The Bank of Botswana (BoB) only raised 53% of the P1.95 billion it was looking for at its recent hunt for debt, as the government continued to reject the higher returns being demanded by the market in order to lend funds.
On behalf of the government, the BoB conducts monthly auctions of government Treasury Bills and bonds, with primary dealers bidding to lend government the funds according to the returns on offer. The primary dealers, who are exclusively banks, compete by offering the yields or returns they would desire on the funds they are willing to lend to government.
Government is banking on its domestic borrowing programme to plug the forecast P6 billion deficit in the 2021-2022 budget, as the other main source of funding, the Government Investment Account (GIA), is running low due to COVID-19 spending.
Parliamentarians last September approved the finance ministry’s request to raise the limit on government’s domestic debt to P30 billion in anticipation of the higher borrowings required due to the COVID-19 pandemic and the depletion of the government reserves in the GIA.However, since then the monthly auctions of government notes have consistently raised less than what the BoB was looking for, with the market opting for the shorter maturing paper such as Treasury Bills, as opposed to the longer term bonds. The trend continued at the latest auction, held on May 28, but worsened as two bonds offered by the BoB witnessed zero allotment due to the central bank rejecting the bids put forward. The auction sought to raise P1.95 billion for government but only raised P1.03 billion with P1 billion being from the shorter term Treasury Bills.
“We continue to see low uptake of bonds with 80% of Treasury Bills allotted versus 5.6 percent for bonds,” analysts at African Alliance said in a note.
“(This is compared to) 100% of Treasury Bills and 33.7% of bonds allotted in April.”
Documents from the May 28 auction show that bidders pushed for yields as high as 12.3% on the 10-year bond, the longest maturing note on offer at the auction. The only bond allotted at the auction, which matures in 2027, raised P39 million for government against the P230 million target. The BoB accepted six percent as a yield for the bond, while bidders had gone as high as demanding 10.9%.
Finance ministry documents indicate government is keeping an eagle eye on the yields and thus its borrowing costs, with research there showing that yields rose in the fourth quarter of 2020 and the first quarter of this year. “Government’s long term bond rate, BW012, is on the rise, which might be worrisome for government’s intention to borrow in order to finance the budget deficit and government’s capital projects,” reads a finance ministry bulletin released on Wednesday. Bond BW012 is government’s longest term note, maturing in 2040. African Alliance Botswana chief investment officer, Nlume Modise said the move up in yields is a result of a more impaired fiscal position as evidenced by the recent downgrade by Moody’s. Moody’s downgraded Botswana’s credit rating in April, a decision which was expected to raise government’s borrowing costs.
“However, the direction of yields going forward will be determined by several factors including supply and demand, interest rate expectations and the speed of fiscal consolidation to name a few,” he told BusinessWeek.
For his part, Kgori Capital managing director, Alphonse Ndzinge said generally in the market, there is a high degree of segmentation between investors and their buying interest along the maturity curve.
“The interest in longer maturity notes really comes down to aligning pricing expectations between the issuer and investors which is partly a function of forward-looking risk/reward expectations of those instruments relative to other investment opportunities in the market,” he told BusinessWeek.
Ndzinge said on the short-term side of the market, the commercial banks are normally the dominant investors given their needs for asset liability management for a combination of regulatory and liquidity requirements.
“And then on the long-end, investors with longer-dated liabilities such as insurers with products like retirement annuities tend to participate more,” he added.
The finance ministry has said yields are also rising as a result of the higher quantum of bond issuance, as a result of the P30 billion programme and the introduction of monthly auctions, instead of the previous quarterly auctions.