Botswana’s central bankers have admitted that the government’s bonds are proving hard to sell to lenders and the development has been pinned to ‘pricing’.
In the last bond auction held end of April by Bank of Botswana, lenders showed waning trust in the government’s ability to finance long term debt, shunning the bonds in preference of short-term lending. The government had planned to raise P1.8 billion but ended up only with P1.3 billion.
The three-months treasury bill (T-Bill) and the six-months T-Bill which are due to be paid back within a month were oversubscribed, with the 3-month T-Bill fetching P530 million and the 6-month T-Bill issued at P600 million.
While lenders clamoured for the short-term securities, it was a different matter altogether when it came to bonds. The BOTSGB0527 bond which sought to raise P300 million for the government failed to lure lenders despite having a one-month maturity, and ended up being issued at P175 million.
The BOTSGB0931 bond, with matures in September 2031, was offered at P200 million but ended up being sold at P42 million. The longer dated BOTSGB0640 bond that is due in June 2040 was also offered at P200 million and ended up being bought for P19 million.
Bank of Botswana governor – Moses Pelaelo told journalist recently that while the less appetite for the government bonds can also be linked to portfolio construction it also has something to do with pricing,
“Admittedly there is an issue about price and price differentials between us and the South African market. The South African market is highly liquid, large market with international participation and so forth, and sometimes when people look at the yield for the various tenures at offer, they look at that but they often forget the risk adjusted returns given the risk differentials and the risk premiums between the two markets”, Pelaelo said.
Each month the central bank raises money for government through issuance of bonds to institutional investors and commercial banks. Though government bonds are usually considered risk free, capital markets players have been observing the country’s deteriorating financial position, marked by significant decline in government investment account and the ever-increasing budget deficits.
Recently, top credit ratings agency Moody’s downgraded Botswana’s long-term local and foreign currency issuer ratings, bringing it close to junk status. The country’s ability to repay debts was dropped a notch down from grade A2 to A3, reflecting the deterioration in fiscal strength due to government financing the 2020 budget deficit mainly by drawing down fiscal reserves and to a lesser extent by issuing domestic debt.
The fiscal reserves in the Government Investment Account (GIA), which represents the government’s share of foreign exchange reserves in the Pula Fund and Liquidity Portfolio, declined by about 86 percent, to P2.8 billion at the end of 2020, compared to the opening balance of P20 billion. Prior to the financial crisis of 2008/9, the government investment account had a healthy balance of P30.5 billion in December 2008.
Between 2017 and 2019, budget shortfalls have added to P21.8 billion, while projections for 2020/2021 financial year points to an all-time high budget deficit of P21 billion. According to the finance ministry, the projected P6 billion deficit for the 2021/2022 financial year will need to be financed through debt.
Botswana’s domestic debt is expected to grow from P22 billion to P23 billion, while medium- and long-term external debt obligations will reduce from P14.1 billion to P11.9 billion.
The ministry of Finance and Economic Development has previously expressed disappointment at the low uptake of government bonds. In September 2020, the country’s domestic bond issuance programme was expanded from P15 billion to P30 billion, partly to address the limitations of the domestic bond market identified in the review of the programme in 2019, and largely to be used in financing government’s expenditure.
In March this year, the Deputy Director of Insurance and Pension at the Finance ministry, Batane Matekane, said they were disappointed at the lukewarm response from the pension and asset management who were expected to be the biggest purchasers of government bonds.
“Despite the fact that there have been calls for more bond issuance over the years, it has proven difficult to sell the bonds on offer at recent auctions, even at higher yields. There is clearly a need for dialogue between government, the Bank of Botswana – who handle bond auctions on behalf of Government – pension funds and the asset managers, to address this blockage and ensure that the assets of the pension fund sector are deployed to finance crucial public investments,” he said at the time.