Experts have warned of the government’s monumental borrowing task ahead, reflecting on the historic magnitude of the 2024/25 issuance compared to previous years.
With the pension funds emerging as the primary holders of government bonds, concerns loom over their ability to absorb a P15 billion substantial increase in debt issuance compared to a P3 billion average per year.
Despite government hopes pinned on the repatriation of offshore funds, economists cautioned that this anticipated influx falls woefully short of the demand created by the borrowing target which will be used to fund the budget deficit.
The government forecasts a budget deficit of P8.69 billion for 2024/2025, entirely dependent on domestic borrowing. Per the Government Borrowing Strategy for Fiscal Year 2024/2025, this deficit will be covered through bond sales totaling P11.250 billion. This includes issuing short-dated conventional bonds amounting to P3.5 billion across ten auctions, and longer-dated conventional bonds and Inflation Linked bonds totaling P7.750 billion across ten auctions.
The government also plans to issue Treasury bills totaling up to P4 billion, bringing the total issuance for the year to P15.250 billion.
This projected borrowing is higher than the deficit itself, which economist Keith Jefferis argued that it accounts for the need to amortise some external debt, as well as a plan to partially rebuild the Government Investment Account (GIA).
“This would be by far the largest annual debt issuance in Botswana’s history, and compares with an annual figure of around P3 billion in recent years,” Jefferis said cautioning that the Government may, therefore, struggle to raise this amount through the issuance of bonds and treasury bills during the year, at least not without having to pay higher interest rates on its debt.
Bonds are a risk that one entity takes if a company or government raises a bond. The nature of the participation, according to Kgori Caprial Chief Investment Officer Tshegofatso Tlhong is that if “I don’t agree with the pricing given or the risk of that bond, I can choose not to participate”. “So if somebody does participate, rates will come lower, but there is going to be a certain point where we are going to see that bottoming out,” she said during a webinar recently. Because of the inherent risk of the government or issuing entity, she explained that there has to be some compensation for taking on that risk and “you do have the option to say we will participate”. “If there is negotiation, especially for corporate issuances, then you will see that bond yields will move or be higher depending on risk profile,” she said. During the most recent bond issuance, the yield only moved down by 3 basis points. The auction before it closed at 7.83%.
“So you can see there is a certain point where the market won’t give liquidity. Then it’s up to the issuers to say do we then review price or do we leave liquidity on to the table?”
The primary holders of bonds in Botswana are pension funds. According to the latest Botswana Economic Financial Statistics released in March 2024, pension funds’ allocation towards government bonds amounts to over P13 billion.
The country’s largest fund, the Botswana Public Officers Pensions Fund (BPOPF) manages four portfolios with an Asset Under Management (AUM) of approximately P100 billion. BPOPF dominates the market (about 75 percent of sector AUM). Moemedi Malindah the CEO of the fund recently revealed during a bond market conference that BPOPF holds a strategic asset allocation of P9.2 billion in fixed income.
Pension funds currently hold approximately P13 billion in cash. This increase in cash holdings is attributed to the repatriation of funds to meet the 50% threshold onshore. Minister of Finance Peggy Serame mentioned that about P8.84 billion was repatriated last year. She further stated that the phased repatriation of pension assets will continue, with an anticipated inflow of P0.5 billion expected for the year 2024.
“Government seems to be hoping that with the pension funds required to repatriate funds from offshore as the ceiling on external asset holdings is reduced, they will have no choice but to buy government bonds,” Jefferis said adding that to some extent this is true.
But he is mindful that the anticipated inflow in 2024/25 from the required repatriation is far from sufficient to provide an additional “P10 billion of demand for Government bonds”.
Put differently, the amount of cash coming back from offshore by the pension funds is small relative to this year’s borrowing target of P15.250 billion.
The prudential fund rules allow pension funds to invest up to 100% of assets in government bonds. This is the upper limit but rarely ever the case for risk and return management purposes. It’s anticipated that not all of the returning cash can be allocated into bonds.
Pension funds have so few opportunities to invest the repatriated funds domestically that some of the money may well sit around in bank accounts. Importantly, pension funds are ahead of schedule in terms of the statutory repatriation requirement. Based on available data, onshore investments currently stand at approximately 42%. Hence if there are no avenues to invest the money in, observers argue that it will just stay offshore, compounding the government’s borrowing targets.
Jefferis believes that “forcing pension funds to buy government bonds by leaving them with no other options is hardly in the interest of pension fund members and pensioners, who are best served when their pension contributions are invested in a diversified portfolio of assets, both domestic and external”.
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