BoB Governor Cornelius Dekop
Bond switches expected at the Bond Auction Committee
Will be driven by government finances and redemption profile
Decision will be made close to the maturity
The government will be open to negotiating a bond switch auction for a P2.2 billion note maturing in 2025. The decision would help reduce liabilities if the country's financial situation worsens.
A bond switch allows the government to offer the market the opportunity to switch to longer-dated notes, reducing the pressure on the government to actually pay out the principal.
Lesego Moseki, Director of the Financial Market Department at the Bank of Botswana (BoB), stated that bond switches will be discussed by the Bond Auction Committee. This committee is composed of officials from both the BoB and the Ministry of Finance.
“This will largely be driven by the government finances and redemption profile and indeed the wish by investors to switch from a maturing bond into a longer-dated bond,” Moseki said when responding to questions after the Bank delivered its rate cut last week.
“That will be discussed and the decision will be made close to the maturity of that bond or later in this year.”
Cash shortfalls
The government is facing a cash shortfall, with revenue collections falling below expectations. As at June 2024, total revenue and grants amounted to P18.2 billion, compared to the anticipated P23.4 billion, according to Minister of Finance Peggy Serame. Additionally, diamond sales in the first half of 2024 were USD1.949 billion, down from USD2.428 billion in the same period of 2023, representing a 46.1 percent decline, Serame noted.
Diamond malaise
“It doesn’t look like the diamond market will recover speedily,” BoB Governor Cornelius Dekop said during the policy rate decision.
The causes of market weakness remain the same as listed by Dr Keith Jefferis, former Deputy Governor of the BoB. In his Q2 report, he said these include competition from (synthetic) lab-grown diamonds (LGDs), weak demand in China, disruption of supply chains due to the Russian invasion of Ukraine, and the negative impact of measures imposed by G7 countries to enforce sanctions on Russian diamonds.
“The combination of all of these factors means that there are high levels of diamond inventory throughout the diamond supply chain,” Jefferis said adding that lower sales combined with high inventories mean that there is less demand for the output of diamond mining companies.
“Overall, the indication is that the second half of 2024 is unlikely to be significantly better for the global diamond industry than the first half of the year, although it should be better than the second half of 2023.”
Short-term volatility or long-term structural change?
A critical question by Jefferis, from a policy point of view is whether the current set of problems afflicting the diamond market is adjudged to be the result of short-term volatility or long-term structural change. If it is short-term volatility, he said then accumulated financial buffers can be used to smooth and offset the broader macroeconomic impact.
“But if the problems are a result of long-term structural change, then running down financial buffers is not a sustainable option – instead, adjustment to the new reality is required.”
Dekop advised that the “government has to optimise revenue sources”. “I expect government to announce fiscal consolidation.”
Spending cuts don’t appear likely with elections coming up
The preliminary budget deficit for the recently completed 2023-24 financial year, was double what was projected a few months back in the 2024 budget. Jefferis’ estimate of the projected deficit for 2024/25 has also doubled to a very worrying P17 billion or 6% of GDP.
IMF which also forecasts a 6% deficit has urged Botswana to curtail some of its developmental project spending. Despite the plea, Vunani Fund Managers argue that large spending cuts don’t appear likely with elections coming up. “We posit that a ramp up in government spending and investments into capital assets should counter some of the weakness and increase the productive capacity of the economy,” Heads of Investments, Kennedy Manopolwe and Jonathan Paledi said in a note.
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