Archive 2009

  • 08.07.2009

    How to develop a public debt market for retail investors?


    While the major share of public debt by most states around the world is owed to institutional investors in the form of wholesale bonds, instruments specifically targeted at retail investors are gaining importance. Indeed, such retail bonds face some very positive features. From a fiscal point of view, retail bonds can decrease funding costs and stabilise the funding basis. In particular, they can reduce the dependency from foreign investors and lessen the vulnerability to exchange rate fluctuations. From an economic point of view, retail bonds can foster the saving activity by the population and bring cash hold under the mattress back into the formal economy (mobilisation of savings). On top, they can contribute towards developing capital markets. Given these positive features, it is hardly surprising that many countries have successfully developed a public debt market for retail investors. In view of Ukraine's plans to issue retail bonds soon, we review the international experience with these instruments and comment on the recent legislation adopted by the Cabinet of Ministers in Ukraine.

    The bonds foreseen the relevant resolution are pretty simple: Bearer securities in documentary form with a face value of UAH 500, a 12 months maturity and fixed quarterly interest payments of UAH 20, which implies a yearly interest rate of 16%. In our view, this "plain vanilla"-approach is the right way to get the market started and we clearly support this resolution. At the same time, we think that this initial stage should also be used to get more information about the preferences of the population (i.e. about the demand side). Consequently, we suggest offering not just a 12-month, but also a 6-month bond to savers. By comparing the demand for the two issues, the Ministry of Finance can gain valuable experience about the preferences of the people regarding maturity.

    In the long-term, we suggest introducing "paperless" (i.e. book entry) bonds, in order to reduce the relatively high issuance cost, which is clearly the most serious disadvantage of this instrument. Also, in order to increase competition at the distribution level, the marketing channel should be broadened from currently only Oshchadbank to all future primary dealers in government bonds. Finally, once the market gets going, the effective maturity of the bonds should be extended using different mechanisms.

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