‘Investors with limited options’

SHARE   |   Monday, 10 October 2016   |   By Kabelo Adamson
‘Investors with limited options’

The Botswana Public Officers Pension Fund (BPOPF) CEO, Boitumelo Molefe, says there is challenge of limited fixed income instruments to invest in by institutional investors in Botswana. Molefe was speaking on Thursday during the Bond Market Conference held under the theme, ‘The Bond Market: A Pillar of the Economy’ which was organised by Botswana Stock Exchange (BSE) in collaboration with Botswana Bond Market Association (BBMA). The conference – attended by industry stakeholders from within and outside Botswana from the capital and financial markets – sought to look at how bonds could be utilised as a source of capital in the process growing the economy. “For far too long we had this problem in our hands at the detriment of pension funds, insurance firms and the wider investor,” she said.

According to Molefe, few issuers come to the market and if they do it results in disjointed markets, where institutional investors buy and hold. She said often this happens with the primary market rather than secondary market, thus creating further inefficiencies. On the roles of bonds in the economic development, Molefe said vibrant bond markets have numerous benefits for companies, investors, economies and governments and can help meet a range of development challenges. The bonds, Molefe said, promote efficient diversification and allocation of available funds in the economy to the most productive uses and minimise the friction and cost of intermediation between issuers and investors. Other benefits, she said, include optimising management of cash flow and currency mismatches between issuers and investors, offering an additional funding mechanism for companies, providing additional capacity if they have a significant need and continuing finance if bank funding is not available.

Though they offer various benefits as opposed to other tradition source of capital such as banks listed equities, figures show that the domestic bond market is underutilised as a source of capital. According to figures provided by Bank of Botswana, capital market depth as a percentage of the GDP sees bonds only accounting for 8.2 percent compared to 33.2 percent as total credit offered by banks and 34.5 percent representing total domestic listed equities. Challenges faced by the bonds market are said to include size and liquidity with managers having a limited number of companies and issuers as well as market efficiency more especially information efficiency. The other challenge Molefe said is diversification in the bond market in terms of sectoral and size. The local bond market is dominated by government bonds in terms of value of listed notes followed by corporate and parastatals. With all that said, Molefe said it is not all bad news as the recent expansion of corporate issuance has generated a significant demand for credit analysis from qualified investors such as retirement funds.

BSE Chief Executive, Thapelo Tsheole, said there has been a steady progress in the local bond market over the last decade. He said the bond market has grown from P3.8 billion to P11.6 billion in the past 10 years and this year a total of 39 bonds have been issued. Tsheole appreciated the challenges faced by the bond market but also shared progress made thus far with regards to developing the sub-sector. The bond market came six years after the BSE set up a Bond Market Task Force, now known as Botswana Bond Market Association which in turn identified and documented several challenges impending bond market development in Botswana. Those challenges, according to Tsheole, included lack of a robust risk free curve, infrequent issuance of government bonds, lack of neutral bond indices and poor information dissemination among others.
To react to those challenges, measures were put in place which has resulted in notable progress, according to Tsheole. He noted that currently a government issue across several maturity gaps and said there has to be consistency in such maturity gaps.

Regarding infrequent issuance, the BSE head said currently there are quarterly auctions, predominantly tap issuance and an issuance calendar has been established as well. The BSE has in addition introduced bond indices in April 2013 with the usage said to be improving, a development which was introduced to address lack of neutral bond indices. The BSE has made progress to counter the challenges identified by the then bond Market Force and the bourse now disseminates daily all bond attributes and market updates. However, government bond trades are said to be still reported with some delay.