Steps to Be Taken to Activate African Government Bond Markets

1. Steps to Be Taken to Activate African Government Bond Markets Botswana’s Experience September 11, 2005

2. 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

3. Preconditions to Develop Capital Markets • 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

4. Policy Initiatives To Develop Government Bond Markets • Increasing market depth and transparency • Establishing benchmark issues and yield curves • Improving market infrastructure • Developing a local investor base

5. Policy Initiatives To Develop Government Bond MarketsCont’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

6. Policy Initiatives To Develop Government Bond MarketsCont’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

7. Policy Initiatives To Develop Government Bond MarketsCont’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

8. Botswana Situation Positive Factors • 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

9. Botswana Situation Negative Factors • Limited tradition for inter-bank Fx trading • Seemingly lack of interest in market • Restricted banks – despite free capital markets

10. Table 1: Low Level of Debt and Good Credit Rating • Credit rating A1 (Moody’s) A+ (Standard & Poor’s) USD/PULA: 0.1872

11. 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)

12. 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

13. 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

14. Table 2: Investor Composition of Government Bonds

15. 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

16. 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

17. 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.

18. 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

19. What might possibly have facilitated a faster development? • 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