Monday, October 19, 2020

Bond market could provide alternative financing for infrastructural projects

The Head of Corporate & Investment Banking at Stanbic Bank Botswana, Shephered Asaim, says the development of the bond market extends beyond the need to increase its size but also provokes debate on whether it could be time for retail banks to start taking credit risk in order to allow investors to engage in economic activities that can propel the economy forward. 

“Risk appetite should be calibrated,” said Asaim at a bond market conference briefing that was held last week Tuesday at the Botswana Stock Exchange (BSE) offices. The issue of limited credit risk has been observed as a challenge, particularly in Africa, as it hinders investors to engage in long term financing.  

The bond market has been identified, particularly within the context of Botswana, as an alternative form of financing to the traditional financing methods being government funding and debt funding provided by commercial banks. Unlike the traditional forms of financing, bond markets are considered to offer the advantage of long term financing, a deficiency which exists in the current structures. What is available is said to not offer sufficient amount of funding and also falls short in granting an appropriate period of repayment particularly with infrastructural projects. These constraints are said to be common with debt financing offered by banks. Presently, said BSE Chief Executive Officer Thapelo Tsheole, there are 39 bonds listed on the stock exchange making up 7.5 percent of the country’s Gross Domestic Product (GDP), which is a slight increase from 7.2 percent of GDP recorded in 2009. “It remains stagnant,” said Tsheole. 

He however said that Botswana has the most diversified bond market, in terms of issuers, in the continent, a factor which brings in confidence into the market. Despite this diversity, he said, government with its six listed bonds issued more in value than the 33 issued corporate bonds.         

The issue of risk and alternative forms of financing particularly regarding large scale projects was also discussed recently by Michael Tichareva when presenting on the subject of alternative financing at the Botswana Finance and Risk Conference. Tichareva proposed a funding model, which was developed in America and today applied in many parts of the world, called the National standard model which offers the benefit of lower cost of funding and long term financing. The model is based on credit enhancement model in which a guarantee, in the form of a letter of credit from a bank, is provided as backing instrument in exchange for long term financing. He explained that the 1 year instrument is subject to renewal every year and offers financing of up to 30 years. If a missed payment occurs, he said, the instrument covers the payment following which discussions are held on how the money will be reimbursed. 

In the case of Botswana, government has traditionally funded infrastructural projects, however Asaim highlighted that the depletion of government’s current account as well as the projected budget deficits present a glaring opportunity for alternative financing to make up for the shortfall. It is therefore expected that discussions to be held will help in building confidence and belief in the local bond market to attract both local and international investors.    

Asaim was speaking on the backdrop of the forthcoming bond market conference scheduled to take place on 6 October 2016, where it is anticipated that the financial brass including Regulatory bodies and government will convene to engage in forward thinking discussions around bond market development. The inaugural conference is the culmination of efforts by BSE together with Botswana Bond Market Association (BBMA) to assist the growth of the bond market. Topical issues that are expected to be discussed include the building blocks of a robust bond market, opportunities for infrastructure funding through the bond market and promoting an efficient regulatory environment. BBMA was registered with Registrar of Societies in 2013 as a not-for-profit association representing the interests of financial market participants such as investment management institutions, investment professionals and issuers of investment securities. It was established to grow the bond market in Botswana with a membership nearing 30. 

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