Transcript Steps To Be Taken To Activate African Government Bond Markets

Steps to Be Taken to Activate African
Government Bond Markets
Botswana’s Experience
September 11, 2005
The Purpose of Government Bond Issues
• Financing of borrowing needs
• Lowering of borrowing cost – at least long term
• Avoid inflationary government borrowing from the
Central Bank
• Develop domestic capital market
thereby creating a better financial environment for
sustained growth
• Attract foreign investors
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Preconditions to Develop Capital Markets
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Stability – politically and economically
Relatively low and stable inflation
Commitment from authorities (Government)
Commitment and follow up from market participants
Primary dealership agreements an advantage
Parallel development of market segments
Bond market – currency market
• Transparency and predictability
• Easy settlement and custodian facilities
• Aims to gradually build confidence in the market
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Policy Initiatives To Develop Government Bond Markets
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Increasing market depth and transparency
Establishing benchmark issues and yield curves
Improving market infrastructure
Developing a local investor base
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Policy Initiatives To Develop Government Bond Markets
Cont’d
• Establishing benchmark issues and yield curves:
Serves to establish benchmark for the pricing of
corporate bond issues
Improving market infrastructure
Improvement of trading clearing and settlement
systems
Establishment of a custodian system
Creation of a system of primary dealers an
advantage
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Policy Initiatives To Develop Government Bond Markets
Cont’d
• Increasing market depth and transparency:
Pre-announced and regular issuance programmes
by the Ministry of Finance
Strong Institutional development
Inflation linked (IL)bonds for countries with history
of high inflation
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Policy Initiatives To Develop Government Bond Markets
Cont’d
• Developing a local investor base:
Development of a local institutional investor base
such as insurance and pension funds
Pension system and capital market reforms
contributes to enhancing depth and stability of the
local market
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Botswana Situation Positive Factors
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Limited need for funding – good credit rating
Stable political and financial environment
Strong commitment from government
Significant demand from newly funded public officers
pension fund
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Botswana Situation Negative Factors
• Limited tradition for inter-bank Fx trading
Seemingly lack of interest in market
Restricted banks – despite free capital markets
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Table 1: Low Level of Debt and Good Credit Rating
Public Debt to GDP ratio - Botswana
Year
Total Debt
(Pula Million)
GDP
(Pula Million)
Total Debt in % of
GDP
1998/99
2,423
21,524
11.3
1999/00
2,425
24,943
9.7
2000/01
2,426
28,637
8.5
2001/02
2,917
31,922
9.1
2002/03
4,695
36,715
12.8
2003/04
4,489
39,881
11.3
• Credit rating A1 (Moody’s) A+ (Standard & Poor’s)
USD/PULA: 0.1872
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Strong Commitment From Authorities
• Government issuance of 2, 5 and 12 year bonds in
the course of 2003
• Reopening of 5 and 12 year bonds, due to high
demand
• Government added in 2004 a range of maturities in
parastatal backed, and government guaranteed
bonds
• But overall issuance was limited to 3,5 billion BWP
(USD 650 million)
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Limited Tradition for Inter-bank Market Trading
• Currency trading traditionally between Bank of
Botswana and the banks – little inter-bank trading
• No capital restrictions – But banks are running very
small positions
Local banks have tight restrictions on positions
International banks represented also limit their
positions
Capital control restrictions in S.A. might reduce
investment capital flows
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Political and Financial Stability
• No conflicts and stable political environment since
independence in 1966
• Generally surplus on current account and a
significant build up of foreign reserves
• Generally budget surpluses
• Macroeconomic stability
Central Bank with instrument independence
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Table 2: Investor Composition of Government Bonds
Investor group
Primary
counterparts
End of
2003
Percentage of outstanding amount by Duration
2-Year
5-Year
12-Year
21.7
22.2
12.6
14.6
1.5
56.5
83.0
75.2
98.5
11.1
4.3
0.0
0.0
10.1
0.0
10.2
0.0
100
100
July 2005
Domestic investors 2003
56.1
July 2005
Foreign investors
2003
19.5
July 2005
Bank of Botswana
2003
2.6
July 2005
Total
100
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Has the Government Bond Issuance Achieved its
Goals?
• YES
Relatively risk-free assets have been added to the
market
Long-term investors needs were met – at least
partly
The market has developed to a certain extent, but
probably less than hoped
Points on the yield curve have been established –
though at wide bid/offer spreads
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Has the Government Bond Issuance Achieved its
Goals?
• NO
Yield points are too few and too vague to establish
a yield curve
Beside the Parastatal backed issuance, only 2
issues have been made with reference to the
government bonds
Foreign investors are not represented after the
shortest bond matured
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What Now?
• Government did not replace the shortest bond when
it matured in 2005
• Most bonds are locked up with domestic investors
• Turnover is low and bid/offer spreads are wide.
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On the Positive Side
• All market participants have gained experience
• Reference points are still there to be used
• Some international investors now know Botswana
better
• Inter-bank market is gradually developing
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What might possibly have facilitated a faster
development?
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Larger issuance – but inappropriate if at too high cost
Tap issuance of bonds over a longer period
Market maker agreement with banks
Concentrate issuance in the shorter segment, up to
e.g. 5 years
• More developed FX market
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