Government sources domestic debt through biannual auctions of bonds and treasury bills conducted by the Bank of Botswana.
While since the recession, government has borrowed heavily locally and externally, the 2012/13 budgetary surplus means last Friday's auction was more about developing capital markets than boosting public coffers.
According to available data, the auction witnessed strong bids from banks eager for the high return, risk-free government bonds and treasury bills. The bid-to-cover ratios on the treasury bill and the two bonds averaged 2.4, indicating a highly successful auction with aggressive bids.
According to analysts, an auction is considered successful if its bid-to-cover ratio is above 2.0. The ratio refers to the value of bids received compared to the value of bids accepted. Results from last Friday's auction indicate high demand for the P1 billion treasury bill, with bids received amounting to P2.94 billion. Bids received ranged from 6.18 percent to 4.45 percent, with the Bank of Botswana (BoB) accepting bids at 5.06 percent and lower.
For the treasury bill, a total of 38 bids were received, with 17 successful.
Government bond BW005 valued at P300 million received bids amounting to P719 million, with bids ranging from 10.25 percent to 6.70 percent. BoB accepted bids at 6.70 percent and lower, meaning only one bid was successful among 26 bids.
The other bond, BW007, also valued at P300 million, received bids amounting to P539 million, with bid ranging from 12 to eight percent. BoB accepted bids at 8.25 percent and lower, with 14 of the 31 bids received being successful. Prior to the auction, analysts had predicted strong demand for the bonds and the treasury bill, noting the excess liquidity commercial banks have been saddled with in recent months.
Last November, BoB cut the stock of outstanding BoBCs, leaving commercial banks with an additional P3 billion in idle funds. The central bank said its move was designed to lessen the interest costs of BoBCs and push banks to innovate new investment avenues.
At the time, BoB also said government bonds and treasury bills were a better investment for commercial banks than BoBCs.
"The beneficial effects of government securities include availing the opportunity for the general public to invest in government paper as well as distributing the interest income more widely," BoB said in announcing the move.
BoBCs are restricted to commercial banks while bank customers are allowed to buy government bonds and treasury bills from the banks, thus "distributing the interest income more widely."
Last Friday's auction was the first opportunity for commercial banks to invest their excess liquidity in government securities since the November decision, with the eagerness reflected by the robust bid-to-cover ratios.