“We are well-funded”
Regional peers offer attractive instruments due to the need to borrow
Capital markets remain a priority for the Government
Allan Gray sees a need to hone in on the structural issues to progress
Allan Gray Botswana attributes the relative inactivity of Botswana’s secondary debt market to the country’s historically robust financial position, which has inherently limited the drive for innovation and improvements in pricing.
Tapologo Motshubi, Portfolio Manager and Director at Allan Gray emphasised the country’s favorable financial position at a recent Bond Market Conference, stating, “We have a very fortunate position in this country; we are well-funded.” Botswana has historically generated it’s income through diamonds which garnered government billions of pula in revenue and has been able to fund its mega projects and economic development initiatives.
Against this background, Motshubi believes that Botswana, unlike its regional counterparts, hasn’t had the same imperative to borrow extensively.
The Bank of Botswana’s 2022 annual report indicates that as of March 2023, government and government-guaranteed debt are projected at P51.3 billion, with P44 billion as the government’s own debt and the remainder as government-guaranteed debt. Total external debt stands at P22.9 billion, equivalent to 9.2% of GDP, while domestic debt amounts to P28.4 billion, or 11.5% of GDP.
As of March 31, 2023, the total projected government debt is 20.7% of the forecast GDP for the 2023/24 financial year, well below the statutory ceiling of 40% of GDP. Both domestic and external debts are lower than the 20% of GDP limit for each category.
Motshubi noted that regional peers, compelled to borrow, offer instruments at attractive prices to attract local and international investors. Additionally, they become innovative in issuing instruments in various currencies, commonly referred to as euro bonds.
“They’ll (peers) issue fixed or floating instruments influenced by the need to borrow.” If a country doesn’t have money, Motshubi argued, it will struggle to fund domestic infrastructure.
Botswana historically has not had this problem. “I think when you look at some of the reasons why some of our debt does not trade as active in the secondary market compared to other places, is there is a structural issue which I must say we must glad we have. We must be glad we are well-funded.”
But he said that doesn’t take away the need to have a more active government curve or more variety in terms of what institutional investors require. So if Botswana is well funded and doesn’t have the same needs as other places that are less funded, then what is going to drive that innovation and improve pricing and so forth?
Motshubi thinks it comes down to who’s going to bear the cost of it because there is a cost to pay. If the government says it doesn’t need to borrow and doesn’t do that, then it means that Botswana has a bond market that “is inherently not going to develop as fast as other players”.
On a different note, the government can say it doesn’t have the need to borrow but for the sake of developing the curve, it will bear the cost of doing this. Meaning the government may be willing to pay up on the bonds which in turn is not so good for it from an immediate cost perspective. But it’s beneficial to the economy in terms of improving the diversity of types of instruments that are out there.
In accordance with a deliberate policy shift by the government, the share of Botswana’s domestic debt has surpassed its external debt and can only grow further in tandem with increasing emphasis on domestic borrowing and issuance of government bonds.
When launching the 2023/24 Government Borrowing Strategy and Auction Calendar, Finance Minister Peggy Serame told bond market participants that the reduction in the external debt composition, which began in 2020, has significantly limited exchange rate risk exposure.
During the Bond Market Conference, Moemedi Phetwe, Deputy Director of Financial Markets at the BoB said the development of capital markets remains a priority for the Government, especially the establishment of a robust Government bond yield curve that provides a pricing benchmark for market participants across the maturity spectrum.
“The market is increasingly playing an important role in optimising government financing sources.”
In addition, he said efforts are continuing towards improving the vibrancy of the domestic capital market, as illustrated by the introduction of bond switch auctions in May 2023 to help support the management of refinancing risk and liquidity in the domestic bond market. Furthermore, there is ongoing work towards introducing Inflation Linked Bonds to diversify debt instruments offered by Government, while at the same time providing investors with an effective hedge against inflation in long-dated securities.
But for Motshubi, “If we don’t hone on the structural issues we will struggle to make the progress.”
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