The Bank of Botswana (BoB) was this week scheduled to float Treasury bills and bonds seeking P4.6 billion in debt for government from the capital market, the highest amount ever targeted in the monthly auctions.
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 'stop-out' yield or the maximum '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 the auction this week scheduled for Friday, the central bank was due to seek P3.2 billion through the offer of three Treasury Bills carrying maturities of three, six and 12 months. Known as T-Bills, the shorter-term instruments have generally been more popular with bidders at the BoB and have been the principle route through which funds have been raised for government over the months.
The BoB will also seek P1.4 billion through the issuance of three longer-term bonds with maturities ranging from 2029 to 2043.
Government’s interest costs associated with the note issuance programme have also 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.
According to central bank data, yields on the longest-dated government bond, which matures in 2043, rose from 8.62 percent at the beginning of last year and closed 2024 at 9.38 percent.
The BoB has also been wrestling with under-allotments at its monthly auctions, with the debt targets missed in all the monthly auctions since July 2024.
The central bank had hoped that changes to the Retirement Fund Act would result in greater liquidity in the local market from which to tap into the note issuance programme. According to NBFIRA’s Pension Fund Rule 2 (PFR2) guidelines, local pension funds are required to increase their domestic portfolios to a minimum of 50% by December 2027, in a stepped manner.
Under the schedule, local pension funds were required to increase their domestic portfolios to 41% by December 2024 then move to 44% by December 2025, 47% by December 2026 and attain full compliance of a minimum of 50% by December 2027.
In the BoB’s last monetary policy briefing in December, the director of financial markets, Lesego Moseki, told BusinessWeek that the pension funds assets had come into the local market and helped the note issuance allotments for a limited period.
“That money did come into the system, but the target for 2024 is 41% and as at August we are already at 40.9% meaning we will not have any reprieve from PFR 2 between now and year-end,” he said in December. “This will probably continue into 2025 because pension funds tend to wait until later in the year to repatriate that money.”