Botswana’s foreign reserves have been declining since 2015, both in absolute terms and months of import cover, making the need to diversify the economy, find other avenues to generate foreign exchange and reduce the country’s import bill critical.
The Director, Financial Markets Department at the Bank of Botswana (BoB), Caster Moseki, laid this reality bare for journalists at a press briefing in Gaborone on Wednesday this week where he underscored the importance of the government finding other sources of financing its budget to relieve the pressure on the forex reserves. The reserves stood at P54.5 billion in December 2022, a figure considered “very low” by historical standards. “That is where the domestic capital market becomes very important,” Moseki said.
He pointed out that the government bond market experienced one of its biggest declines on record on the back of stubbornly high inflation in 2022 and a wave of central bank interest rate increases to reign inflation in. “This drove government bonds yield to their highest levels in more than 10 years,” he said. “If you have a government bond that has a coupon of 5 percent, and then interest rates rise to 10 percent, you don’t want to own that bond.”
Therefore, he said, the bond will decline in value as investors seek new bonds that are paying the current high interest rate levels. Moseki emphasised that 2022 was not just the worst year on record for global bonds but was three times worse than the last worst year.
Shift in economic data
“In the US, for example, the previous worst year was 1803 when US bond markets lost 19 percent,” he stated. “Last year, the US long bonds lost 39.2 percent.” That notwithstanding, he noted, there has been some turnaround in bond markets in 2023 due to a shift in economic data and inflation expectations.
He revealed that in the UK, there has already been an inflow of US$2.3 billion into fixed-income markets, US$996 million of it coming in June alone. “High yields are very attractive and there is the opportunity for a turnaround in bond markets,” he said. Moseki warned that the performance of the bonds market therefore will largely be dependent on the trajectory of economic growth and mostly the ability of central banks to control inflation and anchor inflation expectations at lower levels.
“Economic recovery and monetary policy normalisation could be rocky with a lot of volatility,” he warned. “Inflation is still high in many countries and central banks are still hiking interest rates.” Global equities were not spared the rod either, losing – as they did – as much as 12 percent or US$6 trillion in 2022. “But we have seen a significant rally in equities, particularly in the US,” Moseki said.
What is needed, he emphasised, is economic and export diversification to boost export earnings or to reduce the import bill. In addition, priority be more impactful economic activities. “We need to be prudent in our external borrowing to relieve pressure on foreign exchange reserves,” he said. He welcomed the government’s continued commitment to development of capital markets as demonstrated by launching the Borrowing Strategy and the Auction Calendar for 2023/2024 fiscal year.
“This we consider to be very important in terms of reaching out to the investor community and also for the government to be very transparent in its borrowing strategy,” he said adding that this should allow investors to plan their portfolios accordingly.
Bond switches were also introduced in May this year for the government to manage the redemptions and so investors do not to have to wait for government bonds to mature to allow them to transition the money into an already existing bond. Moseki said BoB is currently working on inflation-linked bonds to increase products in the bond market and to help annuity providers to manage their portfolio profiles.
This forms part of developing a liquid domestic bond market which also involves a Securities Lending Facility, which Moseki said will help increase liquidity in the bond market where primary dealers can sell bonds that they do not want to have. “That will help in the development of the secondary market,” he noted.
Moseki said a well-developed domestic bond market will also help attract foreign investors. “We are planning on going on a roadshow with the Ministry of Finance to increase the visibility of the bond programme,” he disclosed. “As I have said, a well-developed government bond market provides a benchmark for domestic corporate issuers and parastatals.” He emphasised that the bond market will aid deployment of the planned repatriation of pension funds.