Government likely to announce DDR on Wednesday – Murtaza Jafferjee

Government will most likely announce a Domestic Debt Restructuring (DDR) on Wednesday and declaring a bank holiday on Friday is the right thing to do because it gives time for market players to digest the ramifications.

This was opined by investment professional, CEO JB securities and Chairman Advocate Institute Murtaza Jafferjee. Fear of a banking crisis from the DDR is unfounded. On the contrary, by including banks in a DDR it will prevent them from making extraordinary profits from high coupon bonds that can be funded with lower deposit rates,’ he said in a tweet.Let’s take a moment to reflect as to why a domestic debt restructuring is needed. We have three problems – stock (high debt to GDP), flow (high Gross Finance Needs (GFN)) and affordability (int to GDP), he explained.

At the end of 2022 the IMF has computed that our public debt (central government + guaranteed SOE debt + CBSL liabilities) to be 128% of GDP. “There is no magic red line but for a middle-income market access country like ours we should target below 60%.”

CBSL will be able to reduce policy rates with the expected fall in inflation to single digit or even negative. Post DDR the default premium on risk free rates will also fall. Thus, market interest rates will come down in line with the macro fundamentals,” he forecasted.

The superannuation funds hold 43% of the bonds at the end of 2022. They are a pay as you go system – inflows fund outflows which yet remain positive. They will not face a liquidity issue from longer maturity bonds for the retirement age is being extended so flows can be managed The remaining T-bills are in the public hands. Governor and ST have stated that they will NOT be restructured. Most of them are short term thus they will get reissued at lower interest rates during this year.