The October 25 auction is the fourth monthly auction in a row at which the Bank of Botswana, as government’s banker, has missed the debt targets it sought to raise from the capital market.
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.
Figures from the BoB’s recent auction show that, as with the three prior auctions, the under-allotment of notes on offer was highest in the longer maturing bonds. The shorter-term treasury bills, with maturities ranging from three to 12 months, enjoyed strong interest from the market, with the six-month bill receiving bids valued at P1.3 billion for the P700 million on offer.
The bonds underperformed, with the BoB raising P40 million from the P350 million on offer under the bond maturing in 2027, while the 2035 and 2043 bonds raised a collective P518 million against the P1.15 billion on offer.
Researchers at Kgori Capital noted that stop-out yields across the treasury bills and bonds had risen by as much as 87 basis points at the auction, pointing to higher interest costs for government.
BoB data, meanwhile, shows that the highest bid rates received for the bonds at the recent 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.
In a recent third-quarter market update, leading economic advisory, Econsult, noted the recent challenges in bond sales.
“Bond sales are becoming more challenging, with shortfalls in the amounts raised (relative to the bonds on offer) at the last three auctions, and a necessity to pay higher interest rates. “The planned launch of inflation-linked bonds in the coming months could help to ease financing pressures, given unmet demand from pension funds for this instrument,” the firm stated.
Econsult noted that the underlying challenge was an unsustainable fiscal position that has been worsened by the drop in mineral revenues.
“(This) has to be addressed head-on through a reduction in spending, in order to avoid the rapid accumulation of public debt with the risks of an eventual debt crisis,” the firm said.
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%.
