Shift in Govt’s Debt Portfolio

The gradual shift in the composition of the government debt portfolio has - for the first time - seen the share of domestic debt as a proportion of total debt outstanding surpassing external debt, the Minister of Finance, Peggy Serame, revealed this week. Launching the 2023/24 Government Borrowing Strategy and Auction Calendar, Minister Serame told bond market participants that the reduction in the external debt composition, which began in 2020, has significantly limited exchange rate risk exposure. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="2,1,3,4" ihc_mb_template="3" ] The Pula has been depreciating versus the USD, from about P4 in 2013 (5.6 percent Compounded Annual Growth Rate, CAGR) and about P8 in 2013 (5 percent CAGR) to about P13 currently. This has meant that there are implications for government on adding USD-denominated debt as the long-term trend suggests that repayment will be expensive for future generations. Consistent with government’s Debt Management Strategy, private bilateral foreign-denominated debt is generally being minimised with preference for borrowing from the multilateral international organisations and governments at concessional and lower interest rates. Government acknowledges that there continues to be a need to access foreign currencies import intensity of the Botswana economy. Available statistics show that total external debt in 2019 amounted to P20.6 billion or 10 percent of GDP, while domestic debt (P15.6 billion), accounts for 7.6 percent of GDP. By 2020, total external debt was still pegged at P20.6 billion or 11.4 percent of GDP while domestic debt increased to P26.1 billion, accounting for 14.4 percent of GDP. In 2021, total external debt amounted to P22.6 billion or 11.3 percent of GDP, while domestic debt stood at P27.2 billion or 13.6 percent of GDP. Since the P30 billion bond programme was approved, the government has so far raised more than P10 billion in the debt market. “This assisted with interventions by government to address the economic and financial disruption brought on by the COVID-19 pandemic, as the proceeds from borrowing were used to finance the budget,” Serame said. “Over the medium-term, external as well as domestic debt financing instruments will be a prominent feature of the fiscal budget as government continues to roll out the post-pandemic Economic Recovery Plan as well as the Transitional National Development Plan.” The Ministry of Finance’s (MoF) financing requirement for FY2023/24 has been published to accompany the regular 2023 Budget Speech, which shows that government’s aim is to keep domestic debt exceeding external debt until 2025/26. Government’s borrowing strategy shows that the Domestic Gross Financing Requirement for FY2023/24 is forecast to be P7.59 billion. This, together with the maturity of BOTSGB0623 in June 2023, will be financed by bond sales of P5 billion and a net Treasury Bill issuance of some P879 million, as well as through competitively priced foreign borrowings. According to the strategy paper, the planned gross bond sales will be met through a combination of issuance of short-dated conventional bonds, and longer-dated conventional bonds with a planned split: Short-dated P2 billion in eight auctions and Longer-dated and Index Linked P3 billion in 10 auctions. Accordingly, the net Treasury Bill issuance implies a stock of Treasury Bills at end FY2023/24 of P6 billion. “Let me hasten to assure you that through the course of all this, domestic market development will remain a priority for government,” the finance minister said. The Bond Issuance Note Programme was formalised in 2004, enabling the issuance of both Government bonds and Treasury Bills up to a limit of P5 billion. The objective of this programme was primarily to support the development of the domestic capital market, given that Serame says government was generally running budget surpluses and did not need to borrow to finance its spending. Issuance under the programme reached the limit in September 2010, after which Parliament approved the raising of the limit from P5 billion to P15 billion in February 2011. The upper limit on the P15 billion Bond Issuance Programme was doubled to P30 billion following Parliamentary approval in September 2020 when the domestic debt outstanding had reached the upper limit of P15 billion. But despite the impressive achievements of the domestic bond market, Serame said the domestic capital market is still facing challenges that “we collectively have to surmount”. She pointed out that the secondary market for Government securities is still characterised by lack of liquidity stemming from a high degree of instrument fragmentation as well as a relatively narrow investor base. The results of this structural feature, she added, is the payment of a premium by the issuer (and ultimately the taxpayer) to investors to compensate them for the risk of holding relatively illiquid securities. When the government started ramping up borrowing during COVID-19, it thought it was going to be easier than it turned out to be because there was not as much liquidity around. While 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, the government struggled to raise funds due to under-allocated auctions. Market participants explained that the demand for government bonds was primarily driven by pricing. Economists then observed that yields on government bonds have had to go up to try to bring in money. Fund managers indicated that government bond yields subsequently rose in late 2021, leading to higher uptake in government bonds and relatively balanced supply and demand dynamics. This was indicated by the 10-year bond (BW011) that saw an uptick in yield in 2021, which demonstrated that investors were bidding for higher yields than in the past few years when inflation was muted. Given the high levels of inflation and the persistence of global inflation, experts noted that investors required higher yields to be offered by the government in order to earn a positive real return from the assets. With inflation running high, the real return (return adjusted for inflation) on bonds becomes negative. Against this background, the yield curve of government bonds shifted upwards dramatically over the past 5 years. For instance, the 2013 bond was 5 percent in 2019 but is currently at 8.55 percent. Dr. Seamogano Mosanako, Head of Communications and Information Services at the Bank of Botswana, previously told this publication that the impact of the increase in bond yields on the public fiscus will be inevitably elevated cost. “However, this reflects the overall market cost of funds and should be compared to alternatives such as the cost of direct foreign borrowing and the opportunity cost of withdrawal of savings to fund the government operations,” she said. Meanwhile, Minister Serame says with the invaluable assistance from “our multilateral development partners such as the International Monetary Fund (IMF)”, the government is actively engaged in identifying deficiencies and implementing reforms in the various sub-sectors of the domestic bond market. She says a Local Currency Bond Market Technical Mission was conducted by the IMF back in August 2022. According to the finance minister, the mission identified several potential areas for reform across all the building blocks of the domestic bond market, including money market transparency, legal framework for repo transactions, primary market pricing and predictability of issuance, secondary market liquidity and depth, investor relations management, as well as clearing and settlement risks associated with financial market infrastructure. Examples of the potentially impactful initiatives to improve the market include introduction of bond buybacks and switches, prospective introduction of inflation linked bonds, listing of bonds on the Botswana Stock Exchange and potential improvements in custodial and settlement arrangements afforded by the Single Central Securities Depository. [/ihc-hide-content]

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Shift in Govt’s Debt Portfolio

In accordance with a deliberate policy shift, the share of Botswana’s domestic debt has surpassed its external debt and can only grow further in tandem with increasing emphasis on domestic borrowing and issuance of government bonds

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Shift in Govt’s Debt Portfolio

In accordance with a deliberate policy shift, the share of Botswana’s domestic debt has surpassed its external debt and can only grow further in tandem with increasing emphasis on domestic borrowing and issuance of government bonds

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