Green bonds attract lower interest rates compared to conventional bonds
Government intends to leverage green bonds and inflation-linked bonds
In a bid to alleviate financial commitments, Ishmael Radikoko, a Senior Finance Lecturer at the University of Botswana (UB), advocated for Botswana’s exploration of green bonds. According to Radikoko, this financial instrument could potentially mitigate the burden of high-interest payments that the government currently faces. He was speaking during the UB budget review seminar.
Though public debt levels remain within the statutory debt ceiling of 40% of GDP, public debt has slightly increased in the recent past. As at end of December 2023, total external debt to GDP was 9.5%, while domestic debt to GDP was at 10.7%, making a total exposure of 20.2% of GDP.
Despite this increase, Finance Minister Peggy Serame said the medium-term risk of debt distress remains low.
But Radikoko contends that deploying green bonds, which typically attract lower interest rates compared to conventional bonds, could yield significant benefits. A research by Absa Bank Botswana’s Salma Baduel showed that on average, the cost of capital could be reduced by approximately 11 basis points for Emerging Market Economies, a concept known as the “Greenium”. Greenium or green premium, is the amount by which the yield on a green bond is lower than an otherwise identical conventional bond.
Baduel, the Country Treasurer of Absa Bank, echoed Radikoko’s sentiments during a recent presentation at the Bond Market Conference. But she warns that the cautious thing is to go expecting no sort of premium because “we have seen that happen”. “We have seen that sometimes a lot of investments don’t see the need to actually give you a premium if you are going to offer green or GSS bonds.”
One major benefit highlighted by Baduel is the alignment of green bond issuance with Botswana’s commitment to environmental sustainability. The nation has pledged to reduce greenhouse gas emissions by 15% by 2030, in line with the National implementation of the 2030 Agenda for Sustainable Development.
Furthermore, she said green bond investors typically exhibit a long-term investment horizon, which aligns well with infrastructure projects requiring sustained funding over extended periods.
Government’s Fiscal Priorities and Funding Strategies
Against the backdrop of Botswana’s developmental aspirations, the government has proposed a significant (P29.77 billion increase in the development budget for the 2024/2025 financial year. Minister Serame emphasised the importance of infrastructure development in driving economic growth and attracting private sector participation.
However, the government faces challenges in financing its ambitious budgetary targets. Serame highlighted the need to moderate drawing on the Government Investment Account, which has seen a decline primarily due to lower mineral receipts, particularly from diamond sales.
In light of these fiscal constraints, Serame outlined the government’s strategy to mobilise additional resources. This includes tapping into fiscal savings, special funds proceeds, and domestic borrowing through innovative instruments such as inflation-linked bonds and green bonds.
Botswana’s Fiscal Resilience and Funding Opportunities
Despite fiscal challenges, Botswana retains its status as the highest-rated sovereign in Sub-Saharan Africa, providing it with the credibility to explore alternative funding avenues. The government’s intention to leverage green bonds and inflation-linked bonds, alongside tapping into the local debt market, underscores its commitment to diversifying funding sources and promoting financial resilience.
First National Bank Botswana (FNBB) Economist Gomolemo Basele anticipates that these initiatives will create opportunities for asset managers, particularly in light of evolving pension fund regulations.
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