Beggars on beaches of gold
Mbongeni Mguni | Friday June 28, 2019 13:04
In 2009, government needed money after the global financial crisis burst into the country, crashing production at Debswana as well as other crucial mines and sectors.
Despite the fact that the local private sector, particularly pension funds, had billions of pula searching for blue-chip investment opportunities such as those personified by government, fiscal authorities looked to the African Development Bank (AfDB) for help.
Pension funds, in fact, had assets of P32.4 billion in 2009 with about P19.5 billion of these invested offshore.
The government reached over the locals and the AfDB was asked to help with $1.5 billion (P16 billion today). Indicative of Botswana’s conservative approach to debt, the AfDB loan was the first time in 17 years government had extended its hand to the Abidjan, Cote d’Ivoire-based bank.
The loan, the largest ever approved by the AfDB, carried a five-year grace period, a repayment period of 15 years (to 2024) and a concessional interest rate.
The decision was a slap in the face of sorts for local investors. However, at that time, government had a P5 billion limit for domestic borrowings, which are done through the issuance of bonds and six-month treasury bills. Even if a benevolent finance ministry official wanted to seek the emergency funding locally, the rules would have to be changed first.
The AfDB loan, while appearing favourable at the time, was the classic ‘original sin’, a term coined by economists to roughly describe a situation where countries find themselves stuck with high foreign debt obligations. The AfDB debt is payable in dollars annually and official figures show the obligation has fluctuated over the years due to exchange rate movements, despite fixed payments.
The last available figures show Botswana owed the AfDB P13.5 billion by the end of 2016-2017.
“The cost of external debt has been rising over the years because the pula has been falling against the dollar over those years,” explained Moemedi Phetwe, the Bank of Botswana’s (BoB) deputy director of financial markets.
“This is a case for improving the domestic market borrowings.”
Besides the ‘original sin’ Botswana is no longer able to access certain types of foreign funding due to its upper middle-income country status.
However, the real issue for experts is that the benefits of government doing more of its borrowings domestically include the fact that this could support greater infrastructure development led by the private sector and lay the building blocks of industrialisation, fostering job creation at a record pace.
While government generally prioritises infrastructure development and also complements this with statutory banks and agencies such as the Botswana Development Corporation, the fact is that there are competing needs every year.
Some of these are a bolt in the blue such as the P900 million allocation for emergency drought relief this year, necessitating the diversion of funds from other areas, including infrastructural priorities.
The local private sector, meanwhile, is saddled with large savings, which have few investment vehicles to go into. Government borrowings, via bonds and treasury bills, are the most preferred asset class for local investors, being virtually risk-free and also offering sound returns.
By March, pension funds, which are the primary investors in the country, had savings of more than P88 billion of which about 60% were held offshore. Local investment opportunities, which could include public infrastructure development, are scarce.
In other countries with similar trends, pension funds have pumped money into the real estate sector, leading to high property price and rental inflation.
“The Botswana capital markets are awash with liquidity but in the past decade the Government of Botswana has struggled with financing infrastructure projects and its budget due to tough economic conditions,” the Botswana Bond Market Association (BBMA) notes in a paper published recently. “These two factors provide a great incentive for government to find new innovative ways of accessing capital markets for capital.”
The BoB, for its part, presented a paper last month to Cabinet on the options for funding the country’s industrialisation. One of these is to look at the domestic bond issuance programme, but go further. The programme was increased from an initial P5 billion to P15 billion in February 2011.
“In terms of government financing needs and complementary to the bond issuance programme, there is an option to float infrastructure bonds for financing specific infrastructure projects of public interest,” the BoB paper reads.
“A potential benefit is that this could be linked to project evaluation in relation to viability, which could also align development costs to cost recovery and user charge options.”
An infrastructure bond involves government raising debt for an infrastructure project by borrowing from the local market. In countries like Kenya, which floated a $350 million infrastructure bond in 2011, these types of instruments can offer high returns for investors as well as tax benefits for investors.
In South Africa, municipalities there had bonds for infrastructural projects amounting to R34.8 trillion by 2016.
For the BBMA, the future dictates that changes be made now.
“Trends generally show that more funding will be needed for infrastructure development given the increased migration of people to cities and towns.
“These trends mean, for example, that a lot of funds will be needed to improve and maintain roads, health facilities, schools, water and energy infrastructure,” the association’s paper reads.
The BBMA argues that the recent P1.5 billion loan the government received from the World Bank for various water projects could have taken the form of a local currency infrastructure bond.
“The government could have alternatively tapped into the local market and issued infrastructure bonds to raise the amount needed.
“The government has for some time been contemplating issuing infrastructure bonds and inflation-linked bonds, but to date, that has not materialised.”
The link between switching to higher domestic borrowing and driving an industrialisation agenda while avoiding the original sin, is also clear.
However, government’s conservative debt approach and the fact that it has P52 billion of its own savings by way of the Pula Fund, mean the urgency to look locally for any borrowings has never been that high. By the end of 2018, government’s local borrowings as a percentage of GDP were just under six percent, compared to more than 50% for South Africa, Namibia and Mauritius. Singapore, the Asian miracle economy, found itself in a similar situation of not needing to borrow some years ago but still committed itself to raising its domestic borrowings to 25% of GDP.
According to Michael Antigi-Ego, the executive director of the Macroeconomic and Financial Management Institute for Eastern and Southern Africa, there are very good reasons for this.
Higher domestic borrowings by government do not only expand the opportunities for financing large projects, but they also channel local and foreign savings into domestic investments while facilitating effective public debt management by avoiding the unforeseen shocks associated with debt based on foreign currencies.
Critically, domestic borrowing by government establishes a ‘yield curve’ or the benchmark against which returns are measured in the domestic debt market. This then encourages corporates and other entities to raise debt in the market, contributing to its development and the funding of diverse needs at appropriate costs.
In Singapore, corporate bond issuances amounted to $191 billion in 2017 from $137 billion in 2016, with issuers ranging from airlines, to financial sectors players to manufacturers to players in the energy sector. Singapore has positioned itself as the financial gateway to Asia and investors arriving on the wealthy island are able to quickly raise capital on the bond market for their ventures.
Antigi-Ego continues on the benefits of higher domestic borrowings by governments.
“Low interest rates on external loans could lead to over borrowing and give rise to currency mismatches.”
For Antigi-Ego, domestic borrowing is the key to alleviating the continent’s unemployment, particularly among youths.
“The way to grow the private sector is through long term financing and lowering of infrastructure gaps, which can be done by seeing the development of domestic capital markets as an opportunity,” he explains.
“I’m very concerned about the youth unemployment bomb that is happening all over our continent.
“When we opt for external borrowing just because the rates are better, these are the second round effects which we should consider.”The BoB is pushing government to listen to the arguments being presented.
“As the Bank, we are the adviser to government and the agent for the bond programme, but the responsibility for the policy and decisions to borrow rests with the government,” says Phetwe.
“As adviser to government, we continue to make the case for an expanded borrowing programme with a large line of bonds in order to develop capital markets and improve liquidity.
For its part, the BBMA is hoping to see not only limits lifted and fiscal caps loosened, but also innovative assets such as infrastructure and retail bonds introduced.
While the wheels often turn slow in government, there are signs fiscal authorities are listening and the medium term debt strategy currently under review could contain several surprises.