Sun, 01st May 2016

Anirudh Sethi Report


Archives of “government debt” Tag

IMF agrees $1.5 billion bailout for Sri Lanka to avert balance of payments crisis

The International Monetary Fund (IMF) has reached agreement with the Sri Lankan government for a $1.5 billion bailout to help the island nation avert a balance of payments crisis.

The three-year loan will require IMF board approval in June, the global lender said on Friday, and is subject to Sri Lanka implementing reforms, including streamlining the tax code and reducing a bloated deficit.

“The Sri Lankan authorities and the IMF have reached a staff-level agreement on a 36-month Extended Fund Facility (EFF),” for a $1.5 billion loan, Todd Schneider, IMF mission chief for Sri Lanka, said in a statement.

The agreement comes as debt-laden Sri Lanka faces a looming balance of payments crisis due to heavy foreign outflows from government securities and high external debt repayments.

Sentiment on financial markets was bolstered by the IMF deal, helping the rupee currencyLKR= trade firmer and stock index .CSE rise nearly 1 percent in early trade.

Sri Lanka’s foreign exchange reserves have fallen by a third from their peak in late 2014 to $6.2 billion at end-March.

Foreigners sell most India debt in a month as yield benefit ebbs

Indian sovereign bonds are losing some appeal as their yield advantage over Treasuries diminishes.

The extra yield investors demand to hold the South Asian nation’s 10-year notes over similar-maturity US debt fell to 556 basis points on Monday, the least since early January, data compiled by Bloomberg show. The gap was as high as 616 in February. Foreign holdings of local government and corporate securities dropped by Rs1,590 crore ($239 million) on Monday, the most since 29 March.

The narrowing spread reflects both diverging monetary policies in the two nations and India’s success in reining in inflation. The Federal Reserve raised interest rates in December for the first time in a decade, while the Reserve Bank of India has lowered benchmark borrowing costs five times since the start of 2015.

The yield on Indian sovereign bonds due January 2026 was little changed at 7.47% in Mumbai, according to the RBI’s trading system. The rupee rose 0.1% to 66.5250 a dollar, ending a three-day losing run, prices from local banks compiled by Bloomberg show. The currency is down 0.6% this year in Asia’s worst performance.

Overseas holdings of rupee-denominated bonds have decreased by Rs4,160 crore in 2016, according to data from National Securities and Depository Ltd. Even so, Western Asset Management Co. plans to buy more Indian sovereign debt, which still offers the second-highest yields among major Asian markets after Indonesia

Fitch Affirms Japan at ‘A’; Outlook Stable -Full Text

Fitch Ratings has affirmed Japan’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘A’. The issue ratings on Japan’s senior unsecured local-currency bonds are also affirmed at ‘A’. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at ‘AA’ and the Short-Term Foreign-Currency IDR at ‘F1’.


Japan’s ‘A’ IDRs reflect the following key rating drivers:

– The key factor constraining the rating is high and rising government debt. Fitch expects gross general government debt to reach 245% of GDP by end-2016, by far the highest ratio of any rated sovereign. Fitch’s projections indicate the government debt / GDP ratio will stabilise in 2020 at about 247%, not far above the current level. However, high indebtedness and weak nominal growth leave the projections highly vulnerable to economic or financial shocks.

– The Japanese sovereign also has a large stock of assets. General government financial assets were worth about 112% of GDP at end-2015, including gross official foreign reserves worth about 31% of GDP. However, the agency focuses on gross debt for assessing solvency in its sovereign rating methodology. Moreover, Japan’s net indebtedness is also high and rising. The OECD estimates Japan’s net financial liabilities at 132% of GDP at end-2015, jointly second-highest in the 28-nation group with Italy (BBB+/Stable). The rise in Japan’s net liabilities as a ratio to GDP between 1995 and 2015 was the highest in the group – 87 percentage points (pp), ahead of Greece (73pp) and Portugal (70pp).

India : Fiscal deficit expected to be below 3.9 per cent for FY16: Finance Ministry

Finance Ministry on April 1 said the fiscal deficit for 2015-16 is likely to remain below 3.9 per cent of the GDP on the back of tax receipts and realisation from disinvestment. Stressing that the government remains committed to the path of fiscal consolidation, the Ministry said “as per initial estimates, the fiscal deficit for 2015-16 is expected to be within 3.9 per cent”.

As per the fiscal consolidation roadmap, the fiscal deficit for the current fiscal has been pegged at 3.5 per cent of the GDP. Receipts of tax revenues are also on track and the 2015-16 revised targets are expected to be fully met when the bank scrolls are fully accounted for, a statement from the Finance Ministry said.

According to revised estimate, Rs 7.52 lakh crore was estimated to come from direct taxes (corporate, and income tax) and another Rs 7.03 lakh crore from indirect taxes (customs, excise and service tax) in 2015-16. With regard to disinvestment target, it said, Rs 25,000 crore has been achieved for fiscal ended March 2016.

The revised estimates announced in the Budget 2016-17 pegged the disinvestment receipts from minority stake sale in PSUs at Rs 25,312 crore, as against the target of Rs 41,000 crore. It did not expect any revenues from strategic stake sale. As regards plan expenditure for 2015-16, it is expected to be around Rs 4,70,000 crore. This is higher than the budget estimate of 2015-16 and also higher than the actual plan expenditure in 2014-15, it said.

RBI provides details for new foreign investment limits in debt

RBI INDIAThe Reserve Bank of India said foreign investors will be allowed to buy up to 275 billion rupees ($4.13 billion) in additional sovereign debt starting next month, as part of its previously announced plan to allow increased overseas investments.

The RBI said foreign institutional investors will be allowed to buy up to 105 billion rupees in government bonds from April 4 and up to 100 billion from July 5, according to a release on Tuesday.

Foreign investors would also be allowed to buy up to 35 billion rupees in state government debt for each of those two periods, the RBI said.

The planned additional investments are part of the RBI’s announcement in September to gradually increase foreign investment in sovereign debt markets by March 2018.

As part of the announcement, the RBI also said it would allow any of the unutilised limits reserved for long-term foreign investors such as central banks by the end of the first half of the fiscal year to be opened up to all investors in the second half.

Currently, 80.51 percent of the limit available for long-term investors is used up, while the limit for foreign institutional investors is almost used up, as per data from National Securities Depository Ltd.

Foreign investors have turned buyers of Indian government and corporate bonds this month, with $319.2 million in net purchases after selling a net $1.3 billion in February.

Trade failures of US bonds hit $456bn

The US Treasury has played down concerns over the soaring number of trade failures for US government bonds, which hit an eight-year high of $456bn in the week to March 9.

Trade failures, reported by big banks and brokers known as primary dealers, occur when a bank or investor agrees to lend or sell a Treasury security but then does not deliver it.

Data released on Thursday by the Federal Reserve Bank of New York show overall failures to deliver reaching $452bn for the week ending on March 16. The figures are usually below $100bn, and compare to an average of $94bn per week earlier in the year.

In the week ending on March 9 failures for the 10-year Treasury note climbed to their highest level since data collection began in April 2013, before falling back to more normal levels in Thursday’s release.

Market participants point to the combination of many factors to explain the severity of the increase in failures. The US Treasury said the main cause was the build-up to fresh issuance of benchmark 10-year notes and 30-year bonds, which settled on March 15. Dealers may oversell securities knowing that fresh supply is not far away, which can result in an uptick in trade failures. Despite the drastic increase the Treasury said there was nothing yet to worry about.

India : Illusory Budget numbers

The homeless and unwashed sleep under flyovers and approach us with outstretched palms at traffic lights even in the exclusive enclaves of Delhi. As we Indians know from personal experience, basic security, health care, clean drinking water or electricity are not available to about 300 million of our citizens. There are none so blind, as those who will not see.

It is axiomatic that high fiscal deficits raise inflation which hits the lowest income and salaried classes the most. And, it is logical for governments to restrict Budget deficits, since that reduces crowding out of private borrowings. In the build-up to the presentation of the Budget on 29 February, the spotlight was on whether the central government would adhere to a fiscal deficit target of 3.5 per cent of GDP for 2016-17. The government stuck to its word. However, the relevance of this 3.5 number is diluted by the central government’s practice of finding ways to provide for expenditures outside the Budget. This practice, quaintly called “cash neutral” in the Indian Ministry of Finance, consists of issuing bonds/guarantees instead of making payments. The consequent actual and contingent liabilities are not part of the Budget and the amounts vary from one year to another.

Additionally, the 2016-17 Budget has not fully taken into account the inevitable outlays, even if staggered, of the Seventh Pay Commission’s recommendations and OROP. Food Corporation of India and publicly owned fertiliser companies are owed large amounts by the central government. Further, funds will be provided to support continued losses in public sector undertakings including Indian Railways, some of which are not part of the Budget.

UK budget 2016 – key points

A surprise “sugar tax” on soft drinks will likely grab newspaper headlines tomorrow morning but here is a run-down of the other major announcements in this year’s Budget.

UK growth forecasts revised down significantly

The Office for Budget Responsibility is now forecasting growth of 2 per cent for this year, compared to a previous forecast of 2.4 per cent. Growth in 2017 will also be lower than previously thought, at 2.2 per cent (the OBR had forecast 2.5 per cent growth for that year at the Autumn Statement in November). Further forecasts have been revised down as follows (the number in brackets is the previous forecast):

2018: 2.1 per cent (2.4 per cent)

2019: 2.1 per cent (2.3 per cent)

2020: 2.1 per cent (2.3 per cent)

Borrowing to be below forecast this year BUT higher over the next 3 years

George Osborne was able to say that he will meet his borrowing forecast for this year and the UK will still deliver a budget surplus by 2020. But that masked a significant upward revision in borrowing forecasts for the next three years. Here are how forecasts have changed compared to the Autumn Statement (again the old forecast is in brackets):

P Chidambaram’s 5 key points :What is wrong with Narendra Modi govt’s fiscal deficit roadmap?

  1. Former FM said the NDA government’s claims to bring fiscal deficit to 3.5 per cent was built on factors like avoidance of direct borrowing and instead asking other ministries like Indians Railways to do so instead. Arguing that while small amounts could be borrowed by individual ministries and PSUs, he said “but to ask them to borrow 59,000 crore (railways) and 40,000 crore (road transport) and show it off the balance sheet and then say that our Fiscal deficit is 3.5 per cent is I am afraid is not acceptable.”
  2. Terming it as unacceptable, P Chidambaram said “instead of the government borrowing, and showing it as part of the fiscal deficit, and giving it to Ministry of Railways and Road Transport as budgetary grant, you (Centre) are asking them to borrow.”
  3. Addressing students of Loyola Institute of Business Administration here on the Union Budget 2016-17, P Chidambaram said such borrowings by the Ministries would not be reflected in the budget balance sheet. “It means this borrowing (by Ministries) is kept outside the budget, this is off the balance sheet borrowing,” he said. The Ministry of Road Transport in 2014-15, when UPA went out of office, borrowed only Rs 3,343 crore, which was a small per cent of total expenditure, he said. “Today you say it is going to borrow 60,000 crore, the correct thing to do is the government should borrow and give as Gross Budgetary Support and that would have hit the fiscal deficit,” he said.
  4. Therefore, he said the Centre was showing it off balance sheet off budget. He said Indians may accept such an approach. However, foreign analysts may not accept it. “I am afraid, while Indians may accept it, as far as Indians are concerned if Government of India does it (borrowing) or a Ministry (does it) what does it matter?.” “For foreign analysts, (however) he is not going to miss the number, he will point out that this is nothing but off the balance sheet borrowing.”
  5. Former FM pointed out that “he (analyst) is going to add it back to fiscal deficit and say that your fiscal deficit is not 3.5 per cent as you claim it to be and it is much higher than that. I am afraid, this is not the right approach. If the government wants to borrow, it must borrow straight on the balance sheet, on the budget and give it to the ministry as GBS.,” he said.

Moody’s: Conflicts between China’s main policy objectives raise risk that momentum on reform will slow -Full Text

Moody’s Investors Service says that China’s (Aa3, negative) policy makers appear to have set themselves three main policy objectives: maintaining reasonably high rates of GDP growth, reforming and rebalancing the economy, and ensuring financial and economic — and thereby social — stability. The Government Work Report delivered to the National People’s Congress on 5 March made explicit reference to each of these policy objectives.

“However, against the backdrop of China’s slower economic growth, capital outflows and rising corporate stress, it will be increasingly difficult for these policy objectives to be achieved in unison,” says Michael Taylor, a Moody’s Managing Director and Chief Credit Officer for Asia Pacific.

“With the government having now given a strong commitment to a growth target of between 6.5%-7.0%, it seems unavoidable that one of the other policy objectives will assume lesser priority. The most likely near-term casualty is reform momentum.”

“We believe that achieving even the lower end of the growth target for 2016 is likely to require further substantial monetary and fiscal stimulus, as evidenced by the 50-basis-point cut to the required reserve ratio in February and the government’s announcement of a 3% fiscal deficit for this year”, adds Taylor. “This level of policy support is likely to frustrate the government’s ability to achieve at least one of its other objectives.”

Moody’s analysis is contained in its just-released report titled “China Credit: Conflicts Between Policy Objectives Raise Risk That Momentum on Reform Will Slow”.

Moody’s report points out that it will be difficult even to implement two of the three objectives at any one time.