Policy rate hike expected to fuel investment in saving certificates

KARACHI: Investments in saving certificates that have been declining for the past couple of years amid dovish interest regime are expected to recover after an overdue change in the central bank’s soft monetary policy stance, analysts said on Thursday.

The analysts expect investors to pour money into savings as they could prefer fixed-income assets in a rising interest rate environment.

“An improvement in profit rates and increased offerings by the CDNS (Central Directorate of National Savings) are likely to fire up demand for the NSS (National Saving Schemes), increasing domestic savings in times to come,” Khurram Schehzad, chief commercial officer at JS Global said. “When interest rates are down investments are shifted from the fixed-income assets to other avenues such as foreign currency, stock market and real estate.”

Investments in various national saving certificates fell 18.7 percent to Rs92.316 billion in the first half of the current fiscal year of 2017/18, the central bank’s latest data showed, as investors diverted funds to other lucrative avenues. A CDNS spokesperson, however, argued that the dollarisation was not the main reason behind a slowdown in NSS inflows.

“The anticipated depreciation of rupee against the dollar is not the reason for lower savings growth rate,” the spokesperson said. “National Savings investors are mainly individuals who do not risk to arbitrage for the short-term investments/gains.”

The spokesperson further said at least four new products, including sharia-compliant product and overseas Pakistanis savings certificate will be launched within the next five months to offset the reduction in the interest rate-sensitive schemes.

Industry officials said the profit rates on NSS are pegged with primary auction yield of market treasury bills and Pakistan Investment Bonds (PIBs).

“There have been no primary auction rates of PIBs for the last six months,” an official said. “This temporary anomaly in rates is likely to be addressed with the recent increase in SBP’s (State Bank of Pakistan) policy rate and the resumption of PIB auctioning from this month onwards.”

SBP raised its key policy rate by 25 basis points to 6 percent after more than one-and-a-half year on January 26.

The CDNS spokesperson said the directorate and finance division are ‘very well’ aware of this situation and trying to arrest the downward trend in investments as early as possible.

“In this respect, National Savings is taking all the measures whereby its investments become less dependent on interest rates,” he added.

A key objective of the NSS is to generate funds for the financing of budget deficit as well as promote savings.

Investments in NSS have been declining due to low yields on different instruments amid reduction in policy rate during the last few years. Savings mobilised through NSS stood at Rs206 billion in FY2017 compared with Rs233 billion in the previous fiscal year. Profit rates on various saving certificates/schemes with different maturity profiles stayed flat since February last year.

Interest rates on saving certificates are hovering in the range of 6 to 9 percent.

NSS has already launched third party payments through the saving accounts, using them as operating accounts like banks, which will help in retaining the investments with CDNS and enhancing deposits in its savings accounts.

Banks are reluctant to participate in long-term debt securities and instead aggressively participate in t-bills auctioning.

In the recent past, government mainly met its borrowing requirements through short-dated instruments of SBP and banks.

Government either rejected or didn’t receive bids for the short and long tenors of the PIBs after July 27, an auction profile showed. Therefore, the offered and accepted amount in PIB auctions fell short of both the maturity and the target for the last two quarters of FY2018.

The CDNS official said NSS has appointed a sharia advisor to launch sharia-compliant products. Rules are under the approval phase, he added.

A consultant has also been engaged to study the regulatory and tax environment in the target market, and to conduct the market research before appointing the manager to roll out overseas Pakistanis savings certificates.