Behind the steep price Govt pays for being strapped

• The real return on bonds is negative – Kgori
• Investors require higher yields to earn a positive real return – Allan Gray
• BoB may have held information that did not necessarily reflect investors’ expectations -Bifm

At a recent economic forum organised by Absa Bank Botswana, the lender’s Country Treasurer, Salma Baduel, picked up the cue, quizzing a government advisor whether liquidity has been a blind spot to policymakers. Particularly, Baduel, who is a seasoned executive with 10 years of experience that spans the banking sector and a specialist in Treasury Risk Management (TRM), observed: “We come from surplus liquidity conditions.”

As “we go ahead”, she noticed that “we are seeing supply and demand factors actually growing, looking at forecast and what the economy needs”. Her specific question to senior government policy advisor Dr. Keith Jefferis was: “What will policymakers do to ensure we preserve liquidity in the market so that it doesn’t have unintended consequences?”

The central point of Baduel’s question, as Jefferis interpreted it, was around fears of the government squeezing out the private sector from the capital market. Ninety One, an asset management firm, recently called on the government to resist temptation to issue bonds, lest it crowds out other participants. In other words, money will flow to the government and this will be to the detriment of private players, given the levels of yields.

In response, Jefferis acknowledged: “It is something we are concerned about and it is a risk.” While there has been a switch to more domestic borrowing – which has long been sought after to make capital markets more effective – Jefferis made it clear that “we don’t want to squeeze everybody else out of the market”. Which is why, he said, “it has been somewhat limited”. What he said government would like to do is get foreign investors to buy Pula government bonds.

“There’s a bit of that. There is some interest but it has not been much. We do hope that some of the issuances will be taken up by foreign markets and not just domestic markets,” Jefferis said when answering Baduel’s question. Lamenting the subdued liquidity, he added: “We offer a pretty standard range of financing instruments to the market and maybe that needs more variety. There has been a lot of requests for inflation-linked bonds to tap into a pool of liquidity.”

When the government started ramping up borrowing, said Jefferis, they thought it was going to be easier than it turned out to be. “There has not been as much liquidity around,” he noted. The Economic Recovery and Transformation Plan (ERTP), which is an important initiative to support economic growth, was to be financed predominantly from the domestic market but the government struggled to raise funds due to under-allocated auctions. Phatsimo Ncube, Managing Director at Allan Gray, explained to this publication that “the demand for government bonds is primarily driven by pricing”.

“The Bank of Botswana (BoB), through Primary Dealers (PDs), may have held price/yield information that did not necessarily reflect investors’ expectations,” Bifm Chief Executive Officer (CEO) Neo Bogatsu also said a statement to this publication. “This gap, to some extent, was previously bridged through adequate engagements and forums between PDs and investors”. In 2021, Bogatsu observed that the change from quarterly to monthly government bond auctions did not afford for such engagements. “Hence, some investors may not have had the opportunity to partake meaningfully at the monthly government auctions.”  Tshegofatso Tlhong, Portfolio Manager at Kgori Capital, argues that government bond liquidity has also been strained due to the increase in the number of government bond auctions per annum, which has increased from 4 to 12.

Jefferis noted that yields on government bonds have had to go up to try to bring in money. As Bogatsu indicated, government bond yields subsequently rose in late 2021, leading to higher uptake in government bonds and a relatively balanced supply and demand dynamics. Ncube demonstrated that this was indicated by the 10-year bond (BW011) which saw an uptick in yield in 2021. “The recent auctions for government bonds have demonstrated that investors are bidding for higher yields than in the past few years when inflation was muted,” she said.

During the first quarter of this year, Kgori Capital showed that there were three government bond auctions held where P4.5 billion of bonds and T-Bills were offered. According to the firm’s quarterly report, demand was moderate with P5.9 billion of bids received. The auctions were under-allotted but the allotment ratio (actual allotment divided by securities on offer) increased to 70.6 percent from 57.4 percent in Q4 2021, said the report.

“The bulk of the allotment was at the short end of the curve where P2.3 billion (72.9 percent of total allotment) of T-Bills were issued,” Kgori Capital’s Kwabena Antwi wrote, adding that “bond yields appear to have stabilised but there is still more supply pressure expected as government plans to run a deficit budget for the 2023 financial year which is expected to be partly funded by local bond issuance”.

Given the current high levels of inflation in Botswana and the persistence of global inflation, Ncube said investors require higher yields to be offered by government in order to earn a positive real return from the assets. With inflation running at +9 percent, Tlhong illustrated that the real return (return adjusted for inflation) on bonds is currently negative.