Bidders squeeze BoB in P55bn debt programme

Mbongeni Mguni | Wednesday November 20, 2024 11:54

Since July, the central bank, acting as the government’s agent, has floated treasury bills and bonds seeking a total of P13.1 billion, but has only raised P9.4 billion or about 72%.

Before July, the BoB was meeting its debt targets, with oversubscription of the treasury bills and bonds on offer at the monthly auctions.

The BoB conducts monthly auctions of short-term treasury bills as well as longer-term bonds to primary dealers who are exclusively banks. At the auctions, the dealers compete to lend to the government by offering the yields they are seeking, with the BoB deciding the 'stop-out' yield or the maximum level of interest it is willing to pay the dealers on the particular securities on offer.

The monthly auctions are part of the P55 billion domestic note programme under which government – the country’s best debtor – borrows from the local capital market. This year, the government doubled the BoB’s borrowing targets to P15.25 billion, in order to plug the forecast P8.7 billion budget deficit projected as part of the record P102 billion 2024–2025 budget.

Both the inability to raise the full debt targets, as well as higher borrowing costs, will impact government badly, especially at a time when revenues are precarious due to the prolonged diamond downturn.

Bank of Botswana acting Financial Markets director, Nenguba Chakalisa, told BusinessWeek that the recent trend in under-allotments of government securities was due to demands for higher yields (returns) from the bidders at the auctions.

“It’s government’s call to say what price it’s willing to borrow from the market,” he said during a media briefing after the recent Monetary Policy Committee meeting held in Francistown.

The central bank had expected bond yields to generally decline this year as more capital flows into the local market due to the stepping up of the pension fund repatriation exercise.

Under changes to the Retirement Funds Act, local pension funds have until December 2027 to invest a minimum of 50% of their assets domestically, from the current threshold of 30%.

While yields were initially stable this year, with full allotments at the auctions, dealers began pushing upward in their bids from July, forcing the central bank to reject bids and thus remit below-target amounts to government.

Researchers at Kgori Capital noted that stop-out yields across the treasury bills and bonds at the last auction, held on October 25, rose by as much as 87 basis points, pointing to higher interest costs for government.

BoB data, meanwhile, shows that the highest bid rates received for the bonds at the October 25 auction were as much as 18%, compared to a peak of 12.5% at the October 2023 auction where the same bonds were offered and fully allotted.

“Treasury bills have been doing well because they are short-term instruments and they are liquid, with banks buying them for prudential requirements. “But bonds, which are long-term and not liquid, these have not been doing well,” said Chakalisa.

Analysts say demands for higher yields are usually linked to higher inflation or inflation expectations, sovereign credit downgrades and the availability of higher returns in neighbouring markets, particularly South Africa.

While the central bank did not provide reasons for the upward movement in yields, analysts believe that the fact that the pressure is highest in the longer-maturing bonds indicates the market holds deteriorating perceptions of the government’s long-term financial stability.