Slow uptake of Govt bonds

Attempts by the ministry of Finance and Economic Development to broaden the domestic capital market by increasing government borrowing is off to a wrong start, with the ministry officials disappointed at the suppressed appetite to borrow the government money which it badly needs to finance its expenditure.

In September 2020, Dr. Thapelo Matsheka, Botswana’s finance minister, got authorisation from legislators 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.

“Increasing the bond issuance to P30 billion is expected to address the limitations of the domestic bond market identified in the review of the programme in 2019. New changes will include more auctions in a year thus improving price information in the market to support more trading activity,” the minister said in parliament when seeking the authorisation.

However, it has now come to light that the response from the market has not been pleasing as the ministry of Finance would have expected. The information was disclosed at the Botswana Pensions Conference held last week by Finance ministry’s the Deputy Director of Insurance and Pension, Batane Matekane, who delivered 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,” according to part of the minister’s statement.

“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.

Though the officials have projected a 33 percent increase in revenues and grants for the 2021/2022 financial year, the P64.5 billion will be dwarfed by government spending which is tipped to grow from P69.3 billion to P70 billion, resulting in a P6 billion budget deficit in the 2021/2022 financial year.

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 minister, the projected P6 billion deficit for the 2021/2022 financial year will need to be financed through debt, expected to be raised through the increased bond issuance programme. 

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.

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