Central Bank root for an expanded Pula debt market

24 Jun 2019

BY BONNIE MODIAKGOTLA

The Bank of Botswana has encouraged the government to develop the domestic capital market, in particular the deepening of the Pula debt market to reduce inherent risks that come with externally borrowing in different currencies.

The central bank, which advises government on borrowing, said that in the financial year 2017/2018, total outstanding government debts stood at P25 billion, with the bulk of it or 58 percent held by external creditors. However, the central bank says the government has been weaning itself from foreign borrowing, focusing more on domestic market. Historically government borrowing has been low due to fiscal surplus, thus no need to borrow. In 2006/2007, the government’s debt stood at P3.8 billion, 70 percent held by foreign creditors.

Moemedi Phetwe, the deputy director of Bank of Botswana’s financial markets, said external loans were preferred due to concessional terms that included lower interest rates and longer maturity, and this borrowing spiked during the 2008 financial crisis when the economy’s mainstay, diamond exports took a hit, resulting in lower revenues and huge deficits.

“There are risks on excessively relying on foreign debt as government will be vulnerable to volatile and increasing debt service costs, and the risk of default when the country cannot refinance its debt is negative implications for both monetary and financial stability if the pula depreciate against foreign loans. This illustrates the importance of deepening the pula debt market as a tool for reducing exchange risk,” said Phetwe on Thursday during bond market conference organised by Botswana Bond Market Association.

He warned that many countries across the world found themselves in economic crisis after piling on foreign currency denominated loans. Furthermore, he said growing the pula debt market was crucial since Botswana was no longer eligible to borrow on soft terms from multinational development institutions.

“The good news is that government has recognised this risk, and therefore in the Medium Term Debt Management Strategy 2016 – 2019, the government was to limit the size of external debts in relation to the total outstanding government debts. In the same strategy, government indicated that its objective is to develop domestic markets,” he said.

Botswana has a leeway to develop and deepen its domestic debt market as it has the smallest bond market and debt maturity compared to its peers. While Botswana’s outstanding debt to Gross Domestic Product (GDP) is 5.2 percent with average bond maturity of 6 years, the economic powerhouse neighbour South Africa has a debt to GDP of 40.5 percent with average length of 29 years. Mauritius’s outstanding debt to GDP is 30 percent with average maturity of 18 years, and Namibia, which roughly has the same population as Botswana, has a debt to GDP ratio of 16.8 percent, with maturity of 14 years.

Phetwe said the main challenges of developing the domestic bond market has been inadequate supply of debt instruments from government and non-government institutions, and even when bond are issued, they are quickly snapped by institutional investors which include pension funds and insurance companies who adopt the buy and hold strategy, which enables them to meet their long term obligations. However, he says this contributes to low liquidity, limited turnover and under-developed bond market.

“As advisor to government, we continue to make the case for an expanded borrowing programme that can build sufficient large line of bonds as a necessary first step to improve market liquidity, and therefore developing the domestic capital markets,” he said.

Phetwe revealed that there is an ongoing review Medium Term Debt Management Strategy as it comes to an end this year, and new strategy for the next three years will look at the domestic note issuance programme, which is currently limited to P15 billion, and also possibly move over the 6 percent limit placed on bonds relative to GDP. Moreover, he said the central bank together with government is mulling the idea of introducing bond buyback programmes or switches as a liability management tool, a move that could enhance liquidity in bond trading and help mitigate refinancing risks.

“The central bank is also supportive of the initiative to enhance market infrastructure through the establishment of a single Central Securities Depository in conjunction with Botswana Stock Exchange,” said Phetwe.

“This is in recognition that such development should be encouraged to improve market liquidity, reduce settlement risk and enhance general market efficiencies.”