International credit rating agency – Moody’s, last week downgraded Botswana’s sovereign credit rating for long-term bonds, denominated in both domestic and foreign currency, from ‘A2’ to ‘A3’.
The downgrade was necessitated by reduction in the capacity of Botswana Government to absorb future shocks as a result of the erosion of fiscal buffers, occasioned by the COVID-19 pandemic and, also, relatively weaker economic resilience mainly reflecting lower economic diversification compared to peer countries in the ‘A’ rating category.
Moody’s indicated in a statement released late last week that there are persistent fiscal consolidation challenges, which suggest a prolonged erosion of the country’s fiscal strength. The rating agency views the external position of Botswana as strong, albeit weakening due to the recent deterioration of the trade balance. Moody’s cautions that the long-term economic challenges are likely to become more severe in the absence of effective progress towards attainment of economic diversification and improvement in the business environment, both of which are key to promoting durable and balanced growth in the long term.
The downgrade comes at a time when already there is a slow uptake of government bonds. In September 2020, Botswana’s former minister of Finance – Dr. Thapelo Matsheka to raise the country’s domestic bond issuance programme from P15 billion to P30 billion. At the time Matsheka said the increased domestic borrowing by the government will lead to improved liquidity and construction of the government’s risk-free yield curve across a wide range of maturities which will support the capital market.
However, it recently emerged that the response from the market has not been pleasing as the ministry of Finance would have expected. The information was disclosed at a recent Botswana Pensions Conference by the Deputy Director of Insurance and Pension at the Finance Ministry – Batane Matekane.
Matekane was delivering the opening remarks on behalf of Matsheka who could not make it to the virtual event.
“A further issue that I need to draw attention to is the disappointing response from the pension and asset management sector to the increased government bond issuance programme,” read part of the remarks.
“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,” the statement 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.
Revenues and grants are projected to reach P64.5 billion in the 2021/2022 financial year, helped in part by the expected increase in value added tax (VAT) and improvements in the mining industry, suggests data released this week.