With western nations going broke and aid volumes rapidly declining, third world countries increasingly have to rely on themselves. However, from what the Deputy CEO of the Botswana Stock Exchange, Thapelo Tsheole says, it is unlikely that Batswana would be able to do what citizens in other parts of the world are doing. The Africa Progress Report 2014 points out that high-growth developing countries in East Asia were able to finance increased investment in their countries out of higher levels of savings. On the other hand, Tsheole says that the difference is that this investment was mainly done with personal savings as opposed to government or pension savings.
“Asians individually save more than Batswana who are more into consumerist behavior,” he says.
This behaviour is mostly debt-financed and this year’s International Monetary Fund mission to Botswana recommended that “macro-prudential measures be used to address the continued rapid increase in household indebtedness.” Under these circumstances, the government – and not its citizens, will bear greater responsibility for the role of using savings to finance investments. The government should be able to do that because, as Tsheole says, Botswana’s savings in terms of national (government) and pension savings are so massive that the country exports up to 70 percent of them outside the country because “there are no investment opportunities to absorb them locally.” While the report suggests that African nations should tap their savings for investment, it notes that economic growth has yet to translate into a regional shift in savings.
“The savings-to-GDP ratio in 2013 was below the level reached in 2006. The widening gap between savings and investment, which is filled by external resource flows, is a major constraint on both public and private investment,” read the report.
The solution it offers is that African governments should secure access to domestic savings through bond markets. It gives the example of Kenya which has mobilised considerable amounts (US1 billion since 2009) through this route for infrastructure financing.
“Botswana can do what Kenya has done by issuing up to P6 billion of total government bonds as at present. The demand for bonds locally by asset managers through pension funds savings is enormous as evidenced by the frequent oversubscription of all bonds issued. This shows there is massive demand for such government bonds due to more domestic savings chasing these bonds,” Tsheole says.
This view is endorsed by Geraldine Nkombeledzi, an economist with IPRO Botswana who says Botswana’s strong financial position puts it in good stead to rely on itself in the manner stated.
“Botswana has one of the most impressive credit ratings due to its economic performance and as a result government bond yields are relatively low especially when you compare them with those of South Africa. The low yields are a result of low default risk,” says Nkombeledzi.
She notes that countries with weak economic fundamentals have to offer attractive yields so at to compensate investors for the high default risk. Botswana’s uniqueness is that it has been running budget surpluses for most of the financial years, which obviates need to borrow through the fixed-income market.
“The government only issued government securities for the purpose of the developing the bond market and in order to establish a risk-free yield curve. So Botswana is capable of emulating the East Asian nations and Kenya and has an advantage because of low cost of borrowing due to its strong financial position,” Nkombeledzi says.
The Africa Progress Report also raps African banks on the knuckles for being “very poor at intermediating between savings and investment.” It says that “almost without exception”, the commercial activities of these banks focus on short-term deposit and loan activity ÔÇô usually at high interest rates. Nkombeledzi, who also writes a finance column for Sunday Standard, says that the problem with Botswana’s credit extension system is that it is retail- and not investment-based.
“Households dominate the credit space – which is worrisome. Even banks such as Standard Chartered who are leading in terms of financing SMMEs, only finance existing companies and not start-up businesses. So, one can say that Botswana’s banks are poor at intermediating between savings and investment,” she asserts.
