BoB tests market with P3.5bn debt auction
The Bank of Botswana, on behalf of government, this week approached the capital market with a P3.5 billion request for debt, the biggest bid on record and a test of whether the eight-month long streak of successful fundraising can hold.
The auction of two treasury bills and three bonds was due to take place on Thursday, according to a notice seen on the central bank’s website at press time on Wednesday.
At the auction, the BoB, acting as government’s capital market agent and chief fundraiser, was due to offer P2 billion in treasury bills equally divided in P1 billion each and bearing maturities of three and six months. Also on offer for bidders were three reopened bonds ranging in maturities from 2027 to 2040.
Under government’s domestic note issuance programme, the BoB raises debt from the local capital market on behalf of government, through the issuance of treasury bills and bonds in monthly auctions. In September 2020, Parliament increased the programme’s ceiling to P30 billion from P15 billion, acknowledging the effects of the COVID-19 pandemic on the budget.
Due to stubborn budget deficits and instances of counter-cyclical spending in the years since the pandemic, the P30 billion ceiling was reached in February, but
Finance Minister, Peggy Serame, was able to secure an increase to P55 billion from Parliament.
According to the borrowing strategy document for 2024–2025 released last week, the central bank plans to raise P15.25 billion from the capital market this financial year on behalf of government. By comparison, the BoB was authorised to raise P7.05 billion for government in the 2023–2024 financial year, or less than half the target for the current financial year.
Analysts have said the P3.5 billion sought this week signals government’s higher domestic debt appetite, as inflation remains benign, while repatriated pension fund inflows continue. Government, meanwhile, has to finance an P8.7 billion budget deficit needed for the record P102 billion expansionary budget.
Even as the debt auctions swell, government’s overall financing costs are expected to be lower than in previous years.
The BoB and by extension, government, went through a testing period of escalating yields beginning in September 2020 after Parliament doubled the domestic debt programme to P30 billion. A combination of a sovereign credit ratings downgrade, escalating inflation which reached a 14-year peak in 2022 and local bidders’ preference for the South African market, drove yields higher. Higher yields for the debt programme are associated with rising debt costs for government.
The situation was bleak as the
BoB failed to meet its debt targets for government at each of the monthly auctions from September 2020, as it was forced to reject the rising demands for higher yields from the market.
However, since at least July last year, yields have been sliding at the auctions of Treasury Bills and bonds, while the BoB has consistently met its debt targets.
“We have seen a decline in the stop-out yields over the past five or so auctions,” the BoB’s financial markets department director, Lesego Moseki, previously told BusinessWeek.
“As funds continue to flow from the PFR2, we expect most of the returning funds to flow into the bond market and therefore yields will continue to trend lower.
“We also expect inflation to be generally contained within the target and if it’s contained and market expectations are also in line, there should be no upward pressure on yields.”
Under changes to the Retirement Funds Act, local pension funds have until December 2027 to invest a minimum of 50% of their assets domestically. Known formally as the Pension Fund Rule 2 or PFR 2, the Non-Bank Financial Institutions Regulatory Authority statute previously required pension funds to invest at least 30% of their assets locally.
Inflation, meanwhile, dropped to a seven-month low in March at 2.9 percent, thanks to base effects associated with a deceleration in the prices of fuel and food.