The local Government bond market has five commercial banks that are Primary Dealers (PDs). PDs participate at Government auctions to purchase bonds for their own accounts as well as for their clients. The Bank of Botswana conducts these auctions every month as an agent for Government. Currently the PDs are Absa Bank, Access Bank, First National Bank, Stanbic Bank and Standard Chartered Bank. Investors can also purchase securities in the secondary market through the same PDs. Potential investors can approach either the PDs or the Bank of Botswana for more information on investing on Government securities.
How can one invest in Government Bonds?
Why should one invest in Government Bonds and T-Bills?
Both government bonds and T-Bills are regarded as the safest investment as the Government is considered to have a very low default risk. Currently the Government issues debt securities largely for budget financing and capital market development. By purchasing Government securities, investors are contributing to the development of the economy while earning a set of returns at regular intervals. Government securities also provide an opportunity for investors to diversify their investment portfolios.
When were the first Bonds issued?
The Government of Botswana issued the first bonds in March 2003 mainly for capital market development since the Government was running budget surpluses at that time. The first issuance programme involved three new government bonds, with maturities of 2, 5 and 12 years. The first issuances were very successful given that pension funds and other institutional investors needed these instruments for investment.
What are Government Bonds?
A bond is a fixed income instrument with longer term maturity, and it represents a loan between the issuer and investors. The investors lend funds to Government/borrower and earn a fixed interest called a coupon. Long-term bonds generally offer higher coupon rates compared to short-term bonds when issued under similar conditions to compensate investors for interest rate movements. Coupon payments are usually paid annually or semi-annually (for Botswana Government bonds is semi-annual coupon). Upon maturity of the bonds, the investor receives the principal amount invested as well as the last coupon. Generally, bonds can be priced based on their face value, or par value. Bonds that are priced above face value are said to trade at a premium, while bonds that are priced below their face value/below par trade at a discount.
However, the investor would be paid the full face-value of the bond at maturity. Currently, the government has seven outstanding bonds of maturities ranging from 0.7 years to 20.9 years as depicted by table 1 below.
Table 1: Government Bond Maturities
|Bond Name||Coupon Rate (Percent)||Years to Maturity|
Note: BOTSGB stands for Botswana Government Bonds
What are Treasury Bills?
These are short term debt instruments with maturity of twelve months or less. They are issued/ sold at a discount at auctions. As a result, the investor pays the discounted amount at issuance and receives the face value (nominal) amount at maturity of the T- Bill. They offer no interest payment during tenure. Locally, the Government issues T- bills of 3- months, 6-months and 12-months maturities. The 3 and 6-months T-bills are issued monthly while the 12-months T-bills are issued quarterly, per fiscal year.
What are the types of Government Securities available in Botswana?
The securities include both bonds and Treasury Bills (T-Bills).
How are they issued?
These securities are usually issued in local currency (Pula) but can also be offered in foreign currency. The securities are available for both local and foreign investors.
What are Government Debt Securities?
Government debt securities are contracts between the Government and investors. The Government issues these instruments to borrow funds from individuals and business entities.
What is a Loan Repayment Holiday?
The forced closure of economies globally, Botswana included, aimed at containing the spread of the Covid-19 disease has brought economic hardships to individuals and companies, alike. In the case of Botswana, most businesses, formal and informal, were closed effective April 2, 2020, – for a period of 28 days – except those designated as providing essential services, such as banks. Realising that economic closure meant increased credit risk on businesses and individuals, the banking industry in Botswana, collectively, resolved to offer repayment moratorium, in deserving cases, for a minimum period of 3 months, extendable to 6 months, where warranted. This note sheds light on the meaning and implications of repayment holidays in practice.
Read Repayment Holidays Explained Notice
What is the purpose of holding foreign exchange reserves, and why does Botswana hold such high reserves relative to the size of the economy?
The reserves enable the country to meet its obligations to make payments in foreign exchange and prevent disruptive volatility in the exchange rate. This is particularly important for a country like Botswana. As a small economy, heavily dependent on the export of a narrow range of resources, it is vulnerable to economic shocks. This was clearly seen in late 2008 and early 2009 when diamond exports virtually ceased due to the global economic slowdown; however, with the reserves as a cushion, imports to the country could continue without interruption. This vulnerability necessitates a higher level of reserves being maintained than would be the case in a more diversified economy. The reserves are also in large part the counterpart of savings by the Government, providing a cushion for gradual adjustment to sharp fluctuations in government revenue and/or expenditure. In addition, the foreign reserves largely arose from sales of diamonds. Since these are non-renewable, it makes sense to treat the proceeds as long term investment that should be invested for the benefit of both current and future generations. (See also foreign reserves.)