Botswana’s pension funds were once anxious about pulling money back from global markets. But in this first instalment of Investing in a High-Interest-Rate Environment, fund managers note that rising local interest rates have unexpectedly softened the feared opportunity cost of repatriation.
Opportunity Cost Fears
When Botswana introduced the revised pension fund rules (PFR2), which mandate that 50% of their money should be invested in Botswana by 2027, asset managers worried about one big thing: the cost of pulling money back home from global markets (cost of opportunity).
During a recent Bifm Breakfast Seminar, its CEO, Ms Clair Mathe-Lisenda, was among those who admitted that they believed that pension funds could lose out by exiting strong international investments for less strong local investments. The repatriation started in 2023 and is being phased over the years to 2027, mainly because there are limited instruments to park money in. With a target of 50 by 2027, pension funds have around 43% of their money invested in Botswana, according to data from the Bank of Botswana (BoB).
During the Bifm Breakfast Seminar, Debswana Pension Fund (DPF) Acting CIO Mr Gopolang Mbakisi put it plainly:
“Once you repatriate (bring back to Botswana) this money, you need to be able to put it into investment instruments that will continue to grow.”
And that’s where the challenge for asset managers lied and still lies.
Offshore Vs Onshore
They agree that the most liquid and fast-growing opportunities, especially in listed shares, are still offshore. Local markets are improving, but they’re not yet operating at the scale or speed of global giants, even as the BSE has been seeing widespread share gains since 2023.
Read: Listed Investments See Broad Price Increases
Market watchers say some of the money flowing into Botswana ended up in the local stock market, pushing share prices up across the board. But experts like Mr Gopolang warn that for some companies, these price jumps aren’t supported by strong business fundamentals, especially given the current economic challenges.
Read: Prices On Mandate & Economy Shrinks, Will Share Prices Follow?
As Mr Gopolang explained:
“The thing you have to be conscious about is that if I’m investing my money in Tesla, Nvidia, Amazon, it’s not going to grow the same here in Botswana.”
Perfect Timing: Scrambling For Cash
But for pension funds, the timing couldn’t have been better. The money coming back home, originally meant to support infrastructure projects, arrived just as the economy, government, and banks were all scrambling for cash (liquidity challenges or money in the financial system).
Read: Money Is Expensive for Banks: How It Costs You As An Investor
Root Cause Of The Problem
Botswana’s liquidity problems are rooted in one big issue: the downturn in the diamond market, which is the country’s main source of revenue. When diamond earnings fall, government cash flow tightens, and that affects the whole financial system.
Economist Dr Keith Jefferis notes that diamonds traditionally make up 80% of exports and about a third of government income. But diamond prices have been slipping for more than a decade.
At the Seminar, Bank of Botswana Senior Dealer Mr Boago Kebaitse explained it clearly:
“Our government is one of the main contributors to liquidity (money) in the banking system. We’ve seen liquidity levels go down, and as a result… interest rates go up.”
What he meant is simple:
When the government needs money, it must offer higher interest rates to attract investors. In simple terms, the government is competing with other investment options like fixed deposits with banks, which is why it has to raise interest rates to attract funds.
Fiscal dominance: when the budget, not the central bank, sets interest rates
Against this background, Dr Jefferis said that this borrowing by the government through bonds and Treasury bills is now the main force pushing interest rates higher. In his words, this is what economists call fiscal dominance. That’s when interest rates are driven by the government’s budget needs, not by the central bank’s monetary policy.
Read: How Botswana’s Deficit Unlocks Hidden Yields For Investors
Competition with Banks
The Bank of Botswana holds auctions monthly. At some of these auctions, it struggled to raise enough money that it wanted. In fact, Dr Jefferis noted that by September, the government was behind on its borrowing target. Banks were paying much higher interest than the government. Dr Jefferis says banks were offering deposit rates of around 15%, which is far above what government T-bills and bonds were paying. Because of that big gap, fund managers shifted a lot of their money, including pension fund cash, into bank deposits instead of lending to the government.
Government is the Price Taker
To catch up with its borrowing target, the government recently went on a roadshow with investors. This helped the September and October auctions perform better, as yields continued to rise.
That drop in diamond revenue now means the government no longer dictates terms to the market; it listens to the market.
Mr Kebaitse reflected on how things have shifted. When Botswana first launched its government bond programme years ago, the goal wasn’t to raise money. It was simple: to build a capital market. At that time, government finances were still comfortable because diamonds, though slowly declining, were bringing in strong revenue.
This Time It’s Different
But Dr Jefferis warned that this time it’s different with diamonds.
“This isn’t a short-term issue,” he said. “It’s a long-term trend, and this latest downturn is deeper and lasting longer than previous ones.”
Right now, Mr Kebaitse said the government is in a position where “we are forced to accept the pricing that the market offers,” adding that “we have to sort of listen to the market in terms of pricing and also in terms of the preference”.
A silver lining for pension funds
The rising interest rates have been a blessing for pension funds. As Debswana Pension Fund’s Mr Mbakisi noted, their fixed-income portfolio has performed well because the government is borrowing more.
Against this background, Ms Mathe-Lisenda believes the feared “opportunity cost” of repatriation was softened by this unexpected timing.
She explained that rising interest rates, combined with a tight cash environment, have created a rare moment where local fixed-income investments suddenly look attractive. Liquidity challenges in the banking system, described by treasurers as unprecedented, meant everyone needed money to keep the wheels of the economy turning. The government needs money to keep the financial system running, and banks need money so they can keep lending.
Read: The Diamond Tide Recedes, Who is Swimming Naked?
“Capital has been repatriated at a point where… the opportunity cost is not as high as we expected because cash yields are elevated,”
Bifm’s Ms Mathe-Lisenda said.
Because the repatriation happened during a period when the government and banks needed financing, pension funds were able to plug some of that gap by buying government bonds and parking money in deposits, helping absorb some of the liquidity strain in the process.
