lynch Global Research
14
170
Imposto sobre Operacoes Financeiras (Tax on Financial Operations).
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
In July 2011 the government introduced a 1% IOF on the daily increase in the short USD long BRL positions in derivatives. Investors should check with their tax consultants for specific details and particular issues.
Clearing and settlement Government securities acquired in primary placement auctions are settled on T+1 through the Selic, which is administered by the BCB. Securities traded in the secondary market and on repo with the BCB are settled on a delivery versus payment (DVP) basis and typically settle on T+1, but could settle on T+0 or T+2. Table 121: Summary of Brazil bond markets and products Instrument LTN Issuer Currency Minimum Denomination Tenor Interest rate/coupon Coupon Payments Day Count Calculation Amortization Schedule Amount outstanding (as of June 2012) Secondary Market Trading Quotation Convention Settlement Period Average Daily Turnover Bid/offer spread (0-5Y) Bid/offer spread (5Y+) Average trade size Clearing Mechanism Major players Trading hours Regulations Restrictions on Foreign Investment Custodian Withholding Tax Capital gains Tax Entry/Exit Primary Auctions Auction Style Average Issue Size
NTN-F
NTN-B
Federal government (Tesouro Nacional) BRL 1000 1-4 years 0 Zero coupon Bus/252 Bullet BRL541.6bn
Federal government (Tesouro Nacional) BRL 1000 1-10 years 10% semi-annual compounded Semi-annual Bus/252 Bullet BRL222bn
Federal government (Tesouro Nacional) IPCA-linked VNA (settled in BRL) NTN-B VNA 1-38 years 6% semi-annual compounded Semi-annual Bus/252 Bullet BRL570bn
OTC or Exchange (BM&F SISBEX) Yield T+1 (foreign clients tend to use T+2 or T+3) BRL3650bn (LTN + NTN-F) 2-5bp (can vary between 1-10bp) 2-5bp (can vary between 1-10bp) 50,000 bonds Selic book entry Local banks and local funds 9am-6pm (Sao Paulo, more liquidity 10-4)
OTC or Exchange (BM&F SISBEX) Yield T+1 (foreign clients tend to use T+2 or T+3) BRL3650bn (LTN + NTN-F) 2-5bp (can vary between 1-10bp) 2-5bp (can vary between 1-10bp) 50,000 bonds Selic book entry Local banks and local funds 9am-6pm (Sao Paulo, more liquidity 10-4)
OTC or Exchange (BM&F SISBEX) Yield T+1 (foreign clients tend to use T+2 or T+3) BRL3140bn 2-5bp (can vary between 1-10bp) 2-5bp (can vary between 1-10bp) 10,000 bonds Selic book entry Local banks and local funds 9am_6pm (Sao Paulo, more liquidity 10-4)
No restriction, required registration with the BCB and IOF tax Banks Locals 15-22.5%, nonresidents 15% Locals 15-22.5%, nonresidents 15% IOF tax on foreign inflows/no exit tax
No restriction, required registration with the BCB and IOF tax Banks Locals 15-22.5%, nonresidents 15% Locals 15-22.5%, nonresidents 15% IOF tax on foreign inflows/no exit tax
No restriction, required registration with the BCB and IOF tax Banks Locals 15-22.5%, nonresidents 15% Locals 15-22.5%, nonresidents 15% IOF tax on foreign inflows/no exit tax
Competitive auction Varies (minimum tender 1,000 bonds)
Competitive auction Varies (minimum tender 1,000 bonds)
Dutch auction Varies (minimum tender 1,000 bonds)
Source: BofA Merrill Lynch Global Research , ANBIMA, Tesouro Nacional, Banco Central do Brasil
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Chile Overview Marcos Buscaglia
The Chilean local government debt market is the fourth largest in Latin America after Brazil, Mexico and Colombia. Corporate borrowers represent the bulk of the local debt market, followed by the central bank and the Treasury. The FX and the fixed income derivatives markets are liquid and the third largest in the region.
Flavio de Andrade
Chile is the most open economy in LatAm and has the biggest exposure to China. Mining represents more than 60% of exports. A structural surplus fiscal rule has been set to isolate public finances from copper price swings, and the government has substantial savings abroad to face copper price declines.
Monetary policy
Table 122: Chile local debt ratings profile Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992
Aa3 Aa3 Aa3 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 -
AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA
AAAAA+ A+ A+ A+ A+ A+ A+ A+ AAAAAAAAAAAAAA -
Source: Bloomberg, BofA Merrill Lynch Global Research
Chart 109: Key Chile CPI components 25.3%
Fo o d
19.3%
Transpo rt
Ho using go o ds
7.5%
Leisure
7.5%
Educatio n
6.0%
Health
5.4%
0%
10%
Source: BofA Merrill Lynch Global Research
172
20%
Base rate. The BCCh achieves its objective by controlling the overnight interest rate known as Tasa de Politica Monetaria (CHOVCHOV Index on Bloomberg), or TPM. The board meets the second or third Thursday of every month and issues a monetary policy statement along with their decision after market close. Minutes of the meeting are published three weeks after. A chart packet is published the day before the meeting, highlighting the key macro and financial variables that factor into the policy decision. The board also produces a monetary policy report, known in Spanish as IPOM, at the end of each quarter that delineates the bank’s baseline macroeconomic projections. Often, a change in these projections results in an adjustment in monetary policy stance. Open market operation. The central bank conducts its open market operations through purchases and sales of securities issued by the BCCh (Cupos de Pagarés y Bonos), repurchases, liquidity deposits and currency swaps.
Reserve requirements. Reserve requirements are not used as a monetary instrument to modify liquidity conditions. Moreover, the reserve requirement rates have remained relatively unchanged since 1980 16.
15.7%
Other
Policy framework. The BCCh targets an explicit inflation level, currently at 3% (+/- 1% margin of error) with a two-year horizon. Symmetrically, the central bank is concerned with missing target bands, namely inflation exceeding or falling short of the respective inflation bands. The BCCh targets the consumer price index (CPI), calculated and released by INE. 15
Lending and deposit facilities. The BCCh offers standing overnight liquidity (SLF) and deposit facilities (SDF) to authorized financial institutions. It compensates the SDF at TPM – 25bp and charge the SLF at TPM + 25bp. Additionally, the BCCh offers an intraday liquidity facility (ILF), which corresponds to a loan that must be repaid on the same day without cost of interest to the bank.
13.3%
Ho using
Background. Central Bank of Chile (BCCh) basic constitutional law establishes three fundamental objectives: to preserve the currency stability, to ensure the normal functioning of domestic payments, and to ensure the normal functioning of external payments. In 1999 the exchange rate band mechanism was abandoned, and a free-floating regime adopted. Since 2000, the BCCh has implemented an inflation target mechanism.
30% 15
Statistics Agency (Instituto Nacional de Estadística).
16
The only exception was in 1994 when the BCCh decided to constitute reserves requirement using a calendar-
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Conventions
FX policy. Chile allows for a free floating exchange rate, but in the past the central bank has intervened to curb CLP strength. As an inflation-targeter, the BCCh’s interest in the FX level is related to impact on the inflation rate. In the words of former Governor Jose De Gregorio (our translation): “Even though the pass-through is low, it does not eliminate the impact of exchange rates on inflation”. 17 The BCCh justified its last two interventions in terms of building reserves and FX misalignment (April 2008), and building reserves and smoothing out the effects of the FX adjustment (January 2011).
Bonds Quote: Yield to maturity Settlement: T+2 (also T+0 and T+1): Basis: ACT/365 Coupon frequency: Semi-annual
IRS Fixing: CAM (Camara rate)
Fiscal policy
Coupon frequency: bullet for tenors under 18m, semi-
Fiscal policy. Since 2001 Chile has based its fiscal policy on the concept of structural balance 18 of the consolidated central government. In simple terms, this means that budgeted spending will be in line with cyclically adjusted fiscal policy, adjusting by economic activity, and copper and molybdenum prices. The government plans to restore structural fiscal balance by the end of President Piñera's administration. The government has the capacity to expand fiscal policy if there is a shock, as it has about US$15bn in the sovereign wealth fund.
annual 2y and longer
CCS Fixing: CLP x LIBOR Coupon frequency: 6m or 3m
Debt issuance. Up until March 2012 the government had been a net creditor, with gross debt and net credit with respect to GDP at 10.5% and 8.1%, respectively. During 1Q the Treasury did not issue external debt but published its local debt issuance schedule in February. However, the government has increased issuance somewhat following the 2010 earthquake with the dual goals of financing the reconstruction effort and building benchmark maturities in the sovereign yield curve. Low debt levels coupled with solid fiscal management and strong institutions have led Chile to be ranked as one of the safest credits in EM by all three rating agencies.
Chart 110: Chile – maturity profile (USDbn) of local CLP-denominated debt 5
BCP
BCU
BTP
BTU
Chart 111: Chile debt composition; total USD58bn CL (Treasury )
Treasury (UF)
8%
33%
4 CLP (BCCh)
3
21%
CLP (EXD)
2
2%
1
USD (EXD) UF (BCCh)
0 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 Source: Direccion de Presupuestos (Budget office), Chile Central Bank, BofA Merrill Lynch Global Research
5%
32% Source: Direccion de Presupuestos (Budget office), Chile Central Bank, BofA Merrill Lynch Global Research
day basis from a working-day basis, and to compensate lowered the different reserve requirement for cash deposits and for savings accounts from 10% and 9% to 9% and 3.6%, respectively. 17 De Gregorio, J.. “ Tipo de Cambio, Ajuste Real y Politica Monetaria”, Documentos de Política Económica No. 34, August 2009. 18
From a conceptual standpoint, cyclically adjusted balance is more appropriate.
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Macro drivers In terms of market impact, the most important macro data releases are monthly CPI and the IMACEC economic activity proxy, both released during the first full week of the month. Toward month-end, an economic activity report is released with details on industrial production, copper sales, construction activity and other variables. Additionally, the BCCh publishes a monthly economists’ expectations survey and a biweekly market maker expectations survey, which include GDP, monetary policy rate, inflation and USD/CLP local debt market forecasts.
Bond market The BCCh and the Treasury represent a significant portion of the Chilean fixed income market. Currently, the central bank is issuing inflation-linked bonds up to 30 years and peso-denominated bonds out to 10 years. The Treasury issues inflationlinked bonds up to 30 years. Primary dealers authorized to participate in the auction process include banks, pension funds, insurance companies and local stock brokers. A large share of the local government debt is inflation-linked. The demand for inflation assets comes from insurance companies and pension funds. Local corporates also issue Unidades de Fomento (UF) bonds in order to raise cheaper funds. These bonds are issued in UF, which is a local currency indexed to inflation. BCP. Fixed-rate bonds issued by the BCCh, denominated in CLP. There are over 20 maturities distributed out to 10 years. All newly issued BCPs have a 6% coupon while a few older issues have an 8% coupon. The BCP represents the largest series of fixed-rate government bonds outstanding, with CLP2.3tn (USD 7bn) outstanding, roughly 14% of the local government debt. BCU. Inflation-linked bonds issued by the BCCh, denominated in Unidades de Fomento and settled in CLP. The UF is an inflation-linked unit published by the central bank. There are over 25 maturities distributed out to 29 years. All newly issued BCUs have a 3% coupon while a few older issues have 5% coupon. With UF372mn (CLP8.4tn/USD17bn) outstanding, it represents 33% of the local government debt. BTP. Fixed-rate bonds issued by the Chilean Treasury, denominated in CLP. There are seven bonds out to 20 years. All BTPs carry a 6% coupon. With CLP2.2tn (USD 4.5bn) outstanding, it represents only 9% of the local government debt.
Chart 113: Chile – a net creditor
Chart 112: Chile – policy rate and inflation
50%
12% 10%
40%
8%
30%
6%
20%
4%
10%
2% 0%
0% -2% -4%
-10%
O/N Policy Rate
CPI (y oy )
Gross Debt (% of GDP)
-6% Mar-00
-30%
Mar-02
Mar-04
Source: BofA Merrill Lynch Global Research
174
Net Debt (% of GDP)
-20%
Mar-06
Mar-08
Mar-10
Mar-12
1991
1994
1997
Source: BofA Merrill Lynch Global Research
2000
2003
2006
2009
2012
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages OTC CLP – Market monitor BCPCL Govt – BCP bonds BCUCL Govt – BCU bonds BTPCL Govt – BTP bonds CHILBT Govt – BTU bonds
BTU. Inflation-linked bonds issued by the Chilean Treasury, denominated in UF and settled in CLP. There are over 20 maturities distributed out to 30 years. All newly issued BTUs have a 3% coupon while a few older issues have coupons that vary from 2.1-4.5%. The BTU represents the largest series of UF-linked government bonds outstanding with UF410mn (CLP9.3tn/USD 19bn), or about 36% of the local government debt.
BMLT – LatAm local markets
Reuters pages
PDBC (Pagares Descontables del Banco Central). A zero-coupon, short-term discount note issued with the following maturities: 30, 60, 90, 180 and 360 days. There is a total of CLP2.3tn (USD 4.7bn) outstanding and the bulk of the trading activity is carried by banks that use it to fine-tune reserves.
Useful official websites Central bank http://www.bcentral.cl/ Finance Ministry http://hacienda.cl/ Statistics agency http://www.ine.cl/home.php Pension regulator http://www.safp.cl/ Budget office http://www.dipres.gob.cl/ Chile Internal Tax Revenue Agency http://www.sii.cl/ Bond auctions http://www.bcentral.cl/operaciones-financieras/mercadoabierto/resultado-licitaciones/index.htm
Useful market websites Exchange: Bolsa de Comercio http://www.bolsadesantiago.com/
Global CLP. Issued in 2010, a single external bond denominated in CLP and settled in USD. The bond carries a 5.5% coupon and matures in August 2020. In September 2011 the Global CLP was reopened, increasing the total outstanding to CLP434bn (USD 900mn). The government has stated its plans to continue issuing more Global CLPs to contribute to the “internationalization of the CLP”. UF (Unidad de Fomento). An inflation-linked unit of account, published daily by the BCCh and used to index inflation-linked bonds and other inflation-linked instruments. The UF is calculated daily such that the shift in the UF from the 10th of the current month until the 9th of the following month is equal to the previous month’s inflation. In any given day between those two dates the UF’s growth rate is proportional to the inflation rate, compounded daily. Auction mechanism. The annual issuance schedule for the placement of Treasury bonds each month is published before the beginning of the year by the Office of Public Debt at the Finance Ministry. In its role of Fiscal Agent of the Treasury, the BCCh announces and conducts the placement auctions monthly. The central bank also coordinates with the Treasury to issue central bank bonds monthly. Placements of Treasury and central bank bonds are done via Dutch auctions. Banks, mutual funds, pension funds and insurance companies are eligible to participate in primary auctions.
Derivatives market There is an active market for interest rate swaps (IRS), with the most common instruments the CLPxCAM (fixed/floating local rates swaps) and UFxCAM (fixed inflation-linked/floating local rate). Investors can also enter into cross currency swaps (CLP/USD and UF-USD) and basis swaps (CAMxLIBOR). In addition, CLP-UF forwards are widely traded given the preponderance of UF-linked debt. CLPxCAM swaps The CLPxCAM swap is a fixed for floating swap: one leg pays a fixed annualized rate and one leg receives a floating rate based on the Tasa Camara (CLICP Index on Bloomberg), an overnight rate reported by the central bank and representing the average prevailing interbank lending rate. For tenors under 18 months, the swaps are bullet, with a single exchange of fixed for floating at expiration. For tenors over 18 months, cash flows are exchanged semi-annually on an actual/360-day count. The floating leg is determined by compounding the daily CAM rates over the reset period. Liquidity is relatively good for 2-5 year tenors, with bid-ask spreads around 4-5bp for 5-10K DV01 on the most liquid tenors: 2, 5 and 10 years.
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UFxCAM swaps and inflation breakevens An investor entering into an UFxCAM swap agrees to pay a fixed rate on a UF notional, and in exchange receives a floating rate indexed to the Tasa Camara, paid on a CLP notional. On the trade date, the UF and CLP notionals are equated using the spot UF rate at settlement. Cash flows are exchanged semi-annually with the UF payment converted to CLP at the prevailing UF rate. Since the UF rate follows inflation, a UF payer in an inflationary environment will owe increasing amounts at each settlement date. At maturity, investors exchange notional based on the prevailing UF rate. Conceptually, a UFxCAM receiver can be thought of as long an inflation-linked bond, or simply long inflation. A UFxCAM payer is therefore short an inflationlinked bond, or simply short inflation. Corporations often issue inflation-linked debt (thereby being short inflation) and receive UFxCAM swaps to hedge their inflation exposure. At times, large corporate hedging demand can push UFxCAM swaps to negative rates in the short tenors, 6 months to 1 year. Market implied breakeven inflation rates can be calculated using the nominal and inflation-linked swaps. The breakeven is the rate at which investors are indifferent from entering into a UFxCAM or CLPxCAM swap, and can be derived as follows: (1 + x ) / (1 +y) -1 where x = CLP x CAM rate and y = UF x CAM rate Breakeven inflation does not account for liquidity, term premium or convexity. An investor that expects inflation to be higher than the breakeven rate can benefit from receiving UFxCAM and paying CLPxCAM. Investors may execute the trade in two legs, or can trade the breakeven as a standalone product. Liquidity is concentrated from 2-10 year tenors. Cross currency and basis swaps Cross currency swaps usually trade on CLPxUSD and UFxUSD based on the LIBOR. Most common are semi-annual basis and actual/360-day count. An investor agrees to pay the fixed rate (CLP or UF), and in exchange receives a floating rate equal to 6m USD LIBOR. Notional is exchanged at trade inception and then at maturity, so the fixed rate payer is long the foreign currency, such as USD or EUR, for the duration of the trade, and therefore is exposed to the currency risk. Investors may also trade basis swaps, which are floating-floating swaps where one investor pays the floating Camara rate and receives LIBOR + spread. Cross currency and basis swaps are often used by the local banking system in order to access an attractive source of USD funding. Table 123: Summary statistics of Chile derivative products and their markets Average daily Average Bid-ask Fixings and Product trading volume transaction size spread other notes Interest rate swap CLP x CAM (Camara) swap Real rate swap UF x CAM swap
75K DV01
5-10K DV01
75K DV01
5K DV01
4-5bp up to 5y, 5-7bp Out to 15 years, not longer tenors liquid out to 18 months
Inflation forwards CLPUF forwards
UF 10mn
UF 500,000
CLP10-20 (1m to 1y) 80% volume on first two inflation months
Cross-currency swaps CLP x LIBOR
20K DV01
USD 20mn
Source: BofA Merrill Lynch Global Research
176
4-5bp
10bp
Most liquid 1y, 2y, and 5y
Convention 6m LIBOR plus spread, most liquid 2-5y
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FX market USD/CLP is the third most traded currency pair in LatAm behind the USD/MXN and USD/BRL, with average daily turnover of over USD2bn. The CLP is nondeliverable offshore. The onshore spot is the most liquid FX instrument. Forward outright and FX swaps are also liquid. USD/CLP forwards are settled against the daily fix called the Dolar Observado published by the BCCh. The USD/CLP trade at forward premium given current rate differentials. Local pension funds are active in the FX market as hedgers of the currency exposure on their sizeable foreign investment position. Investors may also enter into CLP-UF and USD-UF forwards (Table 123). In either case, the buyer of the forward is entering into agreement to buy/sell CLP (or USD) at a future date and sell/buy UF. Contracts are settled against the UF index. The buyer of the forward contract profits if inflation, as reflected in the CLP-UF rate, is higher than what is priced in by the market over the life of the contract. Table 124: Chile’s FX market Vital statistics and characteristics Tradable product
Avg daily trading volume
Avg trading size
Bid-ask spread
Reuters reference
CLP spot
USD2.0bn
USD1mn
20pips
NDF on CLP
USD1.5bn
USD10mn
10-15pips
Offshore NDF
Fx outright
USD750mn
USD 10mn
30pips
Fixing observado
NDF NDO
Fx swaps ND Options
USD1bn USD50mn
USD 20mn USD10mn
20 pips 10bp
Fixing observado
FX product Onshore Spot Forwards
Key facts Settlemen t: T+1 Spot vs longer dates
1 pip = CLP0.01 Source: BofA Merrill Lynch Global Research
Investor base Chile’s local investor base is quite large given the size of its local pension fund and insurance industries. Local insurance firms make up the largest demand for inflation-linked debt and related instruments. The pension system was privatized in 1981, requiring individuals to make contributions to individual savings accounts managed by one or more private management companies, or administrators known as AFPs. Pension fund assets under management totaled over US$144bn (58% of GDP) as of June 2012. Mutual fund AUM accounts for 15% of GDP. The pension fund system is broken down into five types of funds (A to E) that differ by investment risk.
Fund A is the riskiest with 76% of the portfolio invested in equities and 24% invested in fixed income.
Fund E is the least risky with 1.3% invested in equities and 98.7% in fixed income, as of June 2012.
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The total AFP investment portfolio has close to 60% invested in fixed income securities (domestic and offshore) and 40% invested in equities (domestic and offshore). There are legal limits to pensions’ asset allocations, which sometimes affect their investment decisions. In particular, limits on unhedged foreign investments affect pensions’ participation in the FX forwards market. Table 125: Pension fund limits (% of AUM) Sovereigns Equities Foreign Investment Unhedged foreign investment
A
30-40 80 45-100 30-50
B
30-40 60 40-90 25-40
C
35-50 40 30-75 20-35
D
40-70 20 20-45 15-25
E
50-80 5 15-35 10-15
Source: Superintendencia de Pensiones
Rules, regulations, capital control and taxation Foreign investors and institutions can invest and trade in the local market but are required to obtain a Taxpayer Identification Number (RUT: rol unico tributario). Non-domiciled and nonresident individuals and entities are subject to an additional tax (AT), a withholding tax that applies to Chilean earned income and to certain specific payments defined by law. Generally, capital gains are considered normal income. Also, any premium payable on redemption of the securities will be treated as interest and subject to the Chilean interest withholding tax, as described above. The AT rate is currently 35%, but drops to 4% for interest income paid on loans or bonds to foreign financial institutions. In addition, the rate may vary (or even be exempt) for residents of countries with a dual tax treaty with Chile. As a reflection of Chile’s intention to promote its capital markets, legislation enacted in April 2009 grants resident and nonresident investors a tax benefit for capital gains obtained from the transfer or sale of debt securities under certain conditions.
Clearing and settlement Most local government bond transactions settle on T+1, but T+0 and T+2 are available under certain conditions when both counterparties agree during time of trade. Settlement and clearing are carried out by Deposito Central de Valores (DCV), a local depository and clearing institution. Transactions on swaps and most derivatives settle on T+2.
178
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Table 126: Summary of Chile bond markets and products Instrument
BCU
BCP
BTU
BTP
Issuer
Central Bank of Chile
Central Bank of Chile
Treasury
Treasury
PDBC Central Bank of Chile
Currency
UF (settled in CLP)
CLP
UF (settled in CLP)
CLP
CLP
Minimum Denomination
UF500
CLP5mn
UF500
CLP5mn
CLP5mn
Tenor
0 to 29 years
0 to 10 years
0 to 30 years
0 to 20 years
Up to 360 days
Interest rate/coupon
3% for on the run (5% a few
6% for on the run (8% two off 3% for on the run (2.1-4.5% a 6%
off the run)
the run bonds)
few off the run)
zero
Coupon Payments
Semi-annual, 180/360
Semi-annual, 180/360
Semi-annual, 180/360
Semi-annual, 180/360
Day Count Calculation
ACT/365
ACT/365
ACT/365
ACT/365
zero ACT/365
Amortization Schedule
Bullet
Bullet
Bullet
Bullet
Bullet
Amount outstanding
UF372mn (CLP8.4tn)
CLP3.5tn
UF410mn (CLP9.3tn)
CLP2.2tn
CLP2.3tn
(as of June 2012) Secondary Market Trading
OTC and Bolsa de Comercio OTC and Bolsa de Comercio OTC and Bolsa de Comercio OTC and Bolsa de Comercio OTC and Bolsa de Comercio (auction and Telerenta)
(auction and Telerenta)
(auction and Telerenta)
(auction and Telerenta)
(auction and Telerenta)
Quotation Convention
Yield
Yield
Yield
Yield
Yield
Settlement Period
Common T+1, also T+0 and Common T+1, also T+0 and
Common T+1, also T+0 and
Common T+1, also T+0 and
Common T+1, also T+0 and
T+2
T+2
T+2
T+2
T+2
Average Daily Turnover
USD100mn
USD50mn
USD50mn
USD30mn
USD30mn
Bid/offer spread (0-5Y)
6bp
6bp
6bp
6bp
3bp N/A
Bid/offer spread (5Y+)
4bp up to 10y, 6bp longer
4bp up to 10y, 6bp longer
4bp up to 10y, 6bp longer
4bp up to 10y, 6bp longer
tenors
tenors
tenors
tenors
Average trade size
UF100K
CLP3bn
UF100K
CLP3bn
Clearing Mechanism
Local DCV
Local DCV
Local DCV
Local DCV
Local DCV
Major players
Insurance companies (long
Insurance companies (long
Insurance companies (long
Insurance companies (long
banks
end), pension funds (belly),
end), pension funds (belly),
end), pension funds (belly),
end), pension funds (belly),
mutual fund (short end),
mutual fund (short end),
mutual fund (short end),
mutual fund (short end),
banks
banks
banks
banks
10:00am to 1.00pm
10:00am to 1.00pm
10:00am to 1.00pm
10:00am to 1.00pm
10:00am to 1.00pm
(Santiago)
(Santiago)
(Santiago)
(Santiago)
(Santiago)
No restriction
No restriction
No restriction
No restriction
No restriction
Trading hours
varies
Regulations Restrictions on Foreign Investment Custodian
DCV
DCV
DCV
DCV
DCV
Withholding Tax
Foreigners pay 35%
Foreigners pay 35%
Foreigners pay 35%
Foreigners pay 35%
Foreigners pay 35%
withholding or qualify for 4% withholding or qualify for 4% withholding or qualify for 4% withholding or qualify for 4% withholding or qualify for 4% withholding if they execute withholding if they execute withholding if they execute per withholding if they execute per withholding if they execute per
Capital gains Tax
per Government guidelines.
per Government guidelines.
Government guidelines.
Government guidelines.
Government guidelines.
Foreigners from dual tax
Foreigners from dual tax
Foreigners from dual tax
Foreigners from dual tax
Foreigners from dual tax
treaty countries pay 4%
treaty countries pay 4%
treaty countries pay 4%
treaty countries pay 4%
treaty countries pay 4%
Foreign investors in non-dual Foreign investors in non-dual Foreign investors in non-dual Foreign investors in non-dual Foreign investors in non-dual tax treaty countries pay 35%. tax treaty countries pay 35%. tax treaty countries pay 35%. tax treaty countries pay 35%. tax treaty countries pay 35%. These same investors can
These same investors can
These same investors can
These same investors can
avoid capital gains taxes if
avoid capital gains taxes if
avoid capital gains taxes if
avoid capital gains taxes if
No
No
No
No
No
These same investors can
avoid capital gains taxes if they execute per Government they execute per Government they execute per Government they execute per Government they execute per Government guidelines guidelines guidelines guidelines guidelines Entry/Exit Primary Auctions Auction Style
Dutch auction
Dutch auction
Dutch auction
Dutch auction
Dutch auction
Average Issue Size
USD230mn monthly
USD200mn monthly
USD400mn monthly
USD140mn monthly
USD400mn monthly
Source: BofA Merrill Lynch Global Research
179
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Colombia Overview Francisco Rodríguez
Colombia is the third largest Latin American local sovereign bond market, roughly one-tenth the size of Brazil’s and one-third the size of Mexico’s, but larger than those of Chile, Argentina or Peru. The government has concentrated on promoting liquid local debt benchmarks with 1, 3, 5, 10, and 15-year maturities. The longest local bond is the Jul-24 TES, which accounts for almost one-fifth of all TES outstanding. A high rate of withholding tax on foreign investors continues to limit the growth of this market.
Flavio de Andrade
The Colombian economy is highly dependent on exports of hydrocarbons and minerals. Total exports of non-renewable natural resources account for 71% of total exports, up from 39% 10 years ago and 12% 40 years ago. Oil output has nearly doubled over the past eight years and, according to government plans, will expand by 50% more by 2020. Colombia has a stable political environment, although an armed insurgency has recovered in recent years.
Monetary policy Table 127: Colombia local debt ratings profile Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 -
BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB BBB BBB BBB BBB BBB BBB BBB+ A A+ A+ A+
BBB BBB BBBBBBBBBBBBBBBBBBBBBBBBBBBBBB BBB -
Source: BofA Merrill Lynch Global Research. Bloomberg
30.1%
Food
28.2%
Base rate. Banrep meets monthly to decide the key policy rate and publishes a brief policy statement with its decision after market close. The reference rate (CORRRMIN Index on Bloomberg) is the minimum repo rate to be offered at Banrep’s daily auction. The meeting is followed by a press conference with the Banrep governor, at which he is occasionally accompanied by board members.
Open market operations. Transitory operations are carried out through short-run repurchase agreements (if expansionary) or reverse repurchase agreements (if contractionary). Permanent operations are carried out through sales of the public debt portfolio. Banrep can also receive deposits from authorized entities.
15.2%
Transport Education
5.7%
Clothing
5.2%
Other
Lending and deposit facilities. Required reserves are remunerated at 37.5% of the target inflation rate.
15.6% 0%
10%
20%
Source: BofA Merrill Lynch Global Research
180
Policy framework. The Constitution establishes Banrep as independent of all other branches of government. Its board has seven members, including the finance minister. During the disinflationary process Colombia had interim biennial inflation target ranges that were reduced progressively. The current target range now coincides with the long-run target, 3 ±1%.
The minutes are released two weeks after the meeting. These typically indicate whether the decision was unanimous or a majority. Additionally, Banrep presents a bi-annual report to Congress that assesses the country’s economic perspectives and its monetary and FX policy guidelines.
Chart 114: Key Colombia CPI components Housing
Background. The Bank of the Republic of Colombia (Banrep) started following inflation-targeting policy in 1991. In 2000 the board fixed 3% as the long-run inflation target, and embarked on a disinflationary process, gradually lowering its target rate. This allowed Colombian inflation to reach single-digit rates for the first time since the 1960s, and to fall below the long-run target range by 2009.
30%
40%
Reserve requirements. Short-term deposits are subject to an 11.5% reserve requirement. CDs and other deposit instruments with duration less then 18 months are subject to a 6% requirement. CDs and other deposits instruments with durations greater then 18 months are exempt from reserve requirements.
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Conventions
FX policy. Banrep intervenes in the FX market with the objective of maintaining an adequate level of reserves, reducing short-term FX fluctuations, and moderating excessive longer-term fluctuations that endanger price or financial stability. The bank can use a combination of direct purchase auctions, put/call options or discretional intervention; only direct purchase auctions have been used since 2009.
Bonds Quote: Yield to maturity Settlement: T+0 Basis: NL/365 Coupon frequency: Annual
In February Banrep announced a program to purchase at least $20mn per day, a program that has been extended until 2 November. The bank can auction options (put or calls) when the market moves to ± 5% of the 20-day moving average.
IRS Fixing: IBR Coupon frequency: Quarterly
Fiscal policy and debt issuance
CCS
Fiscal policy. Total expenditures of the nonfinancial public sector are 28.4% of GDP, with 18.1% coming from the central government and the rest from local and regional governments and decentralized entities of the public sector. Over the past 10 years Colombia has reduced its deficit from 5.1% to 2.8% of GDP, and its stock of pubic debt from 59.1% to 43.4% of GDP. Sustained economic growth and increasing oil fiscal revenues have helped fiscal consolidation.
Fixing: 6m LIBOR Coupon frequency: Semi-annual
In 2010 and 2011 the Santos administration pushed through a set of aggressive reforms for fiscal institutions, including constitutional reforms to change the royalties distribution system and protect fiscal responsibility principles. The administration also adopted a fiscal rule to target a structural fiscal deficit of 1.0% of GDP by 2020, as well as the creation of national and regional stabilization funds. However, the implementation of the rule designed by the Ministry of Finance does not foresee investment in the national stabilization fund until 2023, as it intends to use any surpluses to bring the central government debt to GDP ratio to below 20%. Colombia’s increasing oil dependence has also brought about fiscal reliance on oil revenues, with the fiscal contribution of oil at 4-6% of GDP. Debt issuance. As of March 2012 Colombia had outstanding debt of COP248tn (US$134bn), of which 172tn (69%) was internal and 31tn (28%) was external. Of internal debt, the central government owed 89.3%, almost all of it in the form of bonds. Of the bonds owed by the central government, 75.6% are denominated in COP and 24.4% are linked to inflation through the Unidad de Valor Real (UVR) index, which is set by the central bank based on the previous month’s CPI print. Chart 115: Colombia – maturity profile (in USDbn) of local COP and UVR denominated debt (including COP denominated TES Global) 16
COP
UVR
Chart 116: Colombia – total outstanding debt (local and external)
TES Global COP USD, 23.2%
14 12 10 8
Other, 0.9%
6 4
COP, 58.6% UVR (COP), 17.3%
2 0 2012
2014
2016
2018
2020
2022
2024
* As of 6/30/2012. Total 153tn COP ($86bn). Source: BofA Merrill Lynch Global Research, Ministerio de Hacienda y Credito Publico.
2026 Source: BofA Merrill Lynch Global Research
181
GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Bloomberg pages
Bond market
OTC COP – Market monitor
There are two types of bonds issued regularly in the local debt market. The government issues fixed-rate, COP-denominated TES and inflation-linked UVR bonds. Liquidity in the secondary market is increasing, with average daily trading volume of approximately USD4bn. Maturities of 2-5 years account for more than half of trading volume, in line with the sovereign’s maturity profile. The bid-ask spread for the liquid bonds can be as tight as 2bp.
COLTES Govt – Tesoro Bonds SENC – SEN TES market prices BVCO – BVC TES market prices ICCO – ICAP live prices TDCO – Tradition live prices GFCO – GFI live prices
Reuters pages
Useful Official websites Central bank http://www.banrep.gov.co Finance Ministry http://www.minhacienda.gov.co Investor Relations Colombia http://www.irc.gov.co Statistics agency http://www.dane.gov.co Financial institution regulator http://www.superfinanciera.gov.co
TES Tasa Fija. These are annual fixed-rate bonds issued in COP that pay full principal at maturity. Maturities currently range from 1-15 years, but the government could issue longer maturity bonds. Most of the liquidity in the market is concentrated in these bonds. TES UVR. These are inflation-linked securities that have an annual fixed coupon and pay the principal at maturity. The face value of these bonds is expressed in terms of UVR. The UVR Index is a unit published daily by the central bank and tied to the CPI of the previous month. Liquidity in UVR bonds is low, and it accounts for less than 10% of the daily trading volume. The liquidity of these bonds is cyclical since the inflation in Colombia is mostly concentrated in the first months of the year, particularly January through March. During these months bond returns are usually more attractive, so liquidity increases. TES Global (COP-denominated). There are three TES Globals maturing in 2015, 2021 and 2027, denominated in COP. Since 2005, US$7bn of these bonds have been issued. They are designed for offshore investors, governed under New York Law and pay all coupons and principal payments in USD.
Bond auctions http://www.banrep.gov.co/informeseconomicos/ine_sub_tesb.htm
Useful market websites Stock exchange http://www.bvc.com.co
Auction and placement mechanism. TES auctions are administered by Banrep. The auctions usually occur the Wednesday (or following business day) of monetary weeks (weeks with four or more banking days). COP TES are usually auctioned during the second and fourth monetary weeks of the month, and TES UVR during the third monetary week.
Derivatives market Cross currency swaps. CCS exists for both COP/LIBOR and UVR/LIBOR. Most Colombian CCS have a fixed local rate leg and a floating 6-month USD Libor leg. This curve goes from 1 to 25 years and liquidity is typically concentrated between the 1 and 10-year tenors. Bid-ask spreads are typically 5bp and the average ticket size is USD10mn. The UVR/LIBOR goes from one to 15 years but is rarely traded. Bid-ask spreads are 25bp. Interest rate swaps. The main interest rate swap traded in Colombia is the IBR swap, which is an OIS tied to the overnight interbank lending rate (IBR). For maturities 18 months and shorter the swap makes a single net payment for the fixed and floating legs at maturity. For 2-year and above the netted payments are exchanged every quarter. At each reset the floating leg amount is based on the effective compounded rate from the daily IBR rates during the reset period. The fixed leg is based on the usual Actual/360 convention. IBR swaps are slowly gaining liquidity. Daily volume of IBR 19 swaps is around COP200bn, most transactions are 3 month to 3 year tenors but sometimes trades to 10 years and the average bid-ask is about 10bp.
19
182
IBR = Indicador Bancario de Referencia.
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Local futures. TES futures have been traded on the Colombian Stock Exchange since 2008. Liquidity is still thin in this market; however, locals expect it to grow over the coming years. In June 2012, stock exchange launched a future on the overnight interbank lending rate (IBR). Table 128: Summary statistics of Colombia derivative products and their markets Avg daily Avg Bid-Ask trading transaction Product Other notes volume size spread Cross Currency Swap COP/LIBOR USD50mn UVR/LIBOR USD5mn
USD10mn USD5mn
5bp 25-50bp
6mLIBOR, liquid in 1-10 year tenors 6mLIBOR, same tenors as COP/LIBOR but poor liquidity. Inflation Index: Bloomberg UVR Index
Interest Rate Swap COP/IBR USD100mn
USD10mn
10bp
O/N IBR daily compounded, most trading in 3m-3y year tenors, trades to 10 years.
Local Futures TES COP100,000mn COP1,000mn
0.05pct
IBR
0.40pct
Quarterly maturities (Mar, Jun, Sep, Dec) and next two monthly maturities. Three different underlying: Short-term, Mediumterm and Long-term COP TES. Four maturities: Mar, Jun, Sep, Dec
COP20,000mn
COP1,000mn
Source: BofA Merrill Lynch Global Research
FX market The COP is a free-floating, nondeliverable currency with an average daily trading spot volume of USD1bn. There is an onshore forward market with maturities up to 18 months, but liquidity is concentrated in 1-3 months. These forwards can be cash settled or delivered if a foreign exchange liability/asset exists. The fixing rate for NDF contracts is the TRM, which is a volume weighted average of the spot market transactions on the fixing date. The TRM is calculated by the Superintendencia Financiera de Colombia (financial institutions regulator). In recent years, futures on TRM started trading on the stock exchange and are slowly gaining liquidity (daily average volume USD60mn). There is also an NDF and NDO offshore market. The NDF offshore market is liquid up to 1 year, and the NDO trades a few times a week. Table 129: Colombia’s FX market vital statistics and characteristics FX product Onshore Spot
Tradable product
Avg daily trading volume
Avg trading size
Bid-Ask spread
Reuters reference
COP Spot
USD1bn
USD10mn
COP1-3
Forwards
Forwards
USD 400mn
USD10mn
COP2-3
Settlement: T+2 Fixing TRM
Offshore NDF NDF NDO
Fx outright Fx swaps Options
USD600mn USD600mn USD10mn
USD10mn USD10mn USD10mn
COP2-3 COP2-3 1 vol
CO/COL03 CO/COL03 CO/COL03
Fixing TRM Fixing TRM Fixing TRM
Key facts
Source: BofA Merrill Lynch Global Research Note: Fixing NDF is TRM with day count convention Act/360
Investor base The main holders of local TES are the pension funds (defined contribution), which hold almost 28% of the total local TES outstanding. Local commercial banks also play a mayor role in the local government bond market, with their holdings
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accounting for 20.6% of the total outstanding. Other major holders are the public entities and public trust funds, which account for 14.4% and 11.9%, respectively. Foreign investors can invest in local debt instruments through a local investment administrator (broker dealer or trust fund administrator). Foreign investment in debt securities has grown significantly in recent years, but still accounts for less than 3% of the total TES outstanding.
Rules, regulations, capital control taxation There have been capital controls in Colombia in the past, but as of August 2012 there were none. The income tax for fixed income investments is 33%. There is a withholding tax (deductable of income tax) on interest payments of 7% for bond maturities of less than 5 years and 4% for longer maturities. Investors are also subject to a 16% value added tax on currency repatriation gains. Although investors pay the VAT, it is based on the dealer’s foreign currency gain on the transaction relative to the tax base exchange rate. The tax base exchange rate is the dealer’s average exchange rate from the previous day. In addition, there is a 0.4% financial transactions tax on after-tax funds repatriated from Colombia. This tax can be avoided if using the same intermediary to close an open currency position.
Clearing and settlement There are two main depository institutions in Colombia: DCV, administered by Banrep; and Deceval, administered by the Colombian Stock Exchange. DCV can only be used for government bonds, while Deceval can be used for any kind of fixed income security. Colombia’s payment system is SEBRA, also administered by BanRep. The majority of the trades in TES are settled delivery versus payment (DVP) through SEBRA and DCV. The standard settlement for government securities is T+0.
Chart 117: TES trading volume
Chart 118: FDI on debt instruments in trillion COP
2021-2026
2012-2013
13%
11%
6 5 4
2017-2020
3
16%
2 1 2014-2016 60% Source: BofA Merrill Lynch Global Research, BanRep
184
0 Feb-01
Feb-03
Feb-05
Feb-07
Source: BofA Merrill Lynch Global Research, Superfinanciera
Feb-09
Feb-11
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Table 130: Summary of Colombia bond markets and products Instrument
TES Tas Fija
TES UVR
Issuer
Tesoreria General de La Nacion
Tesoreria Nacional de La Nacion
Currency
COP
UVR (settled in COP)
Minimum Denomination
COP500,000/increment COP100,000
UVR10,000/increment UVR1,000
Tenor
1 to 16 years
1 to 16 years
Interest rate/coupon
Annual
Annual Fixed (in UVR)
Coupon Payments
Fixed
Day Count Calculation
NL/365
NL/365
Amortization Schedule
Bullet
Bullet
Form
Scripless
Scripless
Amount outstanding
COP114,572bn
COP 33,682bn
Trading
Exchange (BVC, SEN) and OTC
Exchange (BVC, SEN) and OTC
Quotation Convention
Yield
Yield
Settlement Period
T+0
T+0
Average Daily Turnover
COP6000bn
COP 300bn
Bid/offer spread (0-5Y)
1bp
3bp
Bid/offer spread (5Y+)
1bp for benchmarks and 3-5bp for others
3 – 10bp
Average trade size
COP5bn
COP 5bn
Clearing Mechanism
DVP via SEBRA/DCV or Deceval
DVP via SEBRA/DCV or Deceval
Major players
Locals (pension funds, banks and broker/dealers)
Locals (pension funds, banks and broker/dealers)
Trading hours
8:00-15:40 (Bogota)
8:00-15:40 (Bogota)
There are no restrictions for foreign investment. However,
There are no restrictions for foreign investment. However,
investments must be made through a local broker/dealer or
investments must be made through a local broker/dealer or
fiduciary.
fiduciary.
(as of June 2012) Secondary Market
Regulations Restrictions on Foreign Investment
Custodian
Local custodian required
Local custodian required
Withholding Tax
7% for maturities of less than 5 years and 4% for longer
7% for maturities of less than 5 years and 4% for longer
maturities.
maturities.
Capital gains Tax
33%
33%
Entry/Exit
16% value added on currency appreciation
16% value added on currency appreciation
Primary Auctions Auction Style
Dutch
Dutch
Average Issue Size
COP10tn
COP10tn
Minimum Amount of Tender
COP500,000,000
UVR1,000,000 (≈ COP200,000,000)
Source: BofA Merrill Lynch Global Research
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Mexico Overview Carlos Capistran +52 555 2013350
The Mexican fixed income market is the second largest in LatAm in terms of volume. Remarkable public debt management has led to a relatively high proportion of local debt being long-term securities. The government issues fixed rates (Cetes, MBono, inflation-linked bonds) and floating rates (Bondes). The main local players include banks and private funds, although these are outpaced by foreigners due to the ease of entry and exit, high spreads against advanced economies, and inclusion in global bond indices. International reserves are at historical highs amid strong macroeconomic fundamentals. Market intervention has taken place only in scenarios of very poor liquidity.
Flavio de Andrade
Market drivers
Table 131: Mexico local debt ratings profile Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992
Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa3 Baa3 Baa3 Baa3 Baa3 Baa1 Baa1 -
AA A A A+ A+ A A AAABBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ A+ AAAA-
BBB+ BBB+ BBB+ BBB+ AABBB+ BBB+ BBB BBB BBB BBB BBB BBBBBBBBB-
Source: BofA Merrill Lynch Global Research, Bloomberg
Chart 119: Mexico CPI components 28.2%
Housing
23.3%
Food
14.6%
Transport Edu & ent ert ainment
7.8%
0%
10%
Background. At the end of the 1990s, monetary policy gradually converged to an inflation-targeting regime. High central bank credibility has led to low and stable inflation. Inflation and inflation expectations are low by historical standards, and well anchored in the sense that cost-push shocks such as MXN depreciations or tax increases do not have second round effects, providing stability to the nominal system of the economy. Short-term interest rates have been stable since 2009. The long end of the curve usually follows long rates in the US. Policy framework. Banxico’s primary objective is to ensure the stability of the national currency’s purchasing power. In 2002 Banxico set a permanent inflation target of 3% (with a +/- 1% variability range). The central bank became autonomous in 1994 and is ruled by a staggered five-member board, chaired by Governor Agustín Carstens. Base rate. Since 2008 the central bank has implemented monetary policy by 20 targeting the overnight interest rate, known as Tasa de Fondeo (MXONBR Index) . The board meets eight times a year, issuing a monetary policy statement at 10am NYT. Two weeks after the release, the board publishes meeting minutes to improve transparency. Banxico produces a quarterly inflation report in which it presents growth and inflation forecasts for the following 7-8 quarters.
Reserve requirements. There are none. 16.9%
Other
Monetary policy
Open market operations. Short-run liquidity is managed through credit or debit auctions with banks and through securities purchases or sales.
9.2%
Healt hcare
As a small and open economy with strong trade and financial links with the US, economic data north of the border often have a greater impact on Mexico’s fixed income market. A free floating FX serves as a buffer to external shocks given the fully convertible, deliverable and liquid currency. Among domestic data, bi-weekly CPI prints head the list and are published by INEGI at 9am NYT around Day 9 (previous month inflation) and Day 24 (1H inflation of the current month) of each month. Monthly volatility and long publication lags of other indicators typically cause markets to shrug off domestic data surprises.
20%
30%
40%
FX policy. The currency is free floating and Mexico does not target USD/MXN levels. However, the Foreign Exchange Commission (FEC), formed by members of Banxico and the Ministry of Finance, has intervened in the FX market during
Source: BofA Merrill Lynch Global Research, INEGI 20
186
The Bloomberg ticker for the effective Tasa de Fondeo is MXBRBA Index
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Conventions Bonds Quote: Yield to maturity Settlement: T+2: Basis: Actual/182, semi-annualized 182/360 for Mbono and Udibono, Act/360 simple interest for CETES
high illiquidity scenarios. A USD sales auction mechanism activates when the exchange rate is 2% above the previous day’s level. However, the US$400mn auctioned, in a market with a daily turnover of around US$18bn, represents just 2.2% of total. This could be considered as a signal that the FEC stands ready to act if dollars become scarce.
Fiscal policy and debt issuance
Coupon frequency: Semi-annual (182/360)
Fiscal policy. Disciplined public finances allowed for small counter-cyclical fiscal policy in 2010, leading to a slight deviation from the usual budget-balanced rule followed in the last years. The public deficit was set at 0.4% for 2012 GDP, down from 0.6% in 2011, excluding investment in Pemex, which accounts for almost another 2% of GDP. However, public finances remain highly dependent on oil revenues and low oil prices could limit further fiscal stimulus.
IRS Fixing: TIIE Coupon frequency: 28d
CCS
Debt issuance. The government’s net debt at 26.5% of GDP is low relative to economies with better credit rating profiles. Strategy has focused on 1) reducing external exposure by increasing domestic debt (79% of total in 2011, up from 59% in 2001 and 20% in 1995); 2) broadening the investor base through a syndicated auction mechanism; 3) taking advantage of extremely low international interest rates through issuance in foreign markets, such as the samurai bond issuance; and 4) extending debt average maturity (7.6 years in 2011, up from 1.5 years in 2000).
Fixing: LIBOR x TIIE Coupon frequency: 6m
Bond market Table 132: Foreign holdings of local bonds Foreign Outstanding holding (MXNbn) Mbono Udibono BondesD Cetes Total (MXNbn) Total (USDbn)
47.8% 11.0% 0.5% 42.2% 30.9% 30.9%
1,723 705 815 861 4,104 308
In July 2012 total net government domestic debt was MXN3526bn, or US$265bn. The main debt instruments issued in local currency are MBonos (fixed-rate bonds), Cetes (short-term zero-coupon bills), Udibonos (inflation-linked bonds), and Bondes D (floating rate bonds). Authorities also issue Bonos de Proteccion al Ahorro (BPA). All bonds and coupon payments are made on Thursdays, which imply semi-annual coupon payments made every 182 days (Mbonos and Udibonos). Monthly payments are made every 28 days (Bondes D). Mbonos. Fixed-coupon bonds that make up the largest share of local issued federal government debt, accounting for 42% of total outstanding local debt. Mbonos pay semi-annual coupons ranging from 5% to 10% and the full face amount at maturity. These bonds are very popular among foreigners, who hold 48% of the outstanding MXN 1723bn. As of July 2012, foreigners held more than 70% of the outstanding amount of the Jun 2020, Jun 2021, and Dec 2024.
Source: BofA Merrill Lynch Global Research, Banxico
Chart 120: Mexico – maturity profile (in USDbn) of local MXNdenominated debt
Chart 121: Mexico debt composition; total USD345bn
50 Mbono
UdiBono
BondesD
Floating
CETES
18%
40
Udi 15%
30 20 10
MXN 55%
0
USD (EXD) 9% other(EXD)
2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042
3%
Source: BofA Merrill Lynch Global Research, SHCP, Banxico Source: BofA Merrill Lynch Global Research, SHCP, Banxico
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Udibonos. Inflation-linked, fixed-coupon bonds that account for 17% of total outstanding local debt. Udibonos are denominated in Unidades de Inversión (UDI) and settled in MXN. UDI is an inflation-indexed unit based on the bi-weekly CPI index. The bonds pay semi-annual coupons ranging from 2.5% to 5.5%, which are also UDI-denominated at each payment date and converted to MXN at the UDI rate. Cetes. Short-term, liquid zero-coupon bills that account for 21% of all outstanding local debt. The longest Cetes are issued with 364 days to maturity. Cetes are also popular among foreigners, who hold 42% of the total outstanding. Bondes D. Floating-rate bonds that pay a floating coupon every 28 days based on the 28-day compounded daily Fondeo rate (MXBRBA Index in Bloomberg). The Bondes D represent 20% of the outstanding federal local debt; however, there has been little demand among foreigners, who hold less than 0.5% of the outstanding amount. Auction and placement mechanism. Mexico has a very transparent placement mechanism. The Hacienda (SHCP – Secretariat of Finance and Public Credit) puts out the annual borrowing plan 21 that states the annual strategy for issuance of local and external debt. At the beginning of each quarter the SHCP sends to Banxico a list of all local bonds to be placed during the quarter, specifying the specific bond, tenor, amount to be placed and date of each auction. Regular auctions are held on Tuesdays, with results published on Banxico’s website 30 minutes after the closing bids. The settlement takes place T+2 through INDEVAL. The shorter tenors of the Mbono (3-7 years) are auctioned three times a quarter, while longer maturities (10-30 years) are auctioned twice a quarter. Currently, Udibonos in all tenors are auctioned three times a quarter. Shorter tenors of Cetes (182 days and below) are auctioned every week, while the 364-day Cetes are auctioned three times a quarter. Currently, 5y Bondes D are auctioned every 2 weeks. In addition to regular auctions, there a few syndicated auctions designed to place new issues within a broad universe of investors and insure that a new issuance reaches a large outstanding amount from the first placement. In 2012 Mexico used a syndicated issue to place MXN15bn of the new benchmark 30-year bond, the Nov-2042. In the last 12 months there were also syndicated placements for a 5-year (Jun-2017), 10-year (Jun 2022) and 20-year (May 2031) bond. UDI inflation-linked account. The Unidades de Inversión is calculated daily such that the shift in the UDI rate from the 10th to the 25th of every month is equal to the bi-weekly CPI rate in the second half of the previous month. The shift from the 25th to the 10th will be equal to the CPI variation in the first half of the month. This mechanism ensures that a portion of the future accrual of the UDI is known in advance. For example, when the bi-weekly inflation for the first half of the month is released, market participants learn the daily UDI that will apply for each day until the 10th day of the following month. Analogously, the daily UDI that will be applied for each day until the 25th of the current month is known when the biweekly inflation corresponding to the second half of the previous month is released.
21http://www.hacienda.gob.mx/English/public_credit_new/public_debt_policy/Paginas/ANNUALBORROWINGPLAN.aspx
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Bloomberg pages
Derivatives market
OTC MXN – Market monitor
TIIE swaps Mexico’s interest rate derivative market is one of the most liquid in LatAm. The most popular interest rate swap is the fixed-floating TIIE swap, a name derived from the floating leg reference. The Tasa de Interés Interbancaria de Equilibrio (TIIE) is the average 28-day interbank lending rate. The TIIE is determined daily by a Banxico survey of local banks. In the last 12 months the 28-day TIIE rate has been approximately 30bp higher than the Fondeo rate. Despite the wide but stable basis between the TIIE and the effective Fondeo rate, the short end of the TIIE swap is a direct way to trade on Banxico’s monetary policy path.
MBONO Govt – Mbonos MUDI Govt – Udibonos MCET Govt – CETES BMLT – LatAm local markets
Reuters pages
Useful official websites Central bank http://www.banxico.org.mx/ Finance Ministry http://www.shcp.gob.mx/ Statistics agency http://www.inegi.org.mx/
Netted payments in a TIIE swap for the floating and fixed legs are exchanged every 28 days. By market convention, swap maturities are quoted based on the number of payment dates. For example, there will be 13 payment dates over the course of a year, so a 1y TIIE swap is quoted as a 13x1. TIIE swaps are very liquid with a typical average bid-ask spread of 2bp. Liquidity is generally good out to 10 years. Netted payments are exchanged at the end of every 28-day period based on the following two cash flow amounts:
Pension regulator
Fixed leg amount = Notional * (swap rate) * (28/360) Floating TIIE leg amount = Notional * (TIIE28days) * (28/360)
http://www.consar.gob.mx/ Bond auctions http://www.banxico.org.mx/portales/especializados/tasasIn
TIIE28days is the 28-day TIIE rate observed at the beginning of the reset period.
teres/ResuSubaPrimaNew-1.html
Table 133: Summary statistics of Mexico derivative products and their markets
Useful market websites
Product
Stock exchange http://www.bmv.com.mx/
Avg daily trading volume
Avg transaction Size
Bid-Ask Spread
Interest rate swap TIIE swaps
750k DV01
10-20k DV01
2bp
TIIE volatility
100k Vega
10-20k Vega
1%
Cross currency TIIE x LIBOR
50k DV01
10k DV01
3-5bp
20k DV01 weekly (combined with UDI x TIIE) 20k DV01 weekly (combined with UDI x TIIE)
5k-10k DV01
15-20bp
5k-10k DV01
15-20bp
UDI x LIBOR
UDI x TIIE
Fixings and other notes 3m – 30y, liquid up to 10y 1m1y – 10y10y, caps-floors 6m – 10y 3m – 30y, 10y the most liquid tenor Traded but thin market Traded but thin market
Source: BofA Merrill Lynch Global Research
Other derivatives Liquidity in other interest rate derivatives is limited, but market participants can trade in TIIE/LIBOR, UDI/TIIE, UDI/LIBOR and UDI/MXN-fixed swaps. These are all cross-currency swaps with two floating legs. Liquidity is best in TIIE-LIBOR swaps where the bid-ask spread is roughly 3-4bp; in the others it can range from 15-20bp. Liquidity in the TIIE-LIBOR is concentrated in tenors up to 10y. UDI Libor and UDI TIIE usually trade two or three times a week. Average ticket size is 5k DV01 up to 5y tenors and 10k 7y and beyond. Liquidity is focused in the 5-7y range, but trades 1-3y too. Bid offer is around 15-20bp but when liquidity is better bid-ask can be as low as 10bp. The swaps all work similarly in that principal is exchanged at inception and maturity, but payment dates vary by instrument.
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Interest rate options 22 Mexico has a relatively liquid market for interest rate options, with the underlying being TIIE swaps. Expiries range from one month to 10 years on underlying TIIE swaps ranging from one year to 10 years. The most common structures are payer and receiver swaptions. Investors may also trade caps/floors which pays the buyer a spread whenever 28d TIIE fixes above/below the agreed upon strike.
FX market According to the BIS, the MXN is the most liquid currency in EM, accounting for 1.3% of global daily FX turnover. It is also the only deliverable currency in LatAm. Average daily volume in the spot and major FX instruments exceed USD40bn. With concerns regarding the growth prospects in the US and the sovereign debt crisis in Europe, trading volume in MXN has dropped significantly in the last year but remains the most liquid currency in EM. The MXN’s liquidity and deliverability make it a preferred currency for speculative investors that often use it to express a view on global risk appetite or hedge other EM FX exposures. As a result, USD/MXN spot consistently exhibits a high degree of correlation to US equities and risk appetite indices such as the VIX. In addition to spot, USD/MXN forwards (traded as swaps) are deliverable and quoted out to two years. The 1m through 12m tenors are very liquid. While the daily volume in the spot currently runs at nearly USD10bn, in the forward (swap) volume is about three times larger at $30bn. Further out, investors engage in cross-currency swaps. Liquidity in USD/MXN currency options is good out to two years. The aggregate daily volume in FX options is about USD750mn and in normal periods the bid-ask is approximately 0.3-05 vol points depending on the tenor and on the size of the trade.
Table 134: Mexico’s FX market vital statistics and characteristics
FX product Spot Forwards/ Swaps Options
Tradable product MXN spot Deliverable forwards Option on MXN
Avg daily trading volume
Avg trading size
Bid-Ask spread
Reuters Reference
Key facts
USD10bn USD30bn
USD10mn USD10mn
30 pips 30 pips
WMR fixing deliverable
USD750mn
USD30mn
0.3 vols
12:30 NYT cut for exercise
Source: BofA Merrill Lynch Global Research
Investor base Both foreigners and local pension funds make up the largest share of Mexico’s investor base. As of July 2012 foreign investors accounted for the largest share of Mbonos holdings with 47.8% of the outstanding amount. Nonresidents held more than 70% of Mbonos in the belly of the curve such as the Jun ’20, Jun ’21 and Dec 2024. Local pensions are the largest holders of the longer tenors.
For more details see: What’s unique in LatAm swaptions? (http://research1.ml.com/C?q=Hgfm0ECzASUTVpttwucbzQ__&s=)
22
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Local pension funds have grown so quickly that they now dominate the local investor base. (Mexico: pension funds the strongest local players). As of 2011, pension fund assets under management (AUM) increased to 10.2% of GDP from 5% of GDP in 2002. Mutual funds account for 9% of GDP. Overall, institutional AUM accounts for about 22% of GDP. The sophistication and success of the Afores system has made the pension fund segment increasingly relevant in Mexico’s financial markets. The pension fund system was transformed in 1997 from pay-as-you-go to a private scheme of defined-benefit and defined-contribution plans. The national commission for the pension system (Consar) is the regulator and supervisor. Its main objective is to regulate the retirement funds administrators of Afores – private institutions authorized to manage individual retirement accounts. There are 13 Afores pension funds that have enjoyed deregulation recently. Each worker in the formal labor force has an individual retirement account, in which contributions are obligatory for the employee, employer and the government. The pension fund system is broken down into five types of funds that differ in the amount of investment risk (SB1 to SB5). The SB5 manages money for those younger than 26 years old and is the riskiest; SB1 manages money for people over 56 and is the most conservative. The majority of the system is invested in fixed income, with a heavy bias for Mexico sovereign debt. As of July 2011, 8.6% of pension fund assets were invested in equities, 17.4% in local corporate debt and 59.2% in sovereign bonds. International exposure remains small with only 12% of assets invested abroad (equities and fixed income).
Rules, regulations, capital control and taxation In addition to having a deliverable currency Mexico is open to foreign flows of capital in and out of the country. There is no form of entry or exit taxation, or barrier for foreign capital. Although foreign investors are not allowed to collect deposits locally there are no restrictions on local lending for foreign institutions, as long as the source of funding is abroad. The strong participation of nonresidents in the Mbonos reflects Mexico’s openness to foreign capital.
Chart 122: Higher foreign participation, especially in Mbonos and Cetes 50 40
Udibono Cetes Bondes D Mbono Total gov ernment securities
Chart 123: USD/MXN exhibits high correlation to global risk and VIX 16
MXN
80
VIX
70
15
60
14
30
50
13 20
40
12
30
10
11
20
0
10
10
Jan-08
Oct-08
Jul-09
Apr-10
Source: BofA Merrill Lynch Global Research, Banxico
Jan-11
Oct-11
Jul-12
Jan-07 Oct-07
Jul-08
Apr-09 Jan-10 Oct-10 Jul-11
Apr-12
Source: BofA Merrill Lynch Global Research
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Foreign investors are exempt from withholding taxes in government securities, including IPAB and state-owned banks. The treatment for withholding and capital gains taxes for foreign investors depend on the instrument and on whether the nonresident is domiciled in a country with dual tax treaty with Mexico. For countries with a dual tax treaty there are no withholding taxes for FX-linked derivatives, TIIE swaps and derivatives involving sovereign debt instruments. In addition, foreign investors from countries with a dual tax treaty with Mexico are subject to a 4.9% withholding tax over interest income on corporate debt. For investors from a country without a tax treaty the withholding rate may be higher than 4.9% and could reach 15%. Local investors are subject to a 0.5% withholding tax on foreign government securities. Investors should check with their tax consultants for specific details and particular issues.
Clearing and settlement Purchases of government bonds in primary market auctions are settled through INDEVAL at T+2. INDEVAL is a private central clearing house that serves both as a securities depository and as provider of securities settlements services. Although most transactions with government securities in the secondary market are settled at T+2, Indeval provides the option of delivery versus payment (DVP), which is determined during the time of trade and can involve settlement as early as same day (T+0). Registration of all securities is made on the settlement date by INDEVAL. The typical settlement for TIIE swaps is T+1, and T+2 for TIIE-LIBOR, UDI-TIIE and UDI-LIBOR. Several OTC derivatives, such as the TIIE swap market rely on the International Swaps and Derivatives Association (ISDA) agreements, which require nonresident investors conform to proper documentation and master agreement in Mexico.
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Table 135: Summary of Mexico bond markets and products Instrument
Mbonos
Udibonos
Cetes
Issuer
Federal government (Hacienda)
Federal government (Hacienda)
Federal government (Hacienda)
Currency
MXN
UDI (settled in MXN)
MXN
Minimum Denomination
100
100
10
Tenor
3 to 30 years
3 to 30 years
28 to 364 days
Interest rate/coupon
Fixed rate
Fixed rate on Udi
Zero coupon
Coupon Payments
Semi-annual (182 days)
Semi-annual (182 days)
Zero
Day Count Calculation
Actual/182, semi-annualized 182/360
Actual/182, semi-annualized 182/360
Actual/360 simple interest
Amortization Schedule
Bullet
Bullet
Bullet
Amount outstanding
MXN1,723bn
MXN705bn
MXN861bn
OTC
(as of June 2012) Secondary Market Trading
OTC
OTC
Quotation Convention
Yield
Yield
Yield
Settlement Period
T+2
T+2
T+2
Average Daily Turnover
MXN10bn
MXN2bn
MXN10bn
Bid/offer spread (0-5Y)
2bp (3-5bp for less liquid tenors)
2bp (3-5bp for less liquid tenors)
2bp
Bid/offer spread (5Y+)
2bp (3-5bp for less liquid tenors)
2bp (3-5bp for less liquid tenors)
2bp
Average trade size
MXN50mn
MXN50mn
MXN100mn
local clearing, Euroclearable
local clearing, Euroclearable
Clearing Mechanism
local clearing, Euroclearable
Major players
Non-resident investors, local pensions, banks local pensions, banks
Non-resident investors, banks
Trading hours
7:00-14:00 (Mexico)
7:00-14:00 (Mexico)
7:00-14:00 (Mexico)
Restrictions on Foreign Investment
No restrictions
No restrictions
No restrictions
Custodian
Indeval
Indeval
Indeval
Withholding Tax
0.5% for locals, none for foreign investors
0.5% for locals, none for foreign investors
0.5% for locals, none for foreign investors
Capital gains Tax
None when there is a dual tax treaty
None when there is a dual tax treaty
None when there is a dual tax treaty
Entry/Exit Tax
None
None
None
Auction Style
Dutch auction
Dutch auction
Competitive auction
Average Issue Size
Varies by tenor MXN 4.5bn – MXN 8.5 each Varies by tenor UDI 650mn – UDI 800mn
Regulations
Primary Auctions
placement
MXN 31.5bn biweekly
each placement
Source: BofA Merrill Lynch Global Research
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Peru Overview Francisco Rodríguez
Peru has a small local sovereign bond market that is roughly 10% the size of Colombia’s and 1% of Brazil’s. Over the last decade the government has improved its debt profile with great success. It has issued local debt out to 2046 and external debt out to 2050. In December 2011, duration of internal debt was 9.2 years and external debt 7.6 years. Refinancing risk has also been lowered, with less than 30% of debt maturing in less than five years.
Flavio de Andrade
The share of local currency debt has risen to 43.1% of the total government debt as of March 2012, but remains low in comparison to countries in the region, exposing Peru to some exchange rate vulnerability. As of December 2011 the fixed rate debt has increased significantly to 76.9% of the total debt from 32.9% at year-end 2000. An extension in debt maturities, a reduction of the relative debt burden, and an increase in central bank reserves have led rating agencies to upgrade Peru multiple times, from BB status in 2005 to investment grade in local debt in 2006 and in foreign currency debt in 2008. Table 136: Peru local debt ratings profile Moody's S&P Fitch 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 -
BBB+ BBB+ BBB+ BBB+ BBB+ BBBBBBBB+ BB+ BB+ BB+ BB+ BB+ BBBBBBBBB-
BBB+ BBB BBB BBB BBB BBBBBBBB+ -
Source: Bloomberg, BofA Merrill Lynch Global Research
Chart 124: Peru CPI components 37.8%
Food 16.5%
Transport
14.9%
Education Housing & Utilities Housing goods
9.3% 5.8%
Peru has a democratic multi-party system with orderly transfers of power; however, governance problems, particularly in the mining sector, have been a cause of concern in recent times.
Monetary policy Background. In 2002 the Central Reserve Bank of Peru (BCRP) adopted an explicit inflation-targeting regime with a target of 2.5% +/- 1%, which was lowered to 2% in 2007. The board meets once a month to decide the reference policy rate, publishing its decision along with a brief statement after market close. Average inflation from 2002 to 2006 was 2.01% and 3.53% from 2007 to 2011. Policy framework. According to the Peruvian constitution, the BCRP is a legally autonomous entity with operational and policy-setting autonomy. Its board has seven members, four of which – including the BCRP governor – are appointed by the president and ratified by Congress. The remaining three members are appointed by Congress. Central bank law mandates the reappointment of all members within the first 30 days after 28 July in the year of general elections. However, the three congressional appointees have not yet been renewed for the current presidential term, currently a delay of 11 months. Base rate. The BCRP board meets on Thursday of the second week every month to decide on the reference policy rate, publishing its decision along with a brief statement after market close. The reference rate (PRRRONUS Index on Bloomberg) is the BCRP overnight borrowing rate. Minutes of the meeting are not published.
15.8%
Other
0% 10% 20% 30% 40%
Source: BofA Merrill Lynch Global Research
194
The Peruvian economy is highly dependent on commodities exports, particularly gold and copper. Commodities exports account for 77% of total exports, with gold and copper at 45% of total exports, up from 31% 10 years ago and 21% 20 years ago. Gold output has grown nearly tenfold over the past 10 years.
Open market operation. The BCRP regulates liquidity through auctions of BRCP certificates of deposit, repos of BRCP CDs or Peruvian treasury Bonds, foreign currency repos, and auctions of Banco de la Nacion deposits in the BCRP.
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Conventions
Lending and deposit facilities. Required reserves in local currency are remunerated at the overnight rate less 100bp. Required reserves in foreign currency are remunerated at 60% of Libor.
Bonds Quote: Yield to maturity Settlement: T+3 (T+1 for primary auctions) Basis: ACT/360 on fixed rate, ACT/ACT on VAC linkers Coupon frequency: Semi-annual
CCS
Reserve requirements. General regime deposits are subject to a minimum legal requirement of 9%. The marginal legal requirement for local currency deposits is 30% and 55% for foreign currency deposits. FX policy. The PEN has been a free-floating currency since 1990, but a high level of dollarization has constrained monetary policy flexibility. In May 2012, 51% of the total credit to the private sector was extended in USD and 41% of total deposits were held in USD. Although the PEN remains undervalued by several fundamental measures (6.5% according to our COMPASS model), the central bank is hesitant to allow a fast pace of appreciation due to the detrimental impact this would have on domestic USD savers. To temper appreciation pressures, the central bank has been accumulating reserves aggressively.
Fixing: LIBOR Coupon frequency: Act/360
The BCRP buys/sells dollars in the currency market with the aim of preventing high exchange rate volatility and providing the treasury with the necessary funds to cover external debt service. In practice, the BCRP has been purchasing dollars in order to prevent local currency appreciation and expand its international reserves. Reserves totaled US$57.2bn as of June 2012 and were the largest in the region as a percentage of GDP (32%), having grown by 72% in the last three years. The BCRP does not purchase dollars every market day. After each purchase the central bank carries out sterilization operations to prevent inflationary pressures.
Fiscal policy Fiscal policy. Total expenditures of the non-financial public sector are 24.0% of GDP, with 12.6% coming from the central government and the rest from local and regional governments, as well as decentralized entities of the public sector. Over the past 10 years Peru has progressively eliminated its deficit, which went from 2.1% of GDP to a surplus of 0.9% of GDP between 2002 and 2011. Its stock of public debt fell from 46.7% to 20.8% of GDP in the same period. Sustained economic growth and increasing mining fiscal revenues have helped fiscal consolidation. Chart 125: Peru maturity profile (USDbn) of local PEN-denominated debt 4.0
Fix ed Rate
Inflation linker
3.5
Chart 126: Peru tradable debt composition; total USD22bn
Nominal 50%
Inflation linker (VAC) 4%
3.0 2.5 2.0 1.5 1.0 0.5
USD(EXD)
0.0
46% 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045
Source: Peru Finance Ministry, BofA Merrill Lynch Global Research
* In the tradable debt we only include local Soberanos and external Global Bonds Source: Peru Finance Ministry, BofA Merrill Lynch Global Research
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Debt issuance. As of March 2012 Peru had outstanding debt of PEN97bn (US$36.2bn), of which PEN55bn (56.9%) was internal and PEN42bn (43.1%) external. Central government debt, most in the form of bonds, comprised 83.1% of total internal debt. Of the local bonds issued by the central government, 98.9% are denominated in PEN. But the mainstream local bonds (Soberanos) are all denominated in PEN.
Bond market Local bond issuance is concentrated in two types of bonds: PEN-denominated fixed-rate Soberanos and PEN-denominated inflation-linked VAC. Peru is concentrating on benchmark maturities (defined as face greater than PEN4bn), prioritizing the 2042, 2031 and 2020 Soberanos, in that order. As memories of double-digit inflation in the 1990s fades and the degree of dollarization in the economy declines, the nominal local rates market is likely to continue to grow. Liquidity in the local bond market remains poor with only PEN3-4bn (USD1-1.5bn) of local bonds traded every month. Fixed-rate Soberanos. The Soberanos are fixed-rate bonds with maturities out to 2042. These bonds pay a semi-annual fixed rate coupon. The largest issue is the August 2020 with PEN9bn outstanding ($3.4bn). The most liquid Soberanos are the ones with larger outstanding face such as the Aug20s, Aug26s, Aug 31s and Aug37s, and the Aug ‘17s. Inflation-linked VAC. The VACs are inflation-linked bonds with maturities out to 2046. The linkers pay a semi-annual fixed coupon and final principal, all of which are adjusted by the VAC at payment date. The VAC is linked to monthly inflation and published daily by the BCRP. The largest issue of the VAC linker is the January 2035 with PEN1.1bn outstanding ($423mn). Linkers have poor liquidity with monthly trading volume of less than USD50mn. Foreign investors and local pensions are the largest holders. Recently, however, nonresidents have accounted for a greater portion of local bond holdings, now exceeding the holdings of private pension funds (AFPs). Auction and placement mechanism. Soberanos are issued to officially appointed market makers via Dutch auctions. In 2012 the Ministry of Finance appointed six market makers: five primary and one secondary (aspirante) 23. The primary auctions are conducted through the Datatec system and settled at T+1. Auctions can occur monthly although in the last 12 months there were only nine.
For 2012 the primary market makers are Banco de Crédito del Perú, BBVA Banco Continental, Citibank, Deutsche Bank, Scotiabank, and the aspirante is Banco Internacional del Perú.
23
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Bloomberg pages
Derivatives market
OTC PEN – Market monitor
Investors can also trade cross currency swaps to express a view on local rates, yet we caution liquidity in these is poor. In a PEN/LIBOR swap an investor agrees to pay a fixed local rate in exchange for USD6mn USD LIBOR semi-annually.
PERUGB Govt – Soberanos
Reuters pages
Useful official websites
Table 137: Summary statistics of Peru derivative products and their markets
Central bank http://www.bcrp.gob.pe/
Product
Finance Ministry http://www.mef.gob.pe/
Rates
Statistics agency http://www.inei.gob.pe/ Pension regulator http://www.sbs.gob.pe/0/home.aspx Bond auctions http://www.mef.gob.pe/ESPEC/mercado/mercado_secund ario.php
Useful market websites Lima Stock Exchange http://www.bvl.com.pe/
Avg daily Avg trading volume transaction size
Bid-Ask spread
Fixings and other notes
20bp
Poor liquidity
Cross currency swap PEN x LIBOR
USD10mn
LIMABOR
USD 3mn
Started trading
Not enough history,
recently
and poor liquidity
Source: BofA Merrill Lynch Global Research
FX market USD/PEN is non-deliverable and daily trading volume ranges from USD350500mn, with the central bank regularly accounting for anywhere from 50-100% of the day’s trading volume depending on PEN performance. The BCRP allowed PEN to strengthen in 2010, but in 2011 volatility increased due to the presidential elections. The overall trend after the elections has been gradual appreciation with low volatility. The NDF curve is highly illiquid, but is quoted out to one year. It tends to invert from time to time in anticipation of the BCRP allowing greater flexibility. Table 138: Peru’s FX market vital statistics and characteristics Tradable product
Avg daily trading volume
Avg trading size
Bid-Ask spread
Reuters reference
PEN Spot
USD550mn
USD1mn
10 pips
DATATEC fixing
Offshore NDF
Forward
USD250mn
USD3mn
30 pips on 1m
DATATEC fixing
NDO
Options
Very infrequent
FX product Onshore Spot
Key facts
1 pip = PEN 0.0001 Source: BofA Merrill Lynch Global Research
Investor base Foreign investors are the major holders of Soberanos (aggregate fixed rate and VAC). By March 2012 nonresidents accounted for just under 50% of the amount outstanding. As of 2011, pension fund and mutual fund AUM accounted for 17.6% and 3.1% of GDP, respectively. Total institutional AUM (USD34.1bn) accounts for roughly 21% of GDP, compared to 2002 when total institutional AUM accounted for only 10% of GDP. As one of the more flexible systems in LatAm in terms of exposure, Peruvian pension funds held 59% of their portfolio in fixed income securities and 41% in equities as of 1Q 2011. Mutual funds, on the other hand, invest heavily in fixed income securities. As of 1Q 2011, 96% of Peruvian mutual funds AUM were invested in fixed income securities, compared with 4% in equities.
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It is worth noting that recent changes in regulations allow insurance companies to move life insurance policy benchmarks away from VAC and USD rates increasing share of new issues in nominal PEN which should drive future demand for longer dated bonds.
Rules, regulations, capital control and taxation Local and foreign investors are exempt from capital gains tax on government securities. Currently there is the tax on financial transactions (ITF) at a rate of 0.05% of the amount of all financial transactions, either in domestic and foreign currency.
Clearing and settlement CAVALI is the major depository and clearing institution in Peru. It has been operating as an independent institution responsible for settlement services and securities custody since its spin-off from the BVL (Lima Stock Exchange) in 1997. Government securities settle through CAVALI, including the ones issued to primary dealers. Foreign investors must appoint a local custodian. Table 139: Still highly dollarized economy (%) Bank credit
Deposits
2000
82.3
82.4
2001
81.6
80.2
2002
80.7
79.5
2003
78.6
77.6
2004
76.6
72.3
2005
72.4
69.4
2006
65.3
67.4
2007
61.9
62.0
2008
56.7
60.5
2009
52.0
57.2
2010
49.5
46.1
2011
50.2
47.3
Jun 2012
50.4
44.0
Note: % of total bank credit and deposits in USD Source: BofA Merrill Lynch Global Research
Chart 128: Peru foreign reserves continue to rise, at $58bn in July 2012
Chart 127: Foreign participation of Soberanos reaches 50% in 2012
50%
Foreign participation
Outstanding debt (PEN bn)
40%
60
30
50
25
40
30%
20
30
20%
15
10% 0% Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: BCRP, BofA Merrill Lynch Global Research
198
35
10
Peru Foreign Reserv es (USD bn)
20
5
10
0
0 Jan-04
Jan-06
Source: BofA Merrill Lynch Global Research
Jan-08
Jan-10
Jan-12
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Table 140: Summary of Peru bond markets and products Instrument
Soberanos fixed-rate
Issuer
Republic of Peru
Soberano VAC-linker Republic of Peru
Currency
PEN
IRD/VAC (settled in PEN)
Minimum Denomination
1,000
1,000
Tenor
1 to 30 years
1 to 34 years
Interest rate/coupon
Semi-annual
Semi-annual
Coupon Payments
Fixed rate
Fixed rate
Day Count Calculation
ACT/360
ACT/3ACT
Amortization Schedule
Bullet
Bullet
Amount outstanding
PEN28.7bn
PEN2.6bn
Trading
Datatec
Datatec
Quotation Convention
Yield
Yield
Settlement Period
T+3
T+3
Average Daily Turnover
PEN175mn
PEN 500k
Bid/offer spread (0-5Y)
5bp
15bp
Bid/offer spread (5Y+)
5bp
15bp
(as of June 2012) Secondary Market
Average trade size
PEN3mn
PEN1mn
Clearing Mechanism
Local CAVALI, or offshore
Local CAVALI, or offshore
Major players
Nonresidents, local funds, banks
Local banks and funds
Trading hours
9:30am – 2:30pm NY
9:30am – 2:30pm NY
Regulations Restrictions on Foreign Investment
No restrictions
No restrictions
Custodian
CAVALI
CAVALI
Withholding Tax
ITF tax (0.05% of transacted amount)
ITF tax (0.05% of transacted amount)
Capital gains Tax
Foreigners exempt, locals 30%
Foreigners exempt, locals 30%
Entry/Exit
None
None
Auction Style
Dutch auction
Dutch auction
Average Issue Size
PEN 250mn
Last issuance May 2010
Primary Auctions
Source: BofA Merrill Lynch Global Research
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Appendix BofAML Local Debt Markets Plus Index (LDMP) rules The BofA Merrill Lynch Local Debt Markets Plus Index is designed to track the performance of sovereign debt publicly issued and denominated in the issuer's own domestic market and currencies other than the more established top-tier sovereign markets. To be included in the Index, a country must have:
At least $10bn (USD equivalent) outstanding face value of Index qualifying debt (ie, after imposing constituent level filters on amount outstanding, remaining term to maturity, etc).
At least one readily available, transparent price source for its securities.
In addition, the following countries are specifically excluded from the index: G10 countries, Euro members and all countries with a foreign currency long-term sovereign debt rating of AA3 or higher (based on an average of Moody’s, S&P and Fitch). Qualification with respect to country size criteria is determined annually based on information as of 30 September, but does not take effect until 31 December. Conversion of local currency outstanding face value into USD terms is based on the average of the previous 12 month-end exchange rates up to and including the 30 September evaluation date. To be excluded on the basis of Euro membership, entry into the European Monetary Union must be announced on or before the country qualification date (30 September) and must take effect on or before 1 January of the upcoming year. Currently qualifying countries and their respective minimum local currency requirements are as follows: Brazil (BRL1bn), China (CNY20bn), Colombia (COP500bn), Czech Republic (CZK20bn), Egypt (EGP2bn), Hungary (HUF50bn), India (INR30bn), Indonesia (IDR1tn), Israel (ILS1bn), Malaysia (MYR1bn), Mexico (MXN5bn), Morocco (MAD2.5bn), Philippines (PHP5bn), Poland (PLN2bn), Russia (RUB10bn), South Africa (ZAR5bn), South Korea (KRW1tn), Thailand (THB10bn) and Turkey (TRY2bn). In addition, qualifying securities must have at least one year remaining term to final maturity and a fixed coupon schedule. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify, provided they are callable within the fixed-rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. Bills, inflation-linked debt and strips are excluded from the Index; however, original issue zero-coupon bonds are included in the index and the amounts outstanding of qualifying coupon securities are not reduced by any portions that have been stripped. Index constituents are capitalization-weighted based on their current amount outstanding, provided the total allocation to an individual country does not exceed 10%. Countries that exceed the limit are reduced to 10% and the face value of each of their bonds is adjusted pro rata. Similarly, the face values of bonds of all other issuers that fall below the 10% cap are increased pro rata. In the event there are fewer than 10 countries in the Index, each is equally-weighted and the face values of their respective bonds are increased or decreased on a pro rata.
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Accrued interest is calculated assuming next-day settlement. Cash flows from bond payments that are received during the month are retained in the index until the end of the month, and then removed as part of the rebalancing. Cash does not earn any reinvestment income while it is held in the index. The index is rebalanced on the last calendar day of the month, based on information available up to and including the third business day before the last business day of the month. Issues that meet the qualifying criteria are included in the index for the following month. Issues that no longer meet the criteria during the course of the month remain in the index until the next month-end rebalancing at which point they are removed from the index. Inception date: 31 December 2005 Note: The above rules take into account all revisions up to and including 31 December 2010.
BofA Merrill Lynch EM Sovereign Bond Index (WSBV) rules The BofA Merrill Lynch Emerging Markets Sovereign Bond Index (WSBV) is a subset of The BofA Merrill Lynch World Sovereign Bond Index (WSOV) excluding all FX G10 and western European countries. The WSOV Index is designed to track the performance of sovereign debt publicly issued and denominated in the issuer's own domestic market and currency. In order to be included in the Index, a country:
Must have at least $10bn (USD equivalent) outstanding face value of index qualifying debt (ie, after imposing constituent level filters on amount outstanding, remaining term to maturity, etc).
Must have at least one readily available, transparent price source for its securities.
Qualification with respect to country size criteria is determined annually based on information as of 30 September, but does not take effect until 31 December. Conversion of local currency outstanding face value into USD terms is based on the average of the previous 12 month-end exchange rates up to and including the 30 September evaluation date.
BofAML Global EM Inflation-Linked Government Index rules The BofA Merrill Lynch Global Emerging Markets Inflation-Linked Government Index tracks the performance of inflation-linked sovereign debt publicly issued by emerging market countries in their own domestic market and local currency. Countries are selected for inclusion in the index by an index committee based on a combination of quantitative and qualitative criteria. Changes in constituent countries, if any, are announced annually at the end of January and take effect at the 31 March rebalancing (ie, the Annual Rebalancing Date). Index constituents are market value-weighted, subject to a 20% maximum country weight and a 2% minimum country weight. The index excludes FX G10 members, all western European countries, territories of the US and western European countries, and South Korea.
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Table 141: The BofA Merrill Lynch indices as of August 2012 Ticker The BofA Merrill Lynch indices # bonds Duration LDMP LDMA LDML LDME WSBV GLEE GLEM GEMI WBDI GEMT G0BR G0CL G0CN CNHG G0CZ G0EG G0HK G0ID G0IN G0IS G0MA G0MX G0MY G0NG G0PH G0PL G0RU G0SA G0SK G0SP G0TH G0TR G0TW GBRI GISI GCLI GMXI G0PI GSAI GSKI GTRI G1CN GVCN G2CN G5CN G3CN G6CN G4CN G7CN GMCN G9CN G8CN GFCZ GBHK GVHK
GEM fixed rate indices Local debt markets plus index Asia local debt markets plus index Latin America local debt markets plus index EMEA local debt markets plus index GEM sovereign bond index (ex-G10 FX & ex-w. Europe) Net equal-weighted liquid local debt markets index Net-cap weighted liquid local debt markets index GEM inflation-linked indices Global emerging markets inflation-linked govt index Global diversified emerging mkts inflation-linked govt index Global emerging markets inflation-linked govt tracker GEM country fixed rate indices (maturity > 1 year) Brazil govt index Chile govt index China govt index Dim Sum govt index Czech republic govt index Egypt govt index Hong Kong govt index Indonesia govt index India govt index Israel govt index Morocco govt index Mexico govt index Malaysia govt index Nigeria govt index Philippines govt index Poland govt index Russia govt index South Africa govt index South Korea govt index Singapore govt index Thailand govt index Turkey govt index Taiwan govt index Inflation indices by country (maturity > 1 year) Brazil inflation-linked govt index Israel inflation-linked govt index Chile inflation-linked govt index Mexico inflation-linked govt index Poland inflation-linked govt index South Africa inflation-linked govt index South Korean inflation-linked govt index Turkey inflation-linked govt index GEM fixed rate country indices by maturity buckets 1-3 year China govt index 1-5 year China govt index 3-5 year China govt index 1-10 year China govt index 5-7 year China govt index 5-10 year China govt index 7-10 year China govt index 10-15 year China govt index 5+ year China govt index 10+ year China govt index 15+ year China govt index 1-4 year Czech Republic govt index 0-3 year Hong Kong govt index 1-5 year Hong Kong govt index
Source: BofA Merrill Lynch Global Research
202
524 289 41 194 752 10 10
4.8 5.7 4.1 4.2 5.7 4.5 4.4
76 88 13
7.8 7.4 7.4
11 17 136 13 13 26 60 30 73 13 48 20 59 13 57 15 29 12 28 16 42 12 76
2.5 4.2 7.2 3.9 5.5 2.3 4.2 7.2 5.6 4.4 4.4 6.1 4.9 3.3 7.0 4.0 4.2 5.8 5.2 6.5 6.1 2.5 8.2
13 10 26 9 2 6 3 10
8.3 7.6 8.7 9.6 5.1 10.7 6.8 3.8
30 55 25 97 22 42 20 9 81 39 30 5 38 38
1.9 2.7 3.6 4.4 5.2 6.3 7.3 8.9 9.6 13.1 14.1 2.2 1.3 2.4
Ticker The BofA Merrill Lynch indices GBIN G1IN GVIN G2IN G5IN G3IN G6IN G4IN G9IN G1MY G1MX G1PL GFPL GBSP G1SP GVSP G2SP G3SP G1SA GFSA GWSA GBSK GSKV G1TH G1TR CJHG GJEG GJNG GJBI GJEI GJSI GJMY GJXI GJPI GJAI GJKI GJRI L0HD LHD0 L4HD L1HD LHD1 L5HD L3HD LHD3 L0MR LMR0 L1MR LMR1 L3MR LMR3 L1SG L3SG L6SG LSG6
# bonds Duration
GEM fixed rate country indices by mat. buckets (cont'd) 1-2 year India govt index 1-3 year India govt index 1-5 year India govt index 3-5 year India govt index 1-10 year India govt index 5-7 year India govt index 5-10 year India govt index 7-10 year India govt index 10+ year India govt index 1-3 year Malaysian govt index 1-3 year Mexico govt index 1-3 year Poland govt index 1-4 year Poland govt index 0-3 year Singapore govt index 1-3 year Singapore govt index 5-10 year Singapore govt index 3-5 year Singapore govt index 5-7 year Singapore govt index 1-3 year South Africa govt index 1-4 year South Africa govt index 1-7 year South Africa govt index 0-3 year South Korean govt index 1-5 year South Korean govt index 1-3 year Thailand govt index 1-3 year Turkey govt index Fixed rate indices by country (maturity > 1 mo) Dim Sum govt index (>1mo) Egypt government index (>1mo) Nigeria government index (>1mo) Inflation indices by country (maturity > 1mo) Brazil inflation-linked government index (>1mo) Chile inflation-linked government index (>1mo) Israel inflation-linked government index (>1mo) Malaysia government index (>1mo) Mexico inflation-linked government index (>1mo) Polish inflation-linked government index (>1mo) South Africa inflation-linked government index (>1mo) South Korean inflation-linked government index (>1mo) Turkey inflation-linked government index (>1mo) Short duration country indices (maturity < 6 mos) Hong Kong dollar overnight LIBID index Hong Kong dollar overnight LIBOR index Hong Kong dollar 1-month LIBID average index Hong Kong dollar 1-month LIBID constant maturity index Hong Kong dollar 1-month LIBOR constant maturity index Hong Kong dollar 3-month LIBID average index Hong Kong dollar 3-month LIBID constant maturity index Hong Kong dollar 3-month LIBOR constant maturity index Malaysian ringgit overnight LIBID index Malaysian ringgit overnight LIBOR index Malaysian ringgit 1-month LIBID constant maturity index Malaysian ringgit 1-month LIBOR constant maturity index Malaysian ringgit 3-month LIBID constant maturity index Malaysian ringgit 3-month LIBOR constant maturity index Singapore dollar 1-month LIBID constant maturity index Singapore dollar 3-month LIBID constant maturity index Singapore dollar 6-month LIBID constant maturity index Singapore dollar 6-month LIBOR constant maturity index
6 13 25 12 49 11 24 13 24 14 4 5 7 7 4 7 3 2 2 3 5 17 17 9 8
1.3 1.8 2.6 3.3 4.1 4.5 5.4 5.9 8.5 1.7 1.9 1.7 2.1 1.3 2 2.8 3.9 5.8 1.7 2.1 3.4 1.3 2.4 2.0 1.4
13 31 16
3.9 2.0 2.6
14 30 12 68 10 2 7 3 10
7.6 7.9 6.7 4.6 9.1 5.1 9.3 6.8 3.8
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
0 0 0 0.1 0.1 0.1 0.2 0.2 0 0 0.1 0.1 0.2 0.2 0.1 0.2 0.5 0.5
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Options Risk Statement Options and other related derivatives instruments are considered unsuitable for many investors. Options strategy is by definition governed by a finite duration. The most severe risks associated with general options trading are total loss of capital invested and delivery/assignment risk, all which can occur in a short period.
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Link to Definitions GEM Macro Click here for definitions of commonly used terms.
Macro Click here for definitions of commonly used terms.
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Special Disclosures Some of the securities discussed herein should only be considered for inclusion in accounts qualified for high risk investment.
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Important Disclosures BofA Merrill Lynch Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues. BofA Merrill Lynch Global Credit Research analysts regularly interact with sales and trading desk personnel in connection with their research, including to ascertain pricing and liquidity in the fixed income markets.
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GEMs Pa pe r #1 0 1 2 Se ptembe r 20 12
Team Page Global Emerging Markets Fixed Income Strategy and Economics Alberto Ades GEM FI Strategist, Economist MLPF&S
Jane Brauer Quantitative FI Strategist MLPF&S
Vasileios Gkionakis GEM FI Strategist, Economist MLI (UK)
Isidore Smart
Arko Sen EEMEA FI Strategist MLI (UK)
Matthew Sharratt S. Africa, Nigeria Economist Merrill Lynch (South Africa)
Raffaella Tenconi Italy, CEE, Ukraine Economist MLI (UK)
Mai Doan
GEM Economist MLPF&S
CEE, Israel Economist MLI (UK)
Emerging Asia Economics Hak Bin Chua
MENA Economist MLI (UK)
ASEAN Economist Merrill Lynch (Singapore)
Jaewoo Lee Korea Economist Merrill Lynch (Seoul)
Ting Lu China Economist Merrill Lynch (Hong Kong)
Indranil Sen Gupta India Economist DSP Merrill Lynch (India)
Marcella Chow Emerging Asia Economist Merrill Lynch (Hong Kong)
Larry Hu 9 China Economist Merrill Lynch (Hong Kong)
Xiaojia Zhi China Economist Merrill Lynch (Hong Kong)
Emerging Asia FX and Fixed Income Strategy Claudio Piron Emerging Asia FI Strategist Merrill Lynch (Singapore)
Bin Gao Rates Strategist Merrill Lynch (Hong Kong)
Albert Leung Emerging Asia FI Strategist Merrill Lynch (Hong Kong)
Christy Tan Emerging Asia FX Strategist Merrill Lynch (Singapore)
EEMEA Fixed Income Strategy and Economics David Hauner, CFA EEMEA FI Strategist, Economist MLI (UK)
Turker Hamzaoglu Turkey, MENA Economist MLI (UK)
Vladimir Osakovskiy Russia, CIS Economist Merrill Lynch (Russia)
208
Jean-Michel Saliba Latin America Economics Marcos Buscaglia LatAm Economist MLPF&S
David Beker Brazil Economist, FI Strategy Merrill Lynch (Brazil)
Carlos Capistran Mexico Economist Merrill Lynch (Mexico)
Francisco Rodriguez Andean Economist MLPF&S
Javier Rouillet Merrill Lynch (Argentina)
LatAm FX and Fixed Income Strategy Claudio Irigoyen LatAm FI Strategist MLPF&S
Ezequiel Aguirre LatAm FI Strategist MLPF&S
Flavio de Andrade LatAm FI Strategist MLPF&S
Sebastian Rondeau LatAm FI Strategist MLPF&S
