The Botswana Stock Exchange has developed three bond indicesÔÇöa move the local bourse said will motivate and sustain the development of the normally illiquid domestic bond market.
BSE said the indices, which have been undergoing tests since last November, have been back dated to commence from 1 January 2010 with a base index of 100 points. The daily publication of the indices commenced from 2 April 2012.
The 3 bond indices comprise the Government Bond Index (GovI), the Corporate Bond Index (CorpI) and the composite of the GovI and CorpI known as the Botswana Bond Index (BBI).
The BBI is an overall, composite index that represents all eligible instruments, including sovereign and non-sovereign bonds covering maturities, including and over 24 months.
Equally, all the bond instruments issued by Botswana government with maturities, including and over 24 months are eligible for inclusion in the GovI. However, currently there are only fixed interest sovereign bonds in issue, but BSE said should floating rate sovereign bonds or inflation-linked sovereign bonds be issued in future, they too will be included in the GovI.
At the sametime, all local currency bond instruments with maturities, including and over 24 months issued by non-sovereign entities in Botswana, including corporates, parastatals and non-government organisations are eligible for inclusion in the CorpI. Currently, there are both fixed interest and floating rate non-sovereign bonds in issue, which are included in this index.
“A bond index provides a benchmark for portfolio managers to determine portfolio returns relative to the movement in the index,” said BSE, which is headed by Herin Mendis.
“It would also form the basis for developing bond index funds and other bond related products. The bond index could also be used by investors to judge and objectively choose between investing in alternative debt funds,” it added.
The move will cheer the tiny Botswana bond market, which comprises 36 listed bonds of which 6 are government and 30 are quasi, parastatals and corporate bonds. At the moment, Botswana’s bond market capitalisation as a percentage of GDP is 7.1 percent.
The BSE said the bond indices will be calculated at the end of each trading day using a Total Returns methodology. i.e. the indices track the value of bonds taking into account capital gains/loss (due to interest rate movements) and returns on account of interest accrued on the specific bonds.
The GovI and CorpI are equally weighted indices meaning that each bond included in the indices will be weighted equally.
The BBI is computed giving an equal cumulative weight to bonds included in the GovI and bonds included in the CorpI.
“Hence the individual weighting given to CorpI and GovI bonds will be based on the number of bonds included in each index .e.g. if the GovI consists of 4 bonds and CorpI consists of 5 bonds, the individual weighting of each Government bond included in the GovI will be 12.5 percent as against the individual weighting of each Corporate Bond included in the CorpI being 10 percent,” BSE added.
All local currency fixed and floating rate instruments listed on the BSE, excluding money market instruments, are eligible for inclusion in the indices.
However, these instruments should conform to other rules of eligibility including bonds having a minimum maturity period of at least 24 months at the point of listing, period to maturity at a given review date should be at least 15 months and bonds should have a minimum face value of P50 million.
The quarterly review of the constituent bonds in the indices will take place during the last month of each quarter and given that the Bond Market in Botswana is illiquid the value of the bonds will be computed using “fair value” as the basis and not traded price.
The BSE is in a drive to reverse the fortunes of the bond market which is dominated by asset managers that normally hold on liquidity limited trading on both equities and bonds. Most of the Sub Saharan African bond markets are dominated by BUY and HOLD investment strategies of their respective asset managers and this result in limited secondary market trading.
“In cases like Botswana, these strategies are a result of lack of enough instruments in the market. Standard market conventions are also non-existing in other markets and this affect the pricing of bonds and impede trading,” noted Thapelo Tsheole, the BSE Product Development Manager said last year in Cape Town when presenting a paper at the South African and African Capital Markets Conference.
Botswana is also working on setting up of a Bond market development forum/association made up of market participants and regulators. The BSE has commenced the dematerialisation of bonds in the CSD and discussion are under way with various stakeholders to “create a market” by making trading and settlement & information dissemination efficient by leveraging on the ATS which was launched in October 2012.
?Equally, the exchange is also in the process of finalising standard market convention like a standard bond & other fixed instrument calculator for the market.”?
┬áAs at mid November 2012, Botswana’s debt market turnover was P300 million, compared to P325.1 million and a record P757.7 million in 2011 and 2010, respectively.