Friday, October 30, 2020

Stakeholders urged to team up to improve liquidity in bond market

The Botswana Stock Exchange (BSE) is of the view that the nagging liquidity issues in the long term debt instruments on the bourse can be addressing by a concert of stakeholders not only single entities.

Just like equities, the bond market in the country is dodged by lack of liquidity especially that government is not issuing more papers to raise funds for infrastructure developments.
A paper compiled by BSE Deputy Chief Executive Officer, Thapelo Tsheole, has highlighted challenges affecting the bond market saying optimal benefits of bonds as an asset class is underpinned by a robust liquid bond market.

Tsheole is of the view that infrastructure alone cannot increase liquidity, therefore he said ultimately all stakeholders have to play their roles in increasing liquidity.

“The BSE and the BBMA are making some progress in addressing the challenges affecting the Bond Market so to improve liquidity, but it is slow,” he revealed.

According to Tsheole, the paper they wrote in 2011 highlighted the need to promote efficiencies in the bond market by improving information dissemination, transparency in trading, price discovery and ultimately liquidity in the bond market. BBMA is Bond Market Association.

Liquidity is a challenge in the Botswana bond market as issuance is not regular and government normally comes to the market with quarterly auctions, while new issuances are limited.

The history of lack of liquidity in the market is well documented. Tsheole revealed that in 2010, the BSE together with market participants identified and documented several challenges impeding bond market development in Botswana.

These impediments included; lack of a robust risk free curve, infrequent issuance of government bonds and T-Bills, pricing issues, lack of benchmark bond index and lack of fair values, poor information dissemination, lack of transparency, trading and settlement and lack of skills.

Some of these challenges are being addressed. For example, in infrequent issuance, the issue was taken up with government. “We now have quarterly auctions although hardly any new bonds are issued, most are tap issuances”.

On pricing issues, a standard bond pricing formulas drafted in 2012 along with market conventions while in a bid to address lack of skills, BSE has been conducting fixed income courses since 2010. In 2014, 5 courses were held. On average, 15 people per each course. Investor Handbook was also published in 2014.

In a paper he presented at the 10th annual South African and African Capital Markets Conference in Cape Town in 2012, at the invitation of IMN-New York, Tsheole noted the bond markets in Sub-Saharan Africa are small and inactive, which makes them to be overshadowed by equity market.

“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,” he said when speaking in personal capacity.

“There is also a need for informed and diversified investor base because a heterogeneous investor base is crucial for “creating a market”, a meeting place for investors with differing views! There is also a great need for fostering relationships between issuers, regulators and investors as this will enable the understanding of each other needs and value creation.”

The value of bonds on the BSE is currently P9.8 billion. The bond market 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.

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