SOUTH AFRICA S EXPERIENCE IN THE ROLE OF INFLATION LINKED BONDS FOR THE SOVEREIGN

Transcription

1 SOUTH AFRICA S EXPERIENCE IN THE ROLE OF INFLATION LINKED BONDS FOR THE SOVEREIGN 2018 WORLD BANK SOVEREIGN DEBT MANAGEMENT FORUM: IS THERE LIFE AFTER DEBT? SESSION 4 Presenter: Jim Matsemela Chief Director: (Debt) Strategy & Risk Management, ALM Division, National Treasury October 2018

2 Objectives, current & medium-term Debt Strategy Before 1999: o Develop the domestic market o Promote a balanced maturity profile After 1999: o Reduce cost of debt within acceptable risk limits o Ensuring government access to domestic and international financial markets o Diversify funding instruments Since Links to Funding Strategy & Fiscal Policy objectives: o Annual funding strategy underpinned by risk guidelines o Debt structure (composition) - insulate annual budget from volatility in interest expenditure caused by interest, inflation and exchange rates o Debt structure - assist in realising government s fiscal policy objectives of debt sustainability and intergenerational fairness 2

3 Background: Introduction of Inflation Linked Bonds in South Africa Government issued first inflation linked bond (13 yr. 6.25%) in March 2000 Currently government issues in the following maturities: 5 yr, 7 yr, 10/11 yr, 15yr, 20 yr, 28 yr, 32 yr South Africa even issued a 3-legged ILB with split-maturity 2049/50/51 The structure of South Africa s inflation linked bonds is principal indexation - no interest indexation Funding share is 20% of annual domestic long-term funding (excluding Treasury bills) and 17.6% of overall domestic funding (including T-bills) Portfolio share of 20-25% informed by the benchmark exercise Risk Benchmark Indicator 1. Share of debt maturing within a year (including T-bills) 2. Share of debt maturing in 5 years (Fixed Rate Bonds and Inflation Linked Bonds) * 3. ATM - (Fixed Rate Bonds + T-bills) 4. ATM - Inflation Linked Bonds (ILBs) 5. Share of ILBs as per cent of domestic debt 6. Share of Foreign Debt as per cent of Total Debt Type of Risk Indicator Short-term Refinancing Risk - LIMIT Refinancing Risk - LIMIT Refinancing Risk - RANGE Refinancing Risk - RANGE Inflation Risk - RANGE Currency Risk - LIMIT Numeric Risk Benchmark (Outcome) 15% of total domestic debt 25% of total domestic debt years years 20-25% 15% 3

4 18% 20% 20% 16% 18% 82% 80% 80% 84% 82% Background: Introduction of Inflation Linked Bonds in South Africa M A R C H _ F I S C A L Y E A R A C T U A L C A S H ( % ) Fixed Rate Bonds (FRBs) M A R C H _ F I S C A L Y E A R A C T U A L C A S H ( % ) FUNDING SPLIT M A R C H _ F I S C A L Y E A R A C T U A L C A S H ( % ) Inflation Linked Bonds (ILBs) J U N E _ F I S C A L Y E A R A C T U A L C A S H ( % ) S E P T F I S C A L - Y E A R A C T U A L C A S H ( % ) Benchmark Indicators Range or limit Benchmark March October 2018 Share of short-term debt maturing in 12 months (Treasury bills) as a percentage of total domestic debt 15% 13.02% 12.84% Share of long-term debt maturing in 5 years as a percentage of fixed rate bonds and inflation linked 25% 11.77% 9.15% bonds Share of inflation-linked bonds as a percentage of total domestic debt 20-25% 22.58% 22.91% Share of foreign debt as a percentage of total government debt 15% 8.86% 10.26% Weighted term-to-maturity (fixed-rate bonds and Treasury bills in years) Weighted term-to-maturity (inflation-linked bonds in years) Average term-to-maturity (total government debt in years) Average term-to-maturity (foreign debt in years)

5 Rationale for issuing linkers In the National Treasury research conducted in 1999, it was observed that a number of countries that successfully issued ILBs went through roughly similar checklist: o Choice of index o Size, frequency of issuance and primary dealership system o Liquidity o Pricing and tax issues Strong macro policy case: o o Signaling of intention to control inflation o Demonstrate government s commitment to prudent macroeconomic policies 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Govt Bond Holdings : 2007: 2008: 2009: 2010: 2011: 2012: 2013: 2014: 2015: 2016: 2017: 2018 Non-residents Banks Insurers Local pension funds Other financial institutions Other 5

6 Rationale for issuing linkers Strong debt/fiscal policy case: Holdings of ILBs o Government saves the risk premium over time and pay actual inflation, which is even back loaded than the excessive market premium priced in conventional bonds 80% 60% 40% 20% 0% R212 (2022) R197 (2023) I2025 (2025) Foreign sector R210 (2028) I2029 (2029) I2033 (2033) R202 (2033) Monetary authorities I2038 (2038) I2046 (2046) I2050 (2050) o Government s willingness to assume financial risk of inflation, while transferring the market (making) risk of conventional bonds to the market Asset Liability matching case: 80% 60% 40% 20% 0% Long-term insurers Private self-administered funds Other financial institutions Short-term insurers Official pension funds Other sector Holdings of Conventional Bonds o Holdings of ILBs by pension funds have increased, while that of conventional bonds has decreased Foreign sector Long-term insurers Private self-administered funds Other financial institutions CSDP reporting error Monetary authorities Short-term insurers Official pension funds Other sector 6

7 Developments in the Debt Exposure 7

8 Developments in ATMs of ILBs, FRBs/TBs 8

9 ILBs and Cost/Affordability Indicators 9

10 Millions Millions Market for Linkers Monthly turn-over (RHS) Turn-over as % of outstanding (monthly) Monthly turn-over (RHS) Turn-over as % of outstanding (monthly) 16% 12, % 350,000 14% 12% 10% 8% 6% 4% 2% 0% 14% 13% 12% 12% 12% 9% 6% 4% R212 R197 I2025 R210 I2029 I2033 R202 I , , , , , % 120% 100% 80% 60% 40% 20% 0% 147% 300, , ,000 77% 150, ,000 32% 30% 25% 19% 20% 22% 25% 20% 21% 50,000 12% 15% 18% 8% 0 R204 R207 R208 R2023 R186 R2030 R213 R2032 R2035 R209 R2037 R2040 R214 R2044 R2048 Annual turnover in ILBs is about R325 billion compared to R6.4 trillion in conventional bonds Turnover as percent of outstanding is spread out for ILBs The R197 (2023) and R202 (2033) have been off-the-run and closed for issuance in excess of 5 years due to high index ratios, only recently (September 2018) has the Treasury reopened them due to need to meet cash targets 10

11 06/29/ /28/ /31/ /29/ /28/ /30/ /31/ /31/ /30/ /30/ /31/ /31/ /30/ /30/ /31/ /31/ /30/ /30/ /30/ /31/ /30/ /29/ /29/ /30/ /29/2018 Market for linkers cont d Since October 2005 linkers were auctioned on a uniform price basis No appetite from investors for liability management operations with respect to linkers Similar to Treasury bills linkers have no primary dealers appointed and compelled to submit bids in the primary market on a weekly basis This poses a risk of auctions not being fully subscribed Taking part in weekly linker auction is open only to members of the Johannesburg Securities Exchange (JSE) The breakeven inflation rate in the 7 year maturity is decreasing but above the actual inflation rate BEI and Actual Inflation Rate June 2012 to Aug 2018 BEI (7 years) CPI YOY 11

12 Possible drawbacks? Investor Base: o Pension funds hold between 40% and 60% of linkers compared to between 2% and 25% in conventional bonds o Of the 40% SA bonds held by foreign investors, linkers comprise a small percentage (1% to 7%) Lengthening the curve: o No constraints on lengthening nominal curve, except dispensing with the old practice of overlaying maturities (linkers redeeming same maturity as nominals) o The real challenge with relatively longer linkers is the higher index ratios Inflation Index: o The SARB dispensed with CPI-X and used the same (headline) inflation index as that used for linkers 12

13 Thank You 13