Gov't targets P2bn in latest debt funding bid
Mbongeni Mguni | Monday January 31, 2022 06:00
The BoB, as government’s banker, conducts monthly auctions of treasury bills as well as bonds to primary dealers who are exclusively banks.
At the auctions, the dealers compete to lend to the government by offering the yields they are seeking, with the BoB deciding the ‘stop-out’ yield or the level of ‘interest’ it is willing to pay the dealers on particular securities on offer.
The debt funding, known as the Domestic Note Issuance Programme, was doubled in size to allow government to borrow up to P30 billion in September 2020, in recognition of the funding squeeze on the budget caused by COVID-19. According to a BoB market notice issued this week, three bonds offering P500 million will be floated today (Friday), together with three treasury bills that carry maturities ranging from three months to one year.
The three bonds are all re-openings of previously listed bonds and carry maturities ranging from five to 18 years. The P2 billion being sought by government is the highest it has targetted since a P2.1 billion auction held at the end of October.
Government has only been able to raise the total funds it has sought at the monthly auctions once since the doubling of the debt ceiling in September 2020, as dealers have persistently demanded yields higher than the BoB and government have been willing to accept.
In the 2020 calendar year, government floated bonds and treasury bills seeking P21.6 billion and only raised P12.9 billion, or about 60% of the funding sought. The situation has threatened government’s ability to fund the budget deficits it has forecast, which amount to as much as P10 billion for the 2020-2021 financial year and an estimated P16.5 billion for the 2021-2022 financial year.
While each auction has enjoyed healthy bidding by the primary dealers, as reflected in the bid to cover ratios, the yields demanded were on the rise throughout 2021 prompting the BoB to speak out on the trend.
“I consider it unfortunate that in the recent past we have seen bid yields for medium to long-term government bonds that are exceptionally high and clearly out of line with the monetary policy posture and medium-term inflation prospects and also not reflecting the sovereign credit rating for Botswana,” BoB deputy governor, Kealeboga Masilila told a Botswana Bond Market Association roundtable last year.
“Therefore, the market (is) failing to provide cost-effective funding of government.”
Late last year, market watchers said they expected the uptrend in the yields on government bonds to ease in upcoming auctions as a balance was reached between the market’s demand for higher returns and government’s desire to keep its borrowing costs down.
“The upward shift in the government yield curve is expected to decelerate as yields on government bonds have now become attractive to investors which limits further upside pressure on yields,” Kgori Capital portfolio manager, Kwabena Antwi said.
“The question remains whether the government can plug the funding gap caused by the continued under allocation of domestic issuances with external loans.”
Capital market participants have previously said their desired yields are pricing in the country’s sovereign credit downgrade by Moody’s in April, as well as the trending higher inflation, which remains at nine-year highs. The central bank also believes local market players are pricing in the fact that the more attractive assets are available across the border in South Africa.