Steps to develop local capital markets underway
Government is reviewing the Medium-Term Debt Management Strategy in order to remove limitations impeding the growth of local capital markets.
Speaking at the recent Bond Market Conference organised by the Botswana Bond Market Association (BBMA), Deputy Director – Financial Markets Department at Bank of Botswana (BoB), Moemedi Phetwe said the country’s main challenge is an inadequate supply of debt instruments from both government and non-government issuers.
“Institutional investors, because they are interested in their long term liabilities, they adopt the ‘buy and hold strategy’. This contributes to low liquidity, limited turnover and undeveloped market,” explained Phetwe.
“There is an ongoing review of the Medium-Term Debt Management Strategy in order to develop another strategy for the next three years. So, there is an opportunity to look at current caps or limits in terms of the domestic note issuing programme,” he continued.
According to Phetwe, there is also scope to introduce the bond buy-backs or switches as a liability management tool, which he noted could also help enhance liquidity bond trades and mitigate refinancing risks.
“This is equally important for the pension funds as they can be able to switch the shorter dated bonds for longer sated ones,” highlighted the central bank executive.
Phetwe further revealed BoB is looking to improve the country’s market infrastructure by establishing a single central securities depository, which they are currently working on with Botswana Stock Exchange Limited (BSEEL).
“This in recognition of the fact that such development should encourage market activity, reduce settlement risks and enhance market efficiency,” he explained, adding the local economy is well placed to develop its capital markets due to its encouraging credit ratings, as well as the seemingly stable political climate.
He believes other countries are unable to issue debt because of high inflation and unsustainable public debt.
“The main message is that, at this stage, issuance of government bonds would be more effective in addressing the liquidity problem and improving the function of the domestic bond market,” he concluded.