Non-Public Sector Bodies to invest surplus funds : could Treasury Certificates contribute to improve cash management?

In a circular issued on 17th May, the Ministry of Finance is encouraging Non-Financial Public Sector Bodies (NFPSBs) to invest their surplus funds in traditional Government securities as well as to invest their surplus funds directly in new Treasury Certificates that will be issued. Various benefits have been mentioned mainly to facilitate investment in Government (GOM) securities. Would this have more positive or negative effects?

The Ministry of Finance explains in the circular letter that the “specifically designed Treasury Certificates,” which will be issued through the Bank of Mauritius (BOM) as from 3rd June and open exclusively to Non-Financial Public Sector Bodies (NFPSBs) “will provide to them the opportunity to directly invest their temporary excess cash balances in an instrument of maturities that will meet their cash flow requirements.”

Issued by the Financial Secretary Dev Manraj, the Ministry of Finance is thus encouraging NFPSBs through this letter “to invest their surplus funds in traditional Government securities through the secondary market” but also “to invest their surplus funds, after taking into account their near term cash requirements, directly in new Treasury Certificates that will be issued or in traditional Government securities through the secondary market.”

It underlines that this will confer various benefits to public sector bodies on account of namely “investment in Government securities generally yields higher returns as compared to bank deposits of similar maturities; Government securities are risk-free financial instruments, thus the most secured type of investment; investment in Government instruments will encourage the development of the market for Government securities and; this initiative will contribute to improving public sector cash management.”

According to the Digest of Public Finance Statistics for 2016/2017 - a document compiled by Statistics Mauritius and dated September 2018 - there is a list of 40 major organisations that fall into the category of Non-Financial Public Corporations among the Central Electricity Board, Landscope Mauritius, National Housing Development Company Limited, Metro Express Limited and Mauritius Telecom Limited.

In an annexed document, the Ministry of Finance outlines the features of the new treasury certificates, namely that maturities that will be for 91 days, 182 days and 364 days, bids will be for minimum of Rs 100,000, and in multiples of Rs 50,000, interest on the TCs will be paid at maturity or on encashment,” among others. When it comes to mechanism for Investment in Treasury Certificates (TCs), it underlines, among others, that “allocation will be made by the existing Allocation Committee for Government Securities on the basis of bid amounts and maturities preferred by the market.

Dr Bhavish Jugurnath : “Short-term TCs generally pay lower interest rates”

According to the economist, this form of investment “is ideal for investors who do not have a high-risk tolerance, mainly the Non-Financial Public Sector Bodies for their capital and seek to make tax-adjusted returns that are better than a Fixed Deposit. Some invest in high credit risk securities like high yield Treasury Certificates (TCs), while others choose to invest in high-risk securities to compensate for the low yield environment.”

However, underlines Dr Jugurnath, this is not common here in Mauritius, especially for public sector bodies. “Usually investing in bonds and Treasury Certificates face a big choice: Should the public sector body pick long-term or short-term for their portfolios? Both types of Investments have advantages and disadvantages, so there’s no one right answer for all the public sector bodies. Instead, I believe the public sector bodies will have to look at the pros and cons of both long- and short-term TCs to see if the rewards outweigh the potential problems.”

Short-term TCs, he states, are attractive to those investors that don’t require to tie up their money for long periods of time. “They’re suitable for those bodies who will need to spend their invested money in the near future, but they can also be useful even for long-term investors. For instance, if we expect a rise in interest rates over the short run, then investing in a short-term TCs will let reinvest the money at maturity in a TC that by then should be paying a much higher interest rate. The downside of short-term TCs is that they generally pay lower interest rates than long-term bonds. As a result, in order to get the benefits of a short-term TCs, the investor typically earn less income, forcing the investor to make sure that the advantages short-term TC investing brings are truly worth it for the organization,” he explains. 

Do these investments have positive effects? “These funds use another strategy for the maintenance of their average maturities in a close range and for the confinement of the credit risk. This is a good way of creating long-term wealth, as it avoids taking on excess risk and brings about a certain amount of stability to the portfolio. On the positive aspect, these TCs are highly recommended for Good and Fixed Returns in less period as compared to funds or investments which give mediocre returns, for example – Fixed Deposit. Secondly the TCs have a lower degree of risk in bear markets. Thirdly, they are less sensitive to the inflation as compared to long-term TCs and finally they are highly liquid and easily convertible into cash,” he utters.

Ganessen Chinnapen : “The return is higher compared to private sector bank deposit”

According to the Development Economist, in the last seven years, the Mauritian economy has faced an excess of liquidity in the market. “The private sector firms and households are very prudent in taking additional loans for further investment even though there has been a continuous descent in the repo rate from 8.25 to 4.25.  Interest rate also has been down. All these have contributed to the excess of liquidity which is not good as the financial market needs to equilibrate. How to wipe this excess out? The State can either decide to raise interest rates or to encourage the public and Non-Financial Public Sector Bodies to invest their surplus of funds in treasury bonds or treasury bills. By seeking treasury bonds, the Central Bank will ensure the removal of excess funds in circulation.”

Ganessen Chinnapen utters, however, that the State has done a strategic move by opening the selling of these bonds only to Non-Financial Public Sector Bodies. “The Government has narrowed the accessibility by conferring the sales of bonds so as to ensure that the flow will remain in the public sector bodies and when required, the State can cash it with consultation from the BoM.” The major advantage of the bonds, he states, is that the return is higher compared to private sector bank deposit. “It is both positive for the State and for these bodies, as many have been overburdened with debt over the years.”