Muted response to P30bn debt offer puzzles BoB
The Bank of Botswana (BoB) is puzzled by the low uptake of government bonds, particularly those notes of longer maturity, a situation that is limiting the impact of the P30 billion domestic debt programme meant to support budget expenditure.
Parliament doubled the domestic debt issuance programme to P30 billion last September, but since then the monthly auctions of bonds by the BoB on behalf of government have produced consistently below par results.
Government borrows from the local capital market through the monthly auction of bonds and short term Treasury Bills (TB) and this year, with depleted reserves, is relying more heavily on the debt issuance programme to support the expected P6 billion budget deficit.
Analysis of the auctions since September show that the BoB has not raised the amount it was seeking at any of the auctions. Government bond and TB auctions are exclusively attended by commercial banks, who are categorised as primary dealers, while the market is underpinned by pension funds as investors.
At the most recent auction, held on April 30, P1.1 billion of the P1.3 billion raised was from Treasury Bills, while the three bonds on offer underperformed. One bond, which also bore the longest maturity amongst the three, only raised P19 million out of the P200 million the BoB was seeking.
“It is a true observation that we are seeing friction with the uptake of the government bond market and our team in the financial markets department is engaging the market to understand the issues,” BoB governor, Moses Pelaelo told BusinessWeek at a briefing. “The Treasury Bills have been doing very well, but it’s in the government bonds that we are seeing a disappointing uptake because of several issues.
“We are still trying to engage and understand some of these details.”
Pelaelo said while market participants had previously told the central bank that they need long maturing assets to balance their liabilities, this appetite is not being reflected in the demand for long term government notes. Pension funds, in particular, have long decried the lack of long term investment opportunities in the local market, which are required to appropriately match their liabilities.
Government notes, such as TBs and bonds, are considered the most attractive in the market, offering zero risk and stable returns, which, when they are long maturing, mean consistent yields that can be used to match liabilities such as annuities over time.
“It could also be about the differences between us and the South African market, which is highly liquid with international participation,” Pelaelo said.
“When people look at the yields here and those from others, they may have that view, but they forget the risk-adjusted returns between the two markets.
“Some of the reasons we are getting, we don’t understand and we have to find a reason why this is the case.”
BoB financial markets director, Carter Moseki said the local market was coming from a low base and was still at a nascent stage of development, which could explain the lukewarm response to the domestic debt programme.
“We are developing the capital market and therefore the uptake would not be like in a developed market,” he told BusinessWeek.
“We think the visibility of the bond market and the knowledge of investors is still at a low level.
“We have to market our bonds to the domestic and international markets.
“Even with the market infrastructure, we are still developing our settlement infrastructure and trying to reach out to international investors which we expect, in terms of their profile, to come to the long term side of the market.”
He added that there were issues of inflation expectations and the yields bond market investors were expecting that needed to be looked at and ironed out.
Former finance and economic development minister, Thapelo Matsheka recently told a meeting of the Botswana Pensions Society that it was proving difficult to sell government bonds, even at higher yields.
“There is clearly a need for dialogue between government, the Bank of Botswana – who handle bond auctions on behalf of the 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.