Govt has BoB support for deficit funding

MBONGENI MGUNI
Staff Writer | Tuesday May 18, 2010 00:00

BoB's support clear the way for finalisation of a bond issuance programme and eventual tabling before the winter Parliament which sits from July. Government also plans  to draw down on its reserves in funding the deficit arising in the 2010/11 budget.

While Government's caps and policies on domestic borrowing entitle it to raise the entire deficit from the local market, analysts - including the International Monetary Fund - have cautioned that this could crowd out other players in the capital market through factors such as higher interest rates and lower liquidity.

Since Finance Minister Kenneth Matambo announced the deficit funding plans in February, Government and the central bank have been hammering out the quantum and timing of the bond programme to support the 2010/11 deficit. A similar P5-billion bond programme initiated in 2008 wrapped up in February with a P1.9 billion float.

While Government and BoB officials have generally been tight-lipped about the discussions, reports emerged last week indicating that the central bank had given its support to Government raising all or part of the deficit from the local capital market.

BoB Deputy Governor Moses Pelaelo added weight to the reports in comments he made during a Stanbic Bank Botswana Economic Review last Thursday. With some commentators at the event voicing concerns about the adverse effects on the local market of a heavy government bond programme, Pelaelo revealed that BoB was satisfied that the deficit would not harm the local capital market.

'When it comes to the capacity of the market to absorb borrowing by Government, there are some indicators to be analysed,' he said. 'One of these is the size of (outstanding) Bank of Botswana Certificates, which is about P16 or P17 billion.

'That's money that's available, and for us it will be interesting to see the shift. Government has made it clear that financing this deficit will require optimal use of its savings and borrowings from the market.'

Indicators of liquidity include outstanding BoBCs pegged at P17.1 billion, pension fund assets currently valued at P32.6 billion and commercial bank and government deposits amounting to P37.3 billion. Liquid pension fund assets include equity investments (P22.4 billion), offshore bonds (P2.7 billion) and cash/near-cash assets of P3.2 billion.

Pelaelo said the market was lush with opportunities for Government and other players to raise capital. 'If you are worried about crowding out, there's still a lot of opportunity in the market for institutional investors and others to borrow,' he said. 'We want to see some activity out there and there's quite a scope for additional borrowing.Banks are unwilling to lend and they are holding onto a lot of deposits; banks are not trading.'

Standard Bank Senior Africa Strategist (Global Markets Research) Phumelele Mbiyo concurred with BoB, saying research had shown adequate capacity for borrowing by Government on the local market. 'I asked (BoB) the same question about whether they are happy with the performance of the bond market, and they said they are not because a lot of investors buy and hold and don't trade,' Mbiyo said.

'There's a high demand for paper and assets that portfolio managers can buy for investment purposes; there's a deficiency of that. I'm not saying Government should go out and borrow willy-nilly, but there's still a lot of capacity to borrow without any impact on interest rates.'

Mbiyo also pointed out that the country's foreign reserves to GDP ratio was still positive compared to the country's debt to GDP ratio. Pelaelo and Mbiyo's optimism will come as welcome news to the private sector and parastatals like the Botswana Housing Corporation which is planning to float a P2-billion bond this year. Private sector players such as Cresta Marakanelo and Firestone Diamonds will be equally pleased as both are planning listings on the BSE this year.

Contacted for comment on whether BoB was supporting Government raising the lion's share of funding the deficit from the capital market, central bank officials referred Mmegi Business to the finance ministry. 'This programme is being led by the government and it will make announcements as time goes on,' said a BoB official. 'Whatever the government has said about the bond issuance programme towards the deficit is also our position.'

Deputy Permanent Secretary (Development Programmes) at the finance ministry, Cornelius Dekop, recently told Mmegi Business that it was Government's intention to push ahead with the bond programme because the funds were needed urgently. He said Government intended to finalise discussions with BoB this month before preparing for the tabling of the programme in the winter Parliament.