The recent auction of a six-month treasury bill and three bonds spurred strong demand amongst bidders, with government raising P1.29 billion in borrowings, the highest amount it has scored in eight years.
At the February 28 auction held by the Bank of Botswana (BoB), the bid to cover ratio, a measure of the demand amongst bidders, hovered above 2.0 across the treasury bill and three bonds. Experts believe a bid to cover ratio of above 2.0 indicates a successful auction with aggressive bids.
The government, through the BoB, borrows quarterly from the local capital market mainly to develop the market’s capacity, but also to fund gaps in the national budget.
For the 2019/20 fiscal year, government’s projected deficit of P7.93 billion is being financed by drawdown from the reserves managed by the Central Bank and quarterly borrowings from the capital market.
The auctions of government notes are exclusively attended by primary dealers, who comprise some banks for whom government treasury bills and bonds represent risk free, lucrative investments. According to figures emerging from the latest auction, the P1.295 billion government raised is the highest since the auction of March 2012. Since then while government has at certain auctions sought amounts of up to P1.5 billion, the interest rates or “yields” offered by the dealers have been unacceptable, resulting in bids being rejected and lower borrowings by government.
At the last auction, the highest demand received was for the P300 million bond. BW013, maturing in 2023, with 12 bids amounting to P740 million. The BoB accepted five bids for the bond, with a bid to cover ratio of 2.47.
The P400 million bond known as BW014 and maturing in September 2029, received 19 bids with only three accepted. The bids received were worth P956 million producing a bid to cover ratio of 2.39.
BW015, the longest maturing bond available from the BoB, received seven bids amounting to P145 million for the P100 million on offer. An amount of P95 million was eventually allotted from the bond.
The demand for government bonds is indicative of investors’ long-term view of the country’s financial stability and prospects. In other markets, government yields are also used as the benchmark for other key long-term rates in the market such as mortgages.
Government borrows domestically under a P15 billion programme, dating back to February 2011.
Recently, more voices have urged government to raise both the P15 billion limit and the frequency of note issuances in order to develop the local capital market and fund infrastructure, without reverting to reserves.