The central bank’s inaugural inflation-linked bond, carrying a face value of P750 million, attracted seven bids worth only P220 million with demands for yields reaching as much as 10.5%. The BoB did not accept any of the bids.
The 21-year inflation-linked bond, first mulled two years ago, was expected to be sought after by the market as a hedge against inflation.
Analysts believe the benign outlook for inflation complicated the ability of the central bank and bidders to reach a balance on the yield for the inaugural bond, with the ongoing liquidity stress in the market further skewing matters.
The BoB will return to the capital on March 28 floating three Treasury Bills and three bonds, in an effort to raise P3.1 billion on behalf of government.
According to a note put out by the central bank, the upcoming auction will feature three-, six- and 12-month Treasury Bills as well as bonds maturing between 2027 and 2041.
Of late, government has been raising much of its debt at the auctions from the shorter end of the spectrum, with bidders preferring the Treasury Bills and shying away from the longer-maturing bonds.
In the last auction prior to the inflation-linked bond, 89% of the total P1.99 billion raised for government by the BoB was from the shorter-term Treasury Bills.
Government is facing a P24.7 billion deficit for 2024–2025 and another P22.1 billion shortfall for 2025–2026, which both require higher debt funding, as the diamond downturn continues. The increased debt appetite has been blamed for tightening liquidity in the capital market, which has forced banks to battle for a decreasing amount of deposits.
In response, the central bank last December lowered the primary reserve requirement for banks, making available about P2 billion for the banks in additional liquidity.
Analysts had expected more liquidity to flow into the market as government ministries and departments quicken their spending ahead of the end of the financial year on March 31. The situation was also expected to be helped by pension funds continuing to repatriate their assets in line with requirements under the Retirement Funds Act.
Pension funds, which are a major source of capital on the market, are directing much of their repatriated funds to government debt securities, which are traditionally the safest instruments on the market and represent the benchmark return.
First National Bank Botswana's chief financial officer, Mbako Mbo, recently described the liquidity squeeze as “unprecedented”.
“We are seeing some unprecedented levels of liquidity squeeze,” he said at the unveiling of the bank’s interims. “The market is facing some headwinds and whilst we do not have a liquidity problem at FNBB, we have come up with very solid plans to manage that. “We will focus very diligently on our non-lending business whilst we continue to do our lending business on credit appetites that we will be adjusting as informed by economic realities.”
