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an opportunity for Morocco

An inflation-indexed financing tool can be an asset-liability management tool for government finances.

What tools do savers and investors have to deal with the erosion of real returns due to inflation? According to the analyzes of CDG Capital Insight, it is high time to see the emergence in Morocco of inflation-indexed bonds issued by the Public Treasury. Why and what interest of this mechanism? The answers.

What lever can be used to mitigate the impact of soaring inflation, fueled by the imported component, the rise in the prices of raw materials and energy? It should be noted that this spiral is already reflected in an inflation rate which was 5.3% in the Kingdom at the end of last March over one year. A situation that will have to last, given that the American Central Bank (Fed) ended up raising its key rates by 50 basis points. This decision comes naturally to counter inflation and avoid regression in the United States. Faced with this observation, the analyzes of CDG Insight question the tools available to savers and investors in order to cope with the erosion of real returns due to this inflation. “It therefore seems appropriate and appropriate to see the emergence of inflation-indexed bonds issued by the Public Treasury”, underline the authors of a new report from the insight management of CDG Capital on inflation-indexed bonds: opportunity for the Moroccan financial market.

The idea of ​​inflation-indexed bonds issued by the Treasury is certainly not new, because the advantages of having such an instrument could be multiple both for investors and for the Treasury or even certain public establishments as as issuers. This is, according to CDG Insight analysts, to highlight the relevance of such a tool in a context where inflation is eroding the real value of savings, fears of prolonged inflation are growing among Investors and the Treasury face a risk of an upside in the average to long-term borrowing curve.
“We therefore believe that the current circumstances present a potential opportunity for the Treasury to implement an inflation-indexed debt instrument. The context is indeed conducive to generating strong demand from investors and savers. In doing so, the Moroccan financial market would have acquired a new instrument contributing more to the development of its efficiency and depth”, deciphers the report.

An essential element of asset-liability management

These bonds have been commonplace in the world for a very long time, both in developed economies and in emerging economies, and have often been issued by States in order to respond to this problem. “So Israel and Chile have issued inflation-linked bonds since the mid-1950s, Brazil since 1964, the UK since 1981, Mexico since 1989 to name but a few. Since then, these instruments have played a crucial role in the economies of these countries but also in the development and efficient functioning of their financial markets,” notes the report.
Clearly, the benefit of these instruments is not limited to protecting savers and investors from erosion due to inflation or to encouraging savings in an inflationary context. These find a natural place in the portfolios of pension funds, whose benefits are revalued in line with inflation, or even in the assets of non-life insurers whose liabilities increase with inflation. They are therefore, according to the same source, an essential element of asset-liability management.

Why you have to go

But overall, governments are trying to get inflation-indexed debt as much for reasons of market efficiency as for reasons that are more directly beneficial to them. These include reducing the cost of sovereign debt in the event that market expectations of inflation are exaggerated. Thus, issuing governments paid a lower coupon if they succeeded in keeping inflation below the level anticipated by the market. Moreover, by supplementing their financing needs with an additional debt instrument, which better meets investors’ need for protection against inflation, governments avoid exerting upward pressure on the nominal yield curve. “In macro-economic configurations where inflation is very high and volatile, indexed bonds have proven to be crucial to the financing of the State. This was the case for certain Latin American countries in the middle of the last century, for example,” the report explains.

Similarly, a financing tool indexed to inflation can constitute an asset-liability management tool for government finances, since tax revenues, particularly indirect taxes (VAT, TIC and customs duties), are naturally indexed to inflation.
This mechanism is also intended to encourage savings and capture a greater part of the currency in circulation in the financial circuit: “Instruments linked to inflation participate in the development of the financial market. These encourage more savings and benefit from the circulation of fiduciary money, to the benefit of a more efficient distributor of savings for the financing of the productive economy”.


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