2023年公共部门债务展望-13正式版

Sovereign

Debt

Institute

PUBLICSECTOR

DEBTOUTLOOK

2023

THE

SEARCH

FOR

DEMAND

AND

LIQUIDITY

YOUR

GREATIDEAS

SHOULD

ANDWILL

COME

TOLIFE

WITHUSONYOURSIDE

SocieteGenerale,awardedBestBank

forSustainableFinanceinAfrica*,bringsyou

innovativefinancesolutionstomeetyour

ambitionsforamoresustainablefuture.

ADVISORYINVESTMENTBANKINGFINANCINGMARKETSTRANSACTIONBANKINGSECURITIESSERVICESEQUIPMENTFINANCEFLEETANDMOBILITYSOLUTIONS

*AwardedbyEuromoneyfor2022.SocieteGeneraleisaSocieteAnonyme,withitsregisteredofficeat29BoulevardHaussmann,75009,Paris.SocieteGeneraleisaFrenchcreditinstitution(bank)authorisedandsupervisedbytheEuropeanCentralBank(ECB)andtheAutoritédeContrôlePrudentieletdeRésolution(theFrenchPrudentialControlandResolutionAuthority)(ACPR)andregulatedbytheAutoritédesMarchésFinanciers(theFrenchfinancialmarketsregulator)(AMF).Thiscommunicationisnotdirectedatorintendedforretailclients.January2023.

8

18

PUBLICSECTOR

DEBTOUTLOOK

2023

OMFIF.ORG/SDI 3

4

Executivesummary

Thesearchfordemandandliquidity

6

Sponsor'scomment

Energycrisisandgeopoliticsunderpinnegativecreditoutlookforeuroareasovereignsin2023.ByHeikoPeters,Moody'sInvestorsService

8

4

Chapter1:

Liquidity

DMOseyemoreincentives

forprimarydealerstoboost

liquidity

13

Sponsor'scomment

Innovationwillbekeyfor

14

Africansovereignsinthe

internationalbondmarkets

in2023.ByKarimElzein,

SocieteGenerale

14

Chapter2:

ESG

SSAsmustbecomemoreinnovativewithGSSissuance

18

Chapter3:Databank

GlobalSSArankings2022

OMFIFSDIPUBLICSECTORDEBTOUTLOOK2023

EXECUTIVESUMMARY

THESEARCHFOR

DEMANDANDLIQUIDITY

Therelationshipbetweensovereignsandtheirprimarydealersisinthespotlightasborrowersgrapplewithachallengingmarketenvironment.ByCliveHorwood

60%

ofborrowerssayreduceddemand

frominvestorsisoneoftheirtop

concerns

38%

believetheaveragecoverageof

theirsyndicationsin2023willbeless

thantwotimes

64%

ofSSAborrowersplantoincrease

theirinvestorrelationsefforts

45%

ofsovereignsareexploringwaysto

givemoreincentivestotheirprimary

dealers

60%

ofissuersthinknewissuepremiums

willbehigherin2023

19%

ofpublicsectorborrowerswill

domorethan20%oftheirannual

fundingprogrammeinGSSformat

OMFIF.ORG/SDI 5

primarymarkets.

Tougherprimarymarketconditionsarealsoreflectedinborrowers’expectationsofthecostofissuance.Around60%ofpublicsectorborrowerssaynewissuepremiumswillbehigher–mostofthemmarginallyso,butsomesubstantially.Only6%thinkpremiumswillbelower.

Liquidity–orthelackofit–isamajordiscussiontopicbetweenborrowersandtheirinvestors.Two-fifthsofrespondentstothesurveyrateliquidityasoneoftheirtoptwoconcerns.Inthesovereigndebtspace,alotofthisdiscussioniscoalescingaroundtheroleofprimarydealersandtheirwillingnessandabilitytoprovideliquidityviaauctionsandinthesecondarymarket.One-thirdofborrowerssaytheyhavehaddiscussionsinwhichprimarydealershaveexpressedconcernsabouttheirobligations.

Inresponse,around45%ofissuerssaytheyarelookingatwaystoprovideprimarydealerswithnewincentives,while18%saidtheyareconsideringhowtoeaseobligationsamongtheircorebankintermediaries.Some15%ofsovereignissuerssaytheyexpecttoincreasetheirnumberofprimarydealersin2023,raisingtheimportanceofensuringthatbankshavetherighteconomicincentivestobeactiveparticipants.

Publicsectorissuersareexpectedtocontinuetotaketheleadinthedevelopmentofsustainablebondmarkets.Aroundone-fifthofrespondentssaidtheywouldissuemorethan20%ofthisyear’sborrowingprogrammeinasustainableformat.Thelargestsectorwillremaingreenbonds–expectedfromcloseto50%ofborrowers–butotherformsofsustainablebonds(27%)andsocialbonds(21%)willalsobeprevalent.Thesovereignsustainability-linkedbondmarketisalsoexpectedtofurtherdevelop,with10%ofborrowerslookingtoissueinthisformatin2023,allfromtheemergingmarkets.

PUBLICsectorborrowersfacearaftofchallengesinfundingtheirprogrammesthroughdifficultandvolatilemarketsin2023,asurveyfromOMFIF’sSovereignDebtInstitutereveals.Concernsincludethelevelofdemandfrominvestors,thesizeofnewissuancepremiums,thelackofliquidityandtheabilityofsovereignissuerstoincentivisetheirprimarydealergroups.

Asidefromtheusualrushtoissuanceattheverystartoftheyear,andatypicallybusyJanuaryinthesovereign,supranationalandagencyprimarymarkets,thesurveyresultspaintaclearpicture

ofborrowersnervousabouttheirabilitytoaccessthemarket.Typically,publicsectorissuerslooktofrontloadtheirfundinginthefirsthalfoftheyear,withasmuchas70%oftheirborrowingcompletedbytheendofthesecondquarter.Thisallowstheissuerstostrategicallypickoptimalfundingwindowsinthelatterpartoftheyear.

ButtheSDIsurveyresultsshowthattwo-thirdsofborrowersexpecttohavefundedupto50%orlessoftheirannualrequirementinthefirstsixmonthsof

2023.Asubstantialpartofthisgroupcomesfrom

emergingmarketsorissuerswithsmallerannual

fundingrequirements.Butithintsthatsomeexpect

marketconditionswillbeextremelytoughearlyin

theyear,duetoalackofclarityfromcentralbanks,

withthehopethat,asinterestrateincreaseslevel

offasinflationsubsidesinthesecondhalfofthe

year,issuancewindowswillbecomemorefrequent

andbenign.Butthismightleaveissuershostage

tothefortunesofthemarketifconditionsfailto

improve.Morethanhalfofrespondentssaidthelack

ofclearissuancewindowswasoneoftheirtopthree

concernsfortheyearahead.

Around60%ofborrowerscitereduceddemand

THEOPENINGUPOFGLOBALTRAVELPOST-

COVID-19ISLIKELYTOSEEMOREBORROWERS

GETONTHEROADFORINVESTORMEETINGS,

BOTHDEALANDNON-DEAL

frominvestorsasoneoftheirtoptwoconcerns

for2023,despiterisingratesboostingreturnsfor

buyers.Coverageratiosforsyndicationsarelikely

tofall,asthedistortionofquantitativeeasingin

somemarketsiswithdrawn.Some38%ofborrowers

expectsyndicationstoonlybeoneortwotimes

covered,and50%expectcoverageoftwoorthree

times,suggestingthattheeraofinflatedorderbooks

maybewellandtrulyover.

Itisthereforenosurprisethattwo-thirdsof

respondentssaytheywillincreasetheirinvestor

relationeffortsin2023.Theopeningupofglobal

travelpost-Covid-19islikelytoseemoreborrowers

getontheroadforinvestormeetings,bothdealand

non-deal.Closeto40%ofborrowersareplanning

toaccessnewinvestors,andthree-quarterswantto

deepentheirrelationshipswithexistinginvestors.

Justunderhalfofrespondentssaidthatthereturn

oftraditionalinvestorsasratesrisehasbeenthe

mostsignificantchangeintheinvestorcommunity

overthepast12months,whilemorethanaquarter

haveseenareductioninhedgefundparticipationin

Anumberofrespondentscommentedthatbuildingnewrelationshipswithenvironmental,socialandgovernanceinvestorswillbeacorepartoftheirinvestorrelationprogrammeoverthenextyear.

Thesurveywascompletedby33sovereign,supranationalandagencyborrowers(two-thirdsfromdevelopedmarkets,withtheremainderfromemergingmarkets)inDecember2022andJanuary2023.

Thesesurveyresultsformthebackboneofthisreportontheoutlookforpublicsectordebtissuancein2023.Onthefollowingpages,weassesstheliquiditychallengesforSSAborrowersandwhattheyaredoinginresponse,withcommentfromborrowersandbanks.Weanalysethecurrentstateofprimarydealershipsandwhatthefutureofthismodelwilllooklike.WereviewtheSSAESGmarketin2022andhowthiscanberechargedin2023,withtheintroductionofnewproductssuchasSLBsandmoredebutESGissuers,aswellasalookathowESGframeworkscanbetterevolve,withcommentfromborrowers,banksandinvestors.

OMFIFSDIPUBLICSECTORDEBTOUTLOOK2023

SPONSOR'SCOMMENT

ENERGYCRISISANDGEOPOLITICSUNDERPINNEGATIVECREDITOUTLOOKFOREUROAREASOVEREIGNSIN2023

Greentransitionpresentssomeupsidesforeconomicgrowth.ByHeikoPeters,vicepresidentandsenioranalyst,Moody'sInvestorsService.

OMFIF.ORG/SDI 7

THEoutlookforsovereignsintheeuroareain2023isnegative,reflectingourexpectationsforcreditfundamentalsoverthenext12months.Sectoroutlooksaredistinctfromratingoutlooks,which,inadditiontosectordynamics,alsoreflectissuers'specificcharacteristicsandactions.Asectoroutlookdoesnotrepresentasumofupgrades,downgradesorratingsunderreview,oranaverageofratingoutlooks.Whilethegreentransitionpresentssomeupsidesforeconomicgrowth,otherfactors–mainlynegative–arelikelytoshapethecreditconditionsoftheregion’ssovereignsinthenearterm.

Weexpecttheregion’ssovereignswillavoidenergyrationingoverthewinter,thankstoeffortstofillstorage,sourcenaturalgassuppliesfromcountriesotherthanRussiaandmanagedemand,aswellasmildtemperatures.However,supplyconditionswillremainstrainedbecauseexistinginfrastructureisgearedaroundsourcinggasfromRussia.Resultinghighenergypricesandongoinguncertaintywill,despitegovernmentsupport,weakenconsumerspendingandbusinessinvestmentmateriallyandtherebydomesticdemand.

Atthesametime,weakdemandfrommajortradingpartnersandhighenergypriceswillweighonexportsdespiteaneasinginglobalsupplychaindisruption.Similarly,therecoveryintourismhasprobablypeaked,withhighertravelcostsandafallinpurchasingpowerinkeysourcecountriescontainingfurtherupsidesinwhatwasaverystrong

WEAKDEMANDFROMMAJORTRADINGPARTNERSANDHIGHENERGYPRICESWILLWEIGHONEXPORTSDESPITEANEASINGINGLOBALSUPPLYCHAINDISRUPTION

reboundintouristarrivalsin2022.ThereisalsoasignificantriskofstagflationtakingholdbecauseofthechallengestheEuropeanCentralBankfacesincontrollinginflation.Higher-for-longerenergypricesmeananysubsequentrecoveryin2024willbeshallow.

Discretionarypublicsupportprogrammesandthekicking-inofautomaticstabiliserswillcontainthesocialeffectsoftheenergycrisis.Atthesametime,theywill–togetherwithagradualriseininterestspending–widentheaverageeuroareafiscaldeficitto4.1%ofgrossdomesticproductfrom3.9%in2022.Anegativeinterestrate-growthdifferentialwillcontributetoamoderatedeclineintheregion'saveragedebtburdento93%ofGDPin2023,butthisremainswellabovethepre-pandemiclevelin2019of84%.Infact,onlyGreece(Ba3stable),Ireland(A1positive),Cyprus(Ba1positive),Portugal(Baa2stable)andCroatia(Baa2stable)willhavelowerdebtburdensthantheydidin2019.Debtlevelswillcontinuetovarywidelywithintheeuroarea,from22.6%ofGDPinEstonia(A1stable)to162.9%inGreece.

Alongsidethis,risinginterestrateswillcontinuetoweakendebt-affordabilitymetricssuchastheinterestpayments-to-revenueratioto3.9%in

2023and4.2%in2024,whichwillbeitshighestreadingsince2017andwellabovelowsrecordedat3.1%in2021.Yieldsonbenchmark10-yearGermangovernmentbondshaverisento2.5%atendof2022from-0.2%atendof2021,againstthebackdropofECBmonetarytightening.AlthoughECBactionwilllimittheriskofasuddenwideningofspreadswithintheeuroarea,Italy’s(Baa3negative)andSpain's(Baa1stable)debt-affordabilitymetricsappearmateriallyvulnerabletorisingratesgivenlargeincreasesintheiralreadyhighpublicdebtsincethepandemicandrelativelyhighlevelsoffloating-ratedebt.Inaddition,bothcountriesfeaturerelativelyhighsharesofdebtmaturingover

INTERPLAY

OFSEVERALDRIVERSUNDERPINS

MOODY’S

NEGATIVE

OUTLOOKFOR

EUROAREASOVEREIGNS

Factorsdrivingthe

euroareasovereign

outlook

Source:Moody's

InvestorsService

thecomingyear:short-termdebtandlong-termdebtwithoutstandingmaturityoflessthanayearamountsto20.8%ofGDPinItalyand17%inSpainasofNovember2022.Thatsaid,therelativelylongaveragematurityofgovernmentdebtsecurities(7.1yearsinItalyand7.7yearsinSpain)willstilllimitthepassthroughtodebt-affordabilitymetricsoverthecomingyears.

Theeuroareaalsofacesanumberoflong-termchallenges.Higher-for-longerenergypricesthreatenthecompetitivenessofsovereignswithlarge,economicallyimportantbutenergy-hungrychemical,automotiveandothermanufacturingsectors,particularlySlovakia(A2negative)andItaly.Acombinationofpoliticalinstability,energyinsecurity,amarkedlossoftradecompetitivenessandthecrystallisationofcontingentliabilitiescouldalsoleadtoanabruptriseintheeuroarea'sriskpremia.Atthesametime,unfavourabledemographictrendswillweighonpotentialgrowthandfiscalsustainabilitywithouteffectivepolicyaction.Thefallintheeuroarea’sworkingagepopulation(aged20-65)isforecasttoaccelerateto0.5%peryearin2030,which,thingsbeingequal,willweakentheregion'spotentialgrowthbyroughly

5percentagepoints.Itwillalsoincreasepressuresonavarietyofspendingcategorieslikepensions,healthcareandlong-termcare.Lookingatthefivelargesteuroareacountries,Germany(Aaastable),ItalyandSpainfacemateriallylargerdemographicpressuresthanFrance(Aa2stable)andtheNetherlands(Aaastable).

Thatsaid,thegreentransitionaswellas

0.5%

Fallintheeuro

areaworkingage

populationperyear

by2030

investmentsandreformslinkedtotheEuropeanUnionrecoveryfundspresentupsideopportunitiesforfuturegrowthperformance.Almostallof

thelargestbeneficiariesofEUrecoveryfundsarebroadlyontrackregardingtheirtargetscontainedwithintheirnationalrecoveryandresilienceplans.Investmentonclimatemeasuresincludingsustainablemobility,energyefficiency,renewableenergy,climatechangeadaptation,thecirculareconomyandbiodiversityarealsolikelytolowerenvironmentalrisksandcouldeaselong-termenergysecurityconcernstriggeredbytheRussia-Ukraineconflict.However,long-standingbottlenecks,likelabourshortagesandmaterialandlengthybureaucraticprocedures,presentmajorimplementationrisks.Moreover,meetingfuturereformmilestoneswillbecomeincreasinglydifficultforsomefrom2023onward,especiallyamiddifficultsocioeconomicconditions.Therearealsoconcernsoverwhethermoneywillbespentefficientlyandcostoverrunsgivenmostprojectsweregenerallyplannedandcostedbygovernmentsafewyearsago.

OMFIFSDIPUBLICSECTORDEBTOUTLOOK2023

OMFIF.ORG/SDI 9

CHAPTER1:LIQUIDITY

DMOsEYEMOREINCENTIVESFORPRIMARYDEALERSTOBOOSTLIQUIDITY

Toughmarketsareforcingpublicsectorissuerstolookatallpartsoftheirfundingstrategy.Investorrelationsaretothefore,butthebank/borrowerrelationshipisalsobeingreapparaised.ByBurhanKhadbai

1.1.Issuersworriedaboutdemand,pricingandliquidity

Whatareyourbiggestconcernsin2023?Shareofrespondents,%

Reduceddemandfrominvestors

Highernewissueconcessions

Lackofclearissuancewindows

Liquidityconcerns

Competingsupply

Other

0

10

20

30

40

50

60

70

Biggestconcern

Secondbiggestconcern

Thirdbiggestconcern

Source:OMFIFSDIissuersurvey

1.2.Orderbookslikelytoshrink

Whatdoyouexpectaveragesubscriptionratiosforsyndicationstobein2023?

Shareofrespondents,%

60

50

40

30

20

10

0

1-2 2-3 3-4 4+

Source:OMFIFSDIissuersurvey

1.3.Issuerswillpaymoreintheprimarymarkets

Howwillnewissuepremiumschangein2023relativeto2022?Shareofrespondents,%

60

Reduceddemandfrominvestorsisthenumberoneconcernofpublicsectorborrowersin2023,accordingtothesurvey(Figure1.1).Thesizeoforderbooksislikelytoshrink,with50%ofborrowersexpectingtheaveragesubscriptionratiotostandattwotothreetimes,while38%expectittobeevenloweratonetotwotimes(Figure1.2).Ontopoflowerdemand,issuersarelikelytopaymoretoissuenewdebt,withalmost60%ofborrowersexpectingnewissuepremiumstobehigherin2023thaninthepreviousyear(Figure1.3).

VolatilityintheEuropeangovernmentbondmarkethasresultedinwiderbid-offerspreadsorthedifferencebetweenthepricesquotedandwhatbondssellfor.Tradevolumesofgovernmentbondsforcertainsovereignshavealsobeenaffectedwhileorderbooksizeshavefallen,showingtheextenttowhichoverallliquidityhassoured.

SpeakingattheTeamEuropeborrowersseminarhostedbyOMFIF’sSovereignDebtInstitute

on25October,TammoDiemer,memberofthemanagementboardatDeutscheFinanzagentur,theGermandebtmanagementoffice,saidwiderbid-offerspreadsandlowertradevolumesofGermangovernmentbondswere‘areflectionofthehighervolatility’anda‘naturalreactionofmarketparticipantstothissituation’.

Whilethereisstill‘verygooddemand’forBunds,Diemeraddedthatticketsizesweresmaller.‘Werunmuchmoreticketsperdaythaninthepastinordertosortofdistributethesameamountoffunding.’

TheseviewsweresharedbyotherEuropeansovereignDMOheadsduringtheseminar.‘ThisisaveryseriousissuethatwearefacingtooandIhavetosayit’ssomethingwelookatverycarefullybecausetheliquidityonthesecondarymarketforushasalwaysbeenacrucialdriverforasoundfundingactivityintheprimarymarket,’saidDavideIacovoni,directorgeneralofpublicdebt,MinistryofEconomyandFinance,Italy.

IacovonisaidvolumesofItaliangovernmentbonds(BTPs)tradedinthethirdquarterof2022wereinlinewithvolumestradedinthethirdquarterof2020,duringthepeakofthepandemic.

BTPbid-offerspreadswerealsoinlinewithlevelsduringthesecondandthirdquarterof

LASTyearmarkedanextremelyvolatileperiodforgovernmentbondmarkets,withtheconsequencesoftheCovid-19pandemicstillplayingoutbutnewissuesarising,suchasthewarinUkraine,highinflationandhugeinterestraterisesfromcentralbanks.

Europeansovereignborrowerswereattheheartofthis,withChristianKopf,headoffixedincomeatUnionInvestment,calling2022‘themostdifficultyearintheEuropeangovernmentbondmarketsincethesecondworldwar’.

‘Wearefacingamultitudeofproblems…eachofthesecrisesisachallengeinitself,andtheirsimultaneityandinterdependencehaveledtoverylargelossesinthebondmarkets,’saidKopf.‘The

capitalmarketsarenotacasino,butareflection

oftheeconomicsituation,anditwouldhavebeen

surprisingifpriceshadriseninthefaceofthis

polycrisis.’

Thesetoughconditionsareunlikelytoeasein

2023,accordingtotheresultsofasurveyofmore

than30leadingpublicsectorborrowers.

THESETOUGHCONDITIONSAREUNLIKELYTOEASEIN2023,ACCORDINGTOTHERESULTSOFASURVEYOFMORETHAN30LEADINGPUBLICSECTORBORROWERSCARRIEDOUTBYOMFIF

50

40

30

20

10

0

Theywillbelower

TheywillbethesameTheywillbemarginally

Theywillbesubstantially

higher

higher

Source:OMFIFSDIissuersurvey

2020,saidIacovoni.‘However,thesituationisnothomogeneousacrossthecurve,’henoted.‘Forexample,thepointsofthecurvethatarecoveredbyfuturecontractstendtobehavebetterintermsofthebid-askspread,basicallybecausedealershavethesehedgingtoolsthattheycanuseandsothesetendtohelpinthiscase.’

‘TherehavebeendiscussionsonliquidityinEuropeangovernmentbondsforanumberofyearsbutitfeelslikelastyearitbecameveryprominentandIthinkthereasonisclearlywiththelackofQE[quantitativeeasing]thereisnowgreaterrelianceontheprimarydealercommunity,’saidaglobalheadofsovereign,supranationalandagencydebtcapitalmarketsatatop-tierEuropeaninvestment

OMFIFSDIPUBLICSECTORDEBTOUTLOOK2023

OMFIF.ORG/SDI 11

bank.‘Therehavebeenanumberoffaileddealsbysovereignswhichisprettymuchunheardofsincethecreditcrisis.’

EASINGOBLIGATIONS

Whileprimarydealersareprovingtheircriticalimportancetosovereignborrowers,thewidebid-offerspreadsshowthattheyarestrugglingtomaintaintheirtradingobligations.

‘Inrecentyears,primarydealershavecomplainedaboutthecostofinfrastructureandthebalancesheetstrainsandnow,withthevolatility,thereismorefocusonthisasissuershavewokenuptoit,’saidtheglobalheadofSSADCM.‘Inrecentyears,issuerswouldsayyoustillover-bidonauctionsandarestillbuyingbonds,sowhat’stheproblem?’

Inresponse,Europeansovereigndebtmanagementofficesareacting.

‘Whatwe’vedoneisgivensomeflexibilitytoprimarydealersintheirquotingobligationsandbeenalittlebitlenientonthethresholdsforthis.Andthatseemstohaveworkedwell,’saidMaricPost,director,treasuryandcapitalmarketsatBelgium’sdebtagency,addingthattheDMOalsoappliedthesechangesduringtheoutbreakoftheCovid-19pandemic.

OtherEuropeanDMOshavealsomadesimilaradjustments.

‘Someofourprimarydealersarefacingdifficultiesinmaintainingourquotingobligationsbutwehavebeenregularlyupdatingourobligations,’saidKarenvanderWiel,headofpolicyandriskmanagementattheDutchStateTreasuryAgency.‘Wehaveseenthatthemarketisdifficultsowehavetriedtoworkwiththem.’

Primarydealershavestrictobligationsincludingprovidingregularquotesonbondsviaelectronicinterdealerplatformswhichblendintoacombinedmonthlyscore,withdealershavingtomeetaminimumscore.WhattheBelgianandotherDMOshavedoneisadaptthatminimumscoretoeasethepressureontheirbanks.

Themajorityofissuersthinktheyhavetherightnumberofprimarydealers,althougharound20%thinktheyhavetoofew.Nosurveyrespondentsthoughttheyhadtoomanyprimarydealers.Thebiggerquestionis:aftermanyyearsofbankswithdrawingfromprimarydealershipsduetothepooreconomicsinvolved,cansovereignsmaintaintheirdealergroups?Onlyafractionexpectstheirprimarydealerlisttoshrink,butisthisasignofcomplacency?

Inthesurveyofpublicsectorborrowers,30%ofsovereignDMOssaidtheyhadexperiencedsomeoftheirprimarydealersexpressingconcernsabouttheirobligations(Figure1.4).Oneborrowersaidtheconcernswerearoundliquidityprovisionsbecoming‘moredifficultandthisiscostlyforprimarydealers’.

Anotherborrowersaid‘primarydealersownedbyinternationalbanksdon’thavemuchflexibility

1.4.Market-makersvoicemisgivingsaboutissuanceeconomics

Haveyouexperiencedprimarydealersexpressingconcernsabouttheirobligations?Shareofrespondents,%

30

70

Yes

No

Source:OMFIFSDIissuersurvey

€7bn

TofurtherboosttheliquidityofKfW’sbonds,theGermanagencyislookingatincreasingtheoutstandingvolumesofneweurobenchmarkbondsto€6bnandincreasingtheoverallsizebytapsto€7bn

toincreasetheirportfolioduetothelimitations

imposedbytheparentbanks’.

‘Clearlylastyearwasspecialattimesand,whenmarketsarevolatile,itbecomesdifficulttofulfiltheobligationstoissuersandonquotingbid-offerspreads,’saidMarkAndryeyev,globalheadofsyndicateandtradingatCommerzbank.‘Foralongtime,sovereignsinEuropedidn’tcareaboutprimarydealershipsbutthelastfewyearshaveshowedthattheyneedbanksandthatbanksplayacriticalroleinfinancialmarkets.’

INCREASINGINCENTIVES

Europeansovereignborrowersarenotjuststoppingateasingquotingobligations.Theyareactivelylookingatotherwaystoprovidemoreincentivestotheirprimarydealers.

AccordingtoaseniorSSADCMbanker,Europeansovereignissuersare‘discussingwaysoftryingtoincentiviseprimarydealersmorethantheyhaveforalongtime’.Thisissupportedbythesurvey,where45%ofsovereignDMOssaidtheywerelookingtoprovidemoreincentivestoprimarydealerstoboost

5.PrimarydealerscrucialtobuildingtradingvolumesHowareyoulookingtoboostliquidity?Shareofrespondents,%

50

40

30

20

10

0

Makingmoreuseof

EasingmarketmakingAllocatingmoretofast

Other

Providingmore

incentivestoprimary

repomarket

obligationsofprimary

moneyaccounts

dealers

dealers

Source:OMFIFSDIissuersurvey

1.6.Issuerseyeincentivesforprimarydealers

Areyouconsideringofferingincentivestoprimarydealersforparticipationinauctions?Shareofrespondents,%

45

40

35

30

25

20

15

10

5

0

Wedoalready No Yes

Source:OMFIFSDIissuersurvey

liquidity(Figure1.5).Meanwhile,23%ofsovereign

borrowerswerelookingtointroduceincentivesto

primarydealersforthefirsttime,withoneborrower

planningtosetupapilotmarket-makerprogramme

in2023(Figure1.6).

TheItalianDMOhasthemostdistinctincentive

schemeofallEuropeansovereignborrowers,with

itsprimarydealersreceivingfeesproportionalto

theirallotmentandbonddurationduringitsbond

auctions.

‘Wehavehadfeesforauctionsformany,manyyears,’saidIacovonioftheItalianDMO.‘Thefeeslevelhaschangedsometimes.In2020wehavechangedboththelevelandthewaywepaythesefees,withfeesbeingpaidquarterlyinsteadofateachindividualauctionasweconsidereditwouldhavehelpedinkeepingtheauctionpricingprocessmoretransparentandefficientthanitusedtobebefore.’

‘For2023onwards,wehaveslightlychangedourcriteriathatwefollowtopayfeestoprimarydealersfortheirparticipationatauction,’saidIacovoni.‘Forthosedealersthatareparticularlynon-performinginthesecondarymarket,theywillseeareductionofthetotalyearlyfeestheyreceivebasedontheirparticipationatauction.Itisaslightchangebutwehavedecidedtointroduceittostresstherelevanceofquotingandtradingonthesecondarymarket.’

AccordingtoAndryeyev,ItalypayingitsprimarydealersforparticipatinginauctionsisauniquesituationgiventhelargefundingprogrammetheyhaveandthefactthattheyarepronetomorebondvolatilitythanotherEurope