The country had internal debts of around K18 billion and foreign debts of around $9.1 billion as at January 31, 2017, according to the Ministry of Planning and Finance (MOPF).

While the foreign debts are based on attractive 10-40 year terms with interest rates of up to 5 percent, the government is currently paying interest of between 8.16pc and 9.69pc on Treasury bills and bonds with maturities ranging from 3 months to 3 years.

This implies that interest rates on internal debts are much higher than external debt. In addition, as the bonds have relatively short term maturities, the government is also taking on more risk when repaying those debts, according to the Myanmar Debt Management Strategy.

As such, longer term bonds with higher interest rates should be auctioned to draw more bond investors and reduce the risk for the government.

Deeper bond market

Since 2016, Myanmar has raised efforts to develop a functioning sovereign bond market as it aims to reduce  borrowing from the central bank to fund the fiscal deficit. By 2020-21, it intends to completely stop relying on central bank borrowing and fund internal debt mainly through the bond market.

Of the K18 billion in total internal debt, around K14 billion is now being funded by central bank borrowing at an interest rate of 4pc.

“Getting loans directly from the central bank is not sustainable in the long run. So, the government plans to sell more Treasury bonds. To sell more bonds and attract more investors, the interest rates must be increased,” said U Zaw Pe Win, a budget analyst and financial expert.

Currently, local banks buy up more than 99pc of the bonds issued by the Myanmar government, while foreign banks take up less than 1pc. “The Myanmar bond market is still very immature. There are not many investors and not enough buyers,” Mr Sean Turnell, economic advisor to the current government, told The Myanmar Times during an interview in January.

“The bond market needs to move completely to full market pricing and in order to do that the country needs a much bigger bond market. This would involve not just the local banks but corporations and foreign institutions like pension funds and insurance companies buying bonds in the local currency,” Mr Turnell added.

Heavier burden

On the other hand, with higher interest rates, “there will be more pressure on the government to repay those debts, so high rates are not good for short-term settlement,” said U Zaw Pe Win. “That is why the bonds issued must also have longer term maturities.”

Currently, around K4 billion of internal debt is covered by Treasury bonds at interest rates of 9.18pc for 2-year bonds and 9.69pc for 3-year bonds. The remaining K975 million in debt is covered by short term Treasury bills at interest rates of 8.16pc for 3-month bills, 8.53pc for 6-month bills and 8.63pc for 12-month bills.

For the six fiscal years from 2011-2012 to 2016-2017, interest payments and administrative charges amounted to K800 million, according to the Debt Management Strategy report.

Over the next 3 fiscal years, a total of K850 million in interest payments will be due, according to estimates in the Debt Management Strategy.

Against that backdrop, MPs have called for better care in handling the fiscal deficit to better manage higher interest payment obligations.

Mr Turnell is positive. “Myanmar’s move in 2016 to set up an auction system for bonds is an important step and shows a real commitment which ties in with the policy to move away from central bank borrowing. This is not yet complete but it does send a signal that the country is more responsible and open to sustainable bond market financing,” he said.

Source: https://www.mmtimes.com/news/higher-bond-yields-needed-draw-foreign-investors.html