Bond Auction results indicate under allocation for longer dates bonds
Considering a weak diamond market, the government is expected run a wider deficit than expected, which may occasion increased borrowing appetite, according to investment analysts at Vunani Fund Managers.
Thus, Kennedy Manopolwe and Jonathan Paledi, the Heads of Investments see a higher propensity to accept higher bid yields. However, the latest auction results indicate an underallocation, raising questions about whether the market has any additional capacity, particularly for long-term instruments, even as yields are expected to rise.
July bond auction under-allocated
Kgori Capital shows that the bond auction for July was under-allotted, with the allotment ratio falling to 91%. Government raised P2.638 billion out of the P2.9 billion offered. “The 3-month T-bill, 3-year and 7-year bonds were under allotted whereas the 6 months & 12-month T-bills along with the 19-year bond were over allotted,” the asset manager wrote in a report. “Stop-out yields decreased at the short end (T-Bills) and rose at the long end.”
Pension funds onshoring exerts pressure on yields
Manopolwe and Paledi attributed additional pressure on yields to continued onshoring of pension fund monies to comply with the amended pension fund rules (PFR 2) with the next target at 41% by December 2024. “With the central bank on a rate cutting cycle, this has also continued to favour a downward trajectory in yields,” they wrote adding that “ahead of the October election, government is expected to ramp up spending which continues to favour a downward trajectory in yields (resulting in higher bond prices)”.
The government has so far borrowed P12.3 billion from the domestic market in the first 3 months of its financial year. The annual borrowing programme (ABP) published in April 2024 already projected a huge increase in net domestic borrowing to P13 billion in 2024/25, but that was based on a projected deficit of P8.7 billion, Jefferis said adding that “the expanded deficit would require a further increase in net domestic borrowing to perhaps P19 billion. He said this is far beyond the appetite of domestic financial institutions, even with the increased domestic investment requirements for pension funds.
Vunani said it continues to favour bonds from an allocation perspective, as it believes this asset class is primed to outperform. “The inflation trajectory remains favourable, with benign inflationary pressures, resulting in moderate inflation, which has resulted in positive real returns.”
Generally, longer-term interest rates have been rising, given increased government borrowing, and hence the yield curve steepening. At the June auction, the 16-year bond rose by 24 basis points, according to Kgori Capital analysis, which shows that it rose from 8.030% to 8.265%, as the government piles up debt. Investors participate in the bond market based on the inherent risk of the issuer, who in this case is the government.
Even as Botswana faces fiscal challenges, it remains one of the least indebted countries in Sub-Saharan Africa. Its debt-to-GDP ratio remains significantly below the imposed target of 40% of GDP. Additionally, the country continues to maintain an investment grade rating according to major rating agencies.
Vunani believes the government will continue to fulfill its repayment obligations. “Considering the slowdown in the diamond market, fiscal prudence is required, which might have to entail reduction in spending from the initially projected stimulus budget.”
P17bn projected deficit
Econsult, an economic think tank said its estimate of the projected deficit for Botswana's 2024/25 budget has doubled to a “very worrying P17 billion or 6% of GDP”. In its Q2 2024 report, Economist Dr. Keith Jefferis explained that the decline in diamond exports has had a serious impact on government finances, given that income from mineral taxes, royalties and dividends is usually the largest single source of government revenues.
“Lower mineral revenues, combined with highly expansionary budgets in 2023/24 and the current 2024/25 financial year (FY), have had a huge negative impact on the budget,” Jefferis said. “The preliminary budget deficit for the recently completed 2023-24 FY, was double what was projected a few months back in the 2024 budget.”
As at June 2024, actual total revenue and grants was P18.2 billion against the expected collection of P23.4 billion, according to Finance Minister Peggy Serame. She revealed before parliament that in the first half of 2024, diamond sales were US$1, 949 million, when compared to US$2, 428 million in 2023, representing a decline by 46.1 percent.”
Government spending increases
Meanwhile, government spending has substantially increased. Serame explained that this is due to among others, payment of personal emoluments of P5.75 billion, expenditure on Botswana Public Officers Pension Fund (BPOPF) of P1.5 billion for pension augmentation, tariff subsidy to Botswana Power Corporation of P1.5 billion and payment for the acquisition of land from Tati Limited Company of P939.3 million (which was a final instalment). There was also P623.1 million allocated towards water projects, P200 million towards Chema Chema Funds, P123.5 million for the purchase of additional fleet for Air Botswana, Subvention to State-Owned Entities (SOEs) and Revenue Support Grant (RSG) to Local Authorities, amongst others.
GIA balance declines
The drop in revenues and increased spending have led to a rapid depletion of government balances held at the Bank of Botswana (BoB). The government tapped into the Government Investment Account (GIA) which fell to P5.1 billion in April 2024 from P18.5 billion in April 2023, figures shared by Serame showed. As at the end of May 2024, the GIA was at P4.1 billion, compared to P19.1 billion in May 2023.
Funding challenges
The government finances the deficit through a combination of accumulated cash balances and borrowing. According to Jefferis, during 2023/24, both sources were used, with a P8.6 billion increase in borrowing (P2.8 billion domestic and P5.8 billion external) and a P5.2 billion drawdown in cash balances in the GIA. He warned that in the coming year, this will not be feasible given that cash balances are depleted while “it is extremely unlikely that a deficit of P17 billion in 2024/25 can be financed by borrowing”.
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