The Bank of Botswana (BoB) returns to the capital market on May 28 seeking to raise P700 million in debt on behalf of the government.
According to a notice circulating this week, the central bank will offer the market three bonds with maturities ranging from 2023 to 2031 in an auction on May 28. The BoB conducts monthly auctions of government bonds and Treasury Bills (TBs) as part of the P30 billion domestic debt programme approved by Parliament last September. The auctions are attended exclusively by some commercial banks who bid for the bonds and TBs.
The central bank will offer the market two P200 million bonds as well as a P300 million bond, according to the notice. All the bonds are reopenings of previously floated bonds. It is expected that TBs will also be offered at the auction, although details of the maturities and amounts have not yet been provided.
The latest auction comes as the central bank engages the capital market on the poor response to the P30 billion debt programme. Since its launch last year, the bonds offered by the central bank have been met with a muted response from the market, particularly those of longer maturity.
The P30 billion debt programme is key to the government’s plan to fund the expected P6 billion budget deficit for this year.
At the most recent auction, held on April 30, P1.1 billion of the P1.3 billion raised was from shorter-maturing TBs, while the three bonds on offer underperformed. One bond, which also bore the longest maturity amongst the three, only raised P19 million out of the P200 million the BoB was seeking.
BoB governor, Moses Pelaelo recently told BusinessWeek there were issues around the expectations of the market around bond yields.
“It could also be about the differences between us and the South African market, which is highly liquid with international participation,” Pelaelo said.
“When people look at the yields here and those from others, they may have that view, but they forget the risk-adjusted returns between the two markets.
“Some of the reasons we are getting, we don’t understand and we have to find a reason why this is the case.”
Pelaelo said while market participants had previously told the central bank that they needed long maturing assets to balance their liabilities, this appetite is not being reflected in the demand for long term government notes. Pension funds, in particular, have long decried the lack of long term investment opportunities in the local market, which are required to appropriately match their liabilities.
Government notes, such as TBs and bonds, are considered the most attractive in the market, offering zero risk and stable returns, which, when they are long maturing, mean consistent yields that can be used to match liabilities such as annuities over time.
Other BoB officials have said the local market’s stage of development could be a factor in the poor response.
Former finance and economic development minister, Thapelo Matsheka recently told a meeting of the Botswana Pensions Society that there was a clear need for dialogue between government, the BoB, pension funds and asset managers, to address the ‘blockage’ and ensure that the assets of the pension fund sector are deployed to finance crucial public investments.