Sunday, December 4, 2022

Bond market continues to grow, despite concerns about illiquidity

The local bond market has over the years seen positive growth, driven largely by the government of Botswana’s commitment to facilitating development of the local debt capital market.

At a time   when the country was running budget surpluses and therefore didn’t have any imminent reason to borrow from the domestic market, government nonetheless instigated a bond programme.  Initially established at P5billion in 2003, the programme has steadily increased to the current P15billion with advances in market dynamics. 

The auctions continue to be driven by the primary dealers, constituting of the five bigger commercial banks through which issuances are made available to market participants, both onshore and offshore. Standard Chartered Bank Botswana Head of Financial Markets, Botho Leburu has observed that there is consistent uptake from local institutional investors comprising asset managers, insurance companies and banks. However, there continues to be minimal participation from the retail sector and offshore investors, which Leburu said can be attributed to the illiquidity of the market, evidenced by the subdued secondary market trading and the prevailing low yield environment.

“Ideally investors opt for more efficient markets characterized by a wider breadth, depth in liquidity, an active secondary market, all of which consequently result in a more definitive price discovery. The regular quarterly auctions and the consistent issuance of key benchmark bonds to a large degree helps to address issues of price discovery,” said Leburu.
She further said as a key fixed income player across several markets in the region, Standard Chartered Bank is keen to leverage off and see to the development of the local market in extending its fixed income offering and solutions to clients across all segments. 

“We recently launched to retail and business clients the distribution of offshore fixed income securities including Islamic, corporate and sovereign bonds,” she said.
She added that considerable efforts are needed to develop a thriving market, part of which entail warranted collaboration amongst all critical stakeholders. Such stakeholders include the issuer, its agent the Bank of Botswana, market participants (primary dealers, investors) as well as the Stock Exchange. According to Leburu, there is also a need to exploit other means to promote trading such as short selling of bonds, developing a repo market and perhaps the issuance of bonds with callable options.
“One issue points to the disparity between supply and demand, indicating the need for greater issuances to counter the demand,” she stated.

Though Botswana boasts of a conducive maro-economic and financial environment, supported by a strong fiscal and monetary policy, the market illiquidity remains a key concern. 



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