Public Sector Debt Outlook 2023
The search for demand and liquidity
The public sector bond market has entered a new era, with high inflation, fast rising interest rates and uncertainty around the future of monetary policy, creating a difficult backdrop for issuing debt, especially for issuers with large funding programmes. According to a survey from OMFIF’s Sovereign Debt Institute, reduced demand from investors, higher new issue premiums and the lack of liquidity are some of the main concerns for borrowers in 2023.
Around 60% of borrowers cited reduced demand from investors as one of their top two concerns for 2023, despite rising rates boosting returns for buyers. Meanwhile, coverage ratios for syndications are likely to fall this year, as the distortion of quantitative easing in some markets is withdrawn, with 50% of borrowers expecting the average subscription ratio to stand at two to three times, while 38% expect it to be even lower at one to two times. On top of lower demand, issuers are likely to be paying more to issue new debt, with almost 60% of borrowers expecting new issue premiums to be higher in 2023 than in the previous year.
To boost liquidity, 45% of respondents from sovereign debt management offices said they are looking to provide more incentives to primary dealers. This includes easing market making obligations of their primary dealers, such as on providing regular quotes on bonds via electronic interdealer platforms. In the survey, 30% of sovereign DMOs said they had experienced some of their primary dealers expressing concerns about their obligations.
Public sector borrowers will also have a strong focus on the sustainable bond markets, with around one-in-five of respondents saying they would issue more than 20% of this year’s borrowing programme in a sustainable format. The largest sector will remain green bonds – expected from close to 50% of borrowers, but other forms of sustainable bonds (27%) and social bonds (21%) will also be prevalent.
The sovereign sustainability-linked bond market will also keep developing, with three sovereign issuers expected to issue an SLB in 2023. However, there is uncertainty on whether the two-way pricing feature will catch on, with three-quarters of survey respondents unsure on this being a good idea. Environmental, social and governance ratings are also becoming more popular, with two-thirds of borrowers saying this is becoming a more important part of their investor relations.
The survey was completed by 33 public sector borrowers, made of 25 sovereigns, four agency and three supranational borrowers and one subnational public debt issuing authority between 6 December 2022-6 January 2023.