The P13bn retirement gamble

Retirement Bill to inject P13bn into the economy Fears over impact on bonds It might cause certain bubbles There is adequate liquidity in Botswana BPOPF says this may not be as disruptive as many have think A panel discussion at a recent breakfast seminar hosted by Botswana Insurance Fund Management (Bifm) in Gaborone directed attention to the Retirement Fund (Amendment) Bill, notably a clause that seeks to increase the limit of funds that can be invested locally by pension funds from the current minimum of 30 percent to a minimum of 50 percent. According to the Minister of Finance and Economic Development, Peggy Serame, this is a pivot that seeks to make more capital available for development purposes in Botswana and thus help boost the country’s economy and create much-needed sustainable jobs. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ] But a key theme generated during the Bifm seminar was that a lot of money is in the country but it has not been able to create jobs perhaps because of poor idea generation, poor project implementation, poor creation of value, low productivity and corruption. Pension funds sitting on P10bn in cash The Chief Operations Officer at Alexandre Forbes, Ati Mannathoko, drew attention to a Bank of Botswana report that he said showed that pension funds were currently sitting with about P10 billion in cash, arguing that cash is clearly not the issue because “we have the money here”. Locally, the average holding for asset managers has been 35-40 percent onshore over the past decade. On average, Botswana’s largest pension fund, BPOPF, has kept exposure of about 60 percent offshore, according to the fund’s CEO, Moemedi Malindah. Effectively, this will mean repatriation of an additional 10 percent to be compliant, he told The Business Weekly & Review in an interview. For the financial year 2021/2022, BPOPF held P90.10 billion worth of Assets Under Management (AUM) while Debswana Pension Fund (DPF) currently holds P9.79 billion in AUM. DPF is currently invested 54 percent offshore and 46 percent domestic, its Investment Manager, Thato Norman, told this publication in an interview. This lends weight to an observation by Salma Baduel, Absa Bank’s Country Treasurer, that asset managers have already been trending above the minimum requirement and that therefore compliance to the new 50 percent onshore allocation will not be the full 20 percent. Because pension funds have historically kept average exposures of above 40 percent – and this will now increase by just 10 and 4 percentage points for BPOPF and DFP respectively - Malindah argued that this might not “be as disruptive as many have thought it would be”. For BPOPF, as like other pension funds, Malindah said the changes will most likely trigger a need to review its investment strategy (Investment Policy Statement). Norman added: “The increased statutory allocation to local assets will compel asset owners and asset managers to seek suitable investment opportunities within the country. This will further enhance efforts to consider a greater investment in local listed equities, domestic bond markets in addition to alternative assets in the unlisted sector, some of which include infrastructure, property and private equity.” P13bn to be injected into the economy However, Mannathoko argued that this essentially means that Botswana will get to repatriate about P13 billion. While Malindah argued that this may not be disruptive, the fear in certain quarters is that this is a significant amount of money to inject into the economy if there are no immediate assets to invest in. The Chief Investment Officer at Bifm, Khalil Modariss, seemed to agree. “Ever since I came to Botswana, I have known that there was too much cash chasing too few assets,” he said in the panel discussion. Malindah’s perspective regarding limited investible assets, however, is that “if we look at the universe of ready-to-invest deals, one can conclude that we have a limited universe”. “Sometimes we use the number of counters on the stock exchange as a proxy of the depth of a market, but that is not a true proxy,” he argued. The Botswana Stock Exchange (BSE) has experienced de-listings over the past years, leaving pension funds sitting at a 10-year high in terms of the cash. The CEO of the BSE, Thapelo Tsheole, recently expounded on how the bourse is reaching out to the international market to lure listings because the conditions are right, the BSE having come into its own. Norman banks on additional listings and increased trading opportunities to assist DPF in deploying its assets. “The increased issuance of government bonds and private sector bonds could also provide additional opportunities, which could offset liquidity challenges,” he said. “Opportunities for issuers within the local market remain vast with inflation-linked bonds another consideration for domestic issuers.” Liquidity expected to improve The government has previously indicated its preference for raising debt locally. To that end, in November 2020, Parliament approved a government request to double its domestic borrowing programme to P30 billion ($2.6 billion) to fund its budget deficit and stimulate the economy. According to Absa’s Baduel, the government has since been able to raise over P9 billion on the debt market. But she observed the momentum has dwindled following decreased surplus liquidity in the market. She therefore anticipates that the P13 billion coming to the local market will improve the reduced liquidity conditions and help the government in addressing its budget deficit and rescue some of suspended infrastructural development projects through the developmental budget. Baduel’s expertise is in Treasury Risk Management Liquidity, Capital and Interest Rate Risk Management. She believes that with more liquidity in the market, other opportunities emerge to help foster development of the local debt capital market that has been on the agenda of the Bank of Botswana and the Botswana Stock Exchange. “Therefore, there is an opportunity for product innovation and developing a more active bond market,” she said. Bonds, equities may be impacted But Mannathoko argued during the panel discussion that P13 billion being injected into the economy may be negative for bonds and bond yields. “The purpose of someone issuing a bond is to pay the least amount for borrowing that cash,” he said, adding that if there is an influx of cash that is into the economy, “what will happen is that we will negotiate down that pricing”. But there were a few desirables that he cherry-picked, among them more liquidity for property that he said “should be positive”. He expects better “allocation to instruments that generate higher yields than what you will get on cash or on bonds”. Like BPOPF, DPF said it will review its strategy and undertake an Asset Liability Modelling Framework for an investment guideline on how the realignment process will be conducted. “The deployment of additional capital in Botswana could provide a much needed tailwind to domestic asset prices and domestic investments, including property, infrastructure and private investments,” Norman told The Business Weekly & Review . But Mannathoko fears that “it might cause certain bubbles in term of equities and the likes”. Pension funds’ assets are growing at a rapid pace Mannathoko is mindful that government needs to consider that the pension fund market is growing at a rapid pace as more and more individuals are being captured into its list. A Bank of Botswana report shows that assets of pension funds increased by 14.2 percent from P105.2 billion in December 2020 to P120.1 billion in December 2021, reflecting an increase in member contributions and fair value gains. For Mannathoko, this means there are more and more contributions going into the funds while the rate of development of “our market does not seem not be improving”. In other words, the crocodile’s jaws are widening a lot more as the pension fund base grows as people get employed or move from severances to pension funds. Risk from a human capital standpoint Mannathoko raised a key risk from a human capital standpoint. In his view, funds in Botswana need qualified and experienced people to manage them. He laid it out thus: The question then becomes, if we are having these opportunities, do we have the right skills sets, experience, and a proven track record to generate the outcomes we are looking for? If the answer is no, Mnannathoko worries that “we will have to import the skills and get foreigners to manage this”. Whereupon he raised a concern that foreigners may not have requite levels of commitment to Botswana. “If you are bringing in foreigners, are they really invested in your economy or they are looking to make money?” he queried rhetorically. BSE, BPOPF push for indigenous fund managers The BSE’s Tsheole recently revealed that the bourse was lobbying BPOPF to support and grow an indigenous set of fund managers to support indigenous ideas and companies through funding. “What we have argued to BPOPF is that we need to grow an indigenous set of fund managers,” Tsheole said. “We need to empower our own people to start our own indigenous fund managers who will look at things with a more indigenous eye.” Malindah told a press conference recently that the Fund plans is to add an incubation manager to the lineup. “Botswana has a deep skills base and we strongly believe home grown managers should dominate and grow outside the borders,” he said then. He still thinks the unlisted market is deep and the infrastructural gap of Botswana alone is massive, presenting opportunities for pensioners. Even so, he conceded that a lot of work is required to get those deals to the level that institutional investors can play, “but the market is deep”. Infrastructure opportunities Malindah said private markets have created opportunities recently. In his view, infrastructure investments remain an asset class of interest as it can absorb big tickets and have great impact.” Bifm’s Modariss classifies infrastructure as a long term asset that fits the needs of pension funds. “Realisation of those opportunities will take time,” he noted. The Chief Investment Officer Designate at Strategic Wealth, Lame Botshoma, chipped in: “We are yet to see instances where the PPP, for example, you go and refurbish the A1 Highway and put together a tollgate and benefit from those projects.” Asked whether Botswana has the right framework, Botshoma replied: “There are so many examples, especially in Europe and US, where we could borrow the template they have and see how we can make it work in our context.” He acknowledged that it might not be easy to work with the government but, he emphasised, under the right conditions, it is something that can work. But offshore is quite liquid than onshore But it was clear that, some panelists at the Bifm Breakfast Seminar were still firm in the view that offshore is quite a liquid asset class. From their perspective, it raises the question of what transferring funds back to Botswana would mean for liquidity? Mumba Musunga, the Portfolio Manager at African Life Financial Services in Zambia, cautioned that liquidity would be an issue of concern if pension funds were now locked in Botswana’s alternative assets for much longer. He advised fund managers to consider whether they would be able to easily liquidate positions if they are now in these alternatives. Giving the Zambian context over the last two years of COVID as an example, he noted: “We would liquidate an entire fund, and having offshore allows us to have a large amount paid out quicker. We normally tell our clients that it is good being offshore as opposed to certain assets in Zambia because of the liquidity that you can easily access when there are needs for pension payouts.” Noting parallels in the economies of Zambia and Botswana, Musunga argued that “where you can find that cash to place is always important”. Zambia, SA push for increased offshore cap Zambia is currently capped at 30 percent offshore. “We did try to petition for a much higher limit,” Musunga said. “We will keep fighting to see if it will be ever increased because we see the value of being offshore.” South Africa has increased its offshore allocation to 45 percent from 30 percent. While it brings the split closer to 50/50, Botswana is almost taking the opposite direction by reducing the ratio. South Africa is reportedly pushing to increase offshore allocation because of more value and more investable opportunities offshore than at home. Baduel argues that the allocation for the two countries are similar but the structural changes will be different. Modariss also highlighted this during the seminar. “Botswana and SA are different from the economy and market size perspective,” he said. Although Modariss welcomed the changes in Botswana, he urged regulatory parties to adopt a gradual introduction. “Maybe increase 5 percent every year to achieve the increase,” he said. “That would be a more prudent way of looking at it.” [/ihc-hide-content]

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