While Botswana has historically had a bank-denominated financial system, the last decade has witnessed a surge in development of the bond market that must now respond to challenges of fiscal deficits and realign with the government’s transformation agenda. Experts discussed these issues in a webinar this week. Staff Writer KITSO DICKSON reports.
While the government bond market has grown amid financial deficit challenges, Lorato Morule, the Chairman of the Botswana Bond Market Association (BBMA), has observed that the government curve continues to trend even higher amid acute funding pressures and limited absorptive capacity within the market.
Making opening remarks to a webinar discussing “Deepening the Bond Market to Support Economic Recovery and Transformation,” Morule said this in turn has raised key questions regarding the requirements and composition of local bond investors and bottlenecks in the uptake of sustained government issuance, as well as the participation of foreign bond investors in the market.
Historically, Botswana has had a bank-denominated financial system. This meant dependence on bank loans for financing was instrumental to the success of local business. By contrast, the corporate bond market was considered to be small, marginal and heterogeneous.
But things have changed dramatically over the past decade. Beginning with parastatals, then blue chip corporates and more recently small and medium-sized enterprises, there is a surge in the development of this market segment.
Morule said corporate debt issuance continues to grow rapidly and is poised to expand even further as companies open up their capital structures and become more comfortable with different capital raising channels. “Returns in the credit space have been steady and inflation beating, which is set to continue and bodes well for the longer-term performance of this asset class,” Morule said.
The Deputy Governor of the Bank of Botswana (BoB), Dr Kealeboga Masalila, called for enhanced marketing and visibility of the domestic bond market to improve participation, including by foreign investors and the retail sector, hence better price discovery and secondary market trading. He disclosed that BoB is also evaluating other initiatives that could promote market liquidity and settlement of securities, such as bond buybacks and switches, as well as securities lending. “Needless to say, these would require the appropriate infrastructure and systems to be in place,” he said.
Another initiative is to address investors’ concern about inflation by introducing inflation-linked bonds which can be “very attractive” to annuity issuers. “There is also scope to onboard government bonds on international settlement systems like Clear Stream and Euroclear for ease of access to international investors,” Masalila said.
Morule noted that the government is running significant budget deficits which are likely to persist certainly over the medium term while the private sector is experiencing unprecedented performance headwinds with earnings and revenues under significant strain amid containment measures related to arresting the spread of the pandemic. “Over the longer-term, it is clear that the public and private sectors have to reform and innovate in order to meet their respective aspirations,” she said.
The IMF is forecasting that Botswana’s trend growth will average just shy of 4 percent from next year, which compares poorly with historic performance. This in turn could mean that the era of fiscal and current account surpluses in the public sector and the business environment may be over, at least for the near-term. “Since capital is the ‘grease’ that sustains business and economic life, it is important to have a strong awareness of the local capital market and the role that it can play to help reinvigorate growth,” Morule said. “The remit of the Botswana Bond Market Association is evidently focused on debt capital markets and the role they can play in allocating funding to both government and business.”
During the last five years, private placement growth has been exponential because of issuance, cost efficiency and primarily institutional demand. Morule sees this trend accelerating going forward amid greater issuer and investor interest.
The primary market for corporate debt securities can exhibit certain features that limit their secondary market liquidity. These limiting features include buy-and-hold strategies legitimately followed by most institutional investors in corporate debt securities and small issue sizes that fulfil the specific needs of the issuer or investor.
Since domestic institutional investors often pursue a buy-and-hold strategy, which contributes less to improving liquidity, Morule said measures to promote liquidity also need to be geared towards attracting foreign investors. “They tend to restructure their portfolios more frequently,” she noted, adding that reform measures should be geared at strengthening market forces. “Market intervention should occur only where markets are unable to develop spontaneously owing, for example, to insufficient critical mass or institutional deficits,” she said.
She pointed out that there are three types of investors: first, banks and financial institutions; second, insurance companies and pension funds; and third, retail investors. From the point of view of prudence, Morule said investment guidelines for institutional investors make a number of stipulations regarding permitted holdings by means of class of paper and rating of the debt securities, among others.
Since institutions are the principal market players, their participation has a significant bearing on the development of the primary market and activity in the secondary aspects. In short, by understanding the market structure, regulatory space and issuance criteria, investors are well-equipped to make informed decisions. In this context, Morule said it is useful for potential issuers to access the abundance of publicly available information to understand the requirements, considerations for raising capital in the Botswana bond market.