BSE�s drive to boost liquidity in bond market
Pauline Dikuelo | Friday October 28, 2016 16:37
BusinessWeek: What is the state of the Botswana Bond Market?
Tsheole: The Botswana bond market has experienced steady growth over the past decade. The size of the bond market has grown from P3.8 billion to P11.6 billion over the past year, particularly due to an increase in issuance by corporates as well as sustained issuance by government. Currently, there are 39 bonds listed on the BSE and 33 of these are corporate bonds while six are government bonds.
On a comparative basis, the six government bonds make up two-thirds of the total value of the bond market, an indication that government is a major issuer in the domestic bond market.
Typical of emerging economies, the local debt market is fairly illiquid. On a year-to-date basis, bond trades have amounted to P240.8 million.
Close to 85% of these trades were on account of government bonds and the balance were on account of corporate trades. The general observation is that due to the prevalence of excess capital in the domestic market relative to investible assets, investors tend to buy and hold bonds to maturity and this constrains the liquidity in the bond market.
BusinessWeek: What developments have taken place in the bond market over the years?
Tsheole: We do acknowledge that liquidity is still low in the bond market and there are some impediments that can be attributed to this.
A number of initiatives are already in place to address these impediments. In 2010, the BSE introduced bond market courses in Botswana, which are broadly targeted at bond market participants and the public at large in order to improve their technical proficiency.
These courses have been running every year, and in any given year there are at minimum two courses.
In 2012, the BSE formulated bond calculation formulae and pricing in conventions in order to standardise the pricing of bonds in the market.
The conventions have been built into the Automated Trading System (ATS), which means bonds are ready to trade electronically on the BSE.
Further, in 2013, the BSE introduced three bond indices to facilitate performance measurement and attribution, and to also set the foundation for introduction of bond related products. In the same year, the Botswana Bond Market Association (BBMA) was formally registered to complement the efforts of the BSE in addressing issues of development of the bond market. One of the major milestones thus far in 2016, is the dematerialisation of bonds and we are happy to say that 32 of the 33 corporates listed on the BSE have been dematerialised. This will go a long way in improving efficiencies in the bond market and we are hopeful it will equally encourage government to dematerialise the six listed government bonds.
BusinessWeek: Why did BBMA and BSE host the Bond Market Conference?
Tsheole: Despite the steady growth realised in the bond market since the late 1990s, a lot still has to be done to further develop the market. T
he BSE and BBMA work together in respect of issues of bond market development and this conference was an opportunity for the two entities to lead from the front the bond market development agenda, and engage fully with all the stakeholders in the market. The conference was also a highly relevant platform to showcase BBMA to the bond market participants who of course are members, and demonstrate value creation to the members and ease alignment in relation to future strategic plans of BBMA.
BusinessWeek: Kindly elaborate the relevance of the theme of the conference?
Tsheole: The theme of the conference was ‘The Bond Market – A Pillar of the Economy’. Bond markets play an important role in spurring economic activity and the theme was in recognition of the contribution of the Botswana bond market to Botswana’s economy and its potential to continue to support sustainable economic growth. So the theme provided the opportunity to ponder about what needs to be done for the bond market to be an effective and efficient pillar of the economy.
BusinessWeek: What were the key issues and messages coming out of the conference?
Tsheole: I would like to highlight the three prominent messages that emanated from the conference.
Firstly, given the continued decline in diamond sales, government is battling an increasing fiscal gap, especially with the imminent advent of the National Development Plan (NDP) 11. As such, infrastructure bonds were identified as a solution to plug these funding gaps. On this note, we had an opportunity to learn the Kenyan and South African experiences in as far as infrastructure bonds are concerned.
The promotion of accessibility to infrastructure bonds through mobile phones, particularly in Kenya, gave good lessons on how retail investors can equally be included in the bond market.
Secondly, there was consensus that information efficiency is key when it comes to trading bonds.
Participants conceded that the trading, clearing and settlement infrastructure at the BSE needs to be maximised to promote transparency, price discovery and information dissemination with a view to spur trading activity in the bond market. It came out very clear that in a small market like ours it is inefficient to maintain two fragmented trading platforms for bonds.
Lastly, it was pointed out that there is a need for the market to come up with innovative ways to increase retail investor participation in the bond market.
Participants suggested innovative products that can attract retail investors such as Retail Savings Bonds and Inflation-Linked Bonds, which of course are also relevant for pension funds given their potential to offer inflation protection.
Further, it was suggested that the bond market should be equally friendlier to SMMEs. These are innovative ideas that collectively as stakeholders in the bond market we will look into to develop the market, enterprises and the investor base.