The higher bill, insiders say, is due both to government’s deepening credit appetite since COVID-19 arrived and upset the budget, as well as rising interest costs incurred when the local market prices in higher inflation and a sovereign credit downgrade.
After the pandemic hit in March 2020, government largely funded the budget gap through drawdowns from its reserves, leaving them at an all-time low of about P3.4 billion in December 2020. From September of that year Parliament authorised the doubling of the domestic debt ceiling to P30 billion, while government’s agent in the capital market, the Bank of Botswana (BoB), introduced monthly bids for debt, in order to cover the widening budget deficits.
A finance ministry note seen by BusinessWeek indicates that while a total of P7.8 billion was paid out as public debt in the financial year to March 2021, an amount of P10.4 billion has been allocated for the year to March 2023. The total paid out for the 2021 fiscal year includes P2.2 billion as settlement of a bond which matured in September of that year.
Actual public debt costs for the 2021–2023 financial year were not made available to Mmegi, although forecasts in the notes range from an approved budget of P6 billion to P12.6 billion.
The finance ministry documents indicate that the majority of costs in the public debt programme this year will come from the settlement of Treasury Bills, the shorter-term notes which have proved more popular with the capital market since the monthly auctions of government securities were introduced two years ago.
The BoB, as government’s banker, conducts monthly auctions of treasury bills and long term government 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 level of interest it is willing to pay the dealers on particular securities on offer.
The P30 billion programme has generally underperformed with nearly all of the auctions since September 2020 delivering less than what government was seeking. Most of the funding has come from the shorter-term treasury bills, whose maturities range from three, six, and 12 months as opposed to bonds where maturities range from three to 21 years.
The finance ministry expects to pay out P7 billion this fiscal year on the settlement of the treasury bills alone, compared to P2.9 billion in the year to March 2021. The BoB’s indicative debt schedule shows that treasury bills will be offered at all the remaining auctions this fiscal year, except at the last auction in March 2023.
Analysts have said shorter-term securities are preferred as they have lower risks than the long term notes and while investors such as pension funds prefer the longer-maturing paper, the yields they have been demanding to cover the risks have largely been rejected by the central bank.
Government also expects to pay about P1.3 billion in interest payments on the various bonds it offers to the capital market this year, compared to P910.4 million in the year ended March 2021.
The central bank has said it is keeping an eagle eye on government’s debt burden and while the various amounts owed are still below the 40% of Gross Domestic Product limit, the capital market’s demands for higher yields is concerning.
“I consider it unfortunate that in the recent past we have seen bid yields for medium to long-term government bonds that are exceptionally high and clearly out of line with the monetary policy posture and medium-term inflation prospects and also not reflecting the sovereign credit rating for Botswana,” BoB deputy governor, Kealeboga Masalila said previously. “Therefore, the market (is) failing to provide cost-effective funding of government.” "Let us reflect on this as market participants and work together to address any challenges or frictions that drive such behaviour."
BoB governor, Moses Pelaelo previously told BusinessWeek that investors, who include pension funds, were possibly more interested in the South African market which is highly liquid and features a strong presence of international investors.
“When people look at the yields here and those from others, they may have that view, but they forget the risk-adjusted returns between the two markets,” he said. “Some of the reasons we are getting, we don’t understand and we have to find a reason why this is the case.”
Finance Minister Peggy Serame previously told BusinessWeek that government was considering introducing inflation-linked bonds to attract investors interested in matching assets and liabilities.
Meanwhile, government expects to also pay P1.5 billion as the principal for various other loans, an amount that includes just over P1 billion for the budget loan sourced from the African Development Bank in 2009. Payments of interest on external borrowings are forecast at P517.6 million for 2022–2023, compared to P262 million for the year ended March 2021.
