Mmegi

Gov't hits record P4.6bn debt target

At the helm: Gaolathe PIC PHATSIMO KAPENG
At the helm: Gaolathe PIC PHATSIMO KAPENG

The Bank of Botswana (BoB) last week raised P4.6 billion for government in the capital market, the highest amount ever raised in a single monthly auction, but one which will squeeze the already tight liquidity in the market.

Under government’s domestic note issuance programme, the BoB floats bonds and Treasury Bills each month to raise debt for government in the capital market. The programme’s ceiling was raised to P55 billion early last year after the previous P30 billion cap was reached due to more aggressive borrowing caused by stubborn budget deficits and pandemic spending.

At the auctions, primary dealers, who are exclusively banks, compete to lend to the government by offering the yields or returns they are seeking. The BoB decides the yield or the 'interest' level it is willing to pay the dealers on the particular securities on offer.

The funds are critical for plugging the budget deficit, which this financial year is expected to grow from the original estimate of P8.7 billion to more than P18 billion due to the downturn in diamonds.

At last week’s auction, the BoB was able to raise the P4.6 billion it was searching for on behalf of government, partly by moving around allocations between the shorter and longer ends of the spectrum.

At the auction, the three-, six-, and 12-month Treasury Bills raised a total of P3.2 billion, whilst the longer maturing bonds raised the balance of P1.4 billion.

With the exception of the 2031 bond, all the government securities on offer experienced oversubscription, with the 12-month treasury bill, in particular, receiving bids worth P2.05 billion for the P1.2 billion on offer.

Trend analysis shows that the yields – or the expenses government will incur on the debt – ticked up across the board at the latest auction, with bidders pushing for even higher returns.

At the auction, the yield on the three-month treasury bill went up to 3.45 percent from 3.008 percent at the previous auction, while the six-month bill rose to 3.922 percent from 3.289 percent and the 12-month increased to 4.108 percent from 2.48 percent.

Yields on the bonds similarly rose, with the 2029 bond increasing to 8.085 percent from 8.058 percent and the 2043 bond rising to 9.346 percent from 9.228 percent. Of all the securities on offer, only the 2031 bond fell in terms of yield, moving to 8.053 percent from 8.1 percent. The highest bid received for the 2043 bond fell from 18% at the previous auction to 13.5% last week.

Government’s interest costs associated with the note issuance programme have generally been rising, as the central bank has leaned harder on the capital market for budget deficit financing, resulting in higher competition for liquidity in the market.

Whilst the BoB was able to secure its targetted debt for government at a record P4.6 billion, the latest development piles more pressure on the liquidity crunch being faced in the market.

Government’s higher demand for debt funding, as the diamond downturn continues, has been blamed for tightening liquidity in the capital market, forcing banks to battle for a decreasing amount of deposits.

Last December, the central bank lowered the primary reserve requirement for banks, making available about P2 billion for the banks in additional liquidity.

Pension funds, which are a major source of capital on the market, generally direct their capital to government debt securities, which are traditionally the safest instruments on the market and offer some of the highest returns.

Commercial banks are understood to be battling for deposits in the liquidity crunch, which has raised their cost of funding, as their main depositors – institutions – demand higher returns.

Editor's Comment
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