understanding the botswana bond market - …

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UNDERSTANDING THE BOTSWANA BOND MARKET

A COMPREHENSIVE DOCUMENTATION OF THE OPERATIONS OF THE BOTSWANA

BOND MARKET

Botswana Bond Market Association Understanding The Botswana Bond Market2

UNDERSTANDING THE BOTSWANA BOND MARKET.A COMPREHENSIVE DOCUMENTATION OF THE OPERATIONS OF THE BOTSWANA BOND MARKET.

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CONTENTSList of Tables ABBREVIATIONS GLOSSARY OF TERMS

PART 1: BACKGROUND INFORMATION 1.1 Introduction1.2 About the Botswana Bond Market Association PART 2: HISTORICAL OVERVIEW OF THE BOTSWANA BOND MARKET 2.1 The History of the Botswana Bond Market 2.2 The Evolution of the Botswana Bond Market 2.3 Size and Liquidity of the Botswana Bond Market 2.4 The Government Yield Curve 2.5 Unlisted Bonds 2.6 Historical Bond Auction Amounts PART 3: BOTSWANA BOND MARKET STRUCTURE 3.1 Government Bond Market 3.2 The Process of Issuing Government Bonds 3.3 Corporate Bond Market 3.4 The Process of Issuing Corporate Bonds 3.5 The Process of Trading Bonds 3.5.1 Government bonds traded between Primary Dealers 3.5.2 Corporate bonds traded between any counterparts 3.6 Botswana Bond Market Participants 3.6.1 Issuers 3.6.2 Investors 3.6.3 Brokers 3.6.4 Arrangers or Corporate Finance Advisors 3.6.5 Legal Advisors 3.6.6 Capital Markets Regulators 3.7 Bond Market Indices 3.7.1 Fleming Aggregate Bond Index (FABI) 3.7.2 Botswana Bond Index Series (BBIS) 3.7.3 A comparison of the FABI and BBIS PART 4: THE CHALLENGES AND ENABLERS TO THE DEVELOPMENT OF THE BOTSWANA BOND MARKET – PRACTITIONERS’ PERSPECTIVES 4.1 The Data Collection Methodology 4.2 Profile of the Participants 4.3 Hallmarks in the Evolution of the Botswana Bond Market 4.4 Impediments to the Development of the Botswana Bond Market 4.5 Catalysts in the Growth of the Botswana Bond Market 4.6 Pertinent Reforms Required for Future Development of the Botswana Bond Market

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PART 5: BOTSWANA BOND MARKET IN COMPARISON TO OTHER MARKETS IN SUB-SAHARAN AFRICA 5.1 Market Capitalisation 5.2 Status of Bond Markets in each Country5.3 Botswana 5.3.1 Trading Processes 5.3.2 Clearing and Settlement5.3.3 Transparency 5.4 South Africa 5.4.1 Trading Processes 5.4.2 Clearing and Settlement 5.4.3 Transparency 5.5 Kenya 5.5.1 Trading Processes 5.5.2 Clearing and Settlement 5.5.3 Transparency 5.6 Nigeria 5.6.1 Trading Processes 5.6.2 Clearing and Settlement 5.6.3 Transparency 5.7 Mauritius 5.7.1 Trading Processes 5.7.2 Clearing and Settlement 5.7.3 Transparency 5.8 Eswatini 5.8.1 Trading Processes 5.8.2 Clearing and Settlement 5.8.3 Transparency

PART 6: A LOOK INTO INITIATIVES OF OTHER BOND MARKETS 6.1 South Africa 6.2 Kenya 6.3 Nigeria 6.4 Mauritius 6.5 Eswatini

PART 7: THE FUTURE OF THE BOTSWANA BOND MARKET 7.1 Public Private Partnerships (PPPs) 7.2 Infrastructure Bonds 7.3 Retail Bonds 7.4 Centralization of the Botswana Bond Market 7.5 Revision of Debt Listing Requirements

8. THE BOTSWANA BOND MARKET IN 2025 9. REFERENCES APPENDICES Appendix 1: List of Listed Bonds as at December 2018

32 32 34 35 35 35 35 36 36 36 36 36 36 36 36 36 36 36 36 37 37 37 37 37 37 37 37

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LIST OF FIGURESFigure 1: GDP and Capital markets growth; 2008-2017 .................................................14Figure2: Comparison of bond and equity market capitalisation .....................................16Figure 3: Total Bond Market Turnover in BWP (millions) ...............................................16Figure 4: Total listed bond market capitalisation in BWP (billions) ................................17Figure 5: Bond Market capitalisation by category of issuer for listed bonds in (BWP Billions) ............................................................................................................18Figure 6: Government bond auction from 2008-2018 .....................................................19Figure 7: Government bond auction demand from 2008-2018 ........................................19Figure 8: Institutional Arrangements in the Botswana Bond Market ..............................21

LIST OF TABLES Table 1: Number of listed bonds from 2006-2018 .........................................................15Table 2: Bond market capitaliswation per category of issuer (BWP Billions) ..................17Table 3: Unlisted bond portfolio as at September 2018 .................................................18Table 4: Comparisons on FABI and BBIS methodologies. ..............................................26Table 5: Size of the bond market as at December 2017 (Millions) ..................................33Table 6: Number of listed and unlisted bonds as at December 2017 ..............................33Table 7: Structure of Select Sub-Saharan Bond Markets ..............................................34Table 8: Fees in comparison to other Sub-Saharan markets .........................................35

Although reasonable care has been taken in the compilation of this report, the use of or reliance upon the information herein is at your own risk. The Botswana Bond Market Association (BBMA) accepts no liability for any loss, damage or expenses incurred as a direct or indirect result or consequence of the use of or placing reliance upon the contents of this report. The BBMA does not represent, warrant or guarantee the accuracy, completeness or reliability of the contents of this report or that the information contained herein is always up to date. This report may not have been distributed to all intended recipients at the same time.

DISCLAIMER


ABBREVIATIONS

ABMDI African Bond Markets Development Bond Index AfDB African Development Bank AfDBI African Development Bank Initiative

AMCON Asset Management Corporation of Nigeria ANDISA Andisa Capital BotswanaATS Automated Trading System BBIS Botswana Bond Index SeriesBBMA Botswana Bond Market AssociationBBS Botswana Building SocietyBDC Botswana Development CorporationBoB Bank of BotswanaBoBC Bank of Botswana CertificateBPOPF Botswana Public Officers Pension FundBSEL Botswana Stock Exchange LimitedBTC Botswana Telecommunications Corporation CBK Central Bank of KenyaCBM Central Bank of Mauritius CBN Central Bank of Nigeria CBE Central Bank of EswatiniCIU Collective Investment Undertaking COMESA Common Market for Eastern and Southern AfricaCSCS Central Securities Clearing SystemCSDB Central Securities Depository BotswanaDMO Debt Management OfficeETF Exchange Traded FundESE Eswatini Stock ExchangeFABI Fleming Aggregate Bond Index FGN Federal Government of NigeriaIFC International Finance Corporation JIBOR Johannesburg Interbank Offer RateJSE Johannesburg Stock Exchange

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LIBOR London Interbank Offer RateMFED Ministry of Finance and Economic Development NBFIRA Non-Bank Financial Institutions Regulatory AuthorityNSE Nairobi Securities Exchange NSE The Nigerian Stock Exchange NT National TreasuryOTC Over-the-CounterPDs Primary DealersPDSF Public Debt Service Fund PEEPA Public Enterprises Evaluation and Privatisation AgencyPPP Public Private Partnerships

SADC Southern African Development CommunitySARB South African Reserve BankSEM The Stock Exchange of Mauritius SOE State Owned Enterprise


GLOSSARY OF TERMS

ARRANGER/ADVISOR

A person or persons identified as such in the disclosure documents who performs certain functions with regard to issuance of debt securities, which functions may include the marketing of and performance of administrative functions. The arranger is also known as a placing agent.

BID AND ASK Refers to a two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time.

BOND INDEX A method of measuring the value of a section of the bond market computed from the prices of selected bonds.

BOND ISSUANCE When a corporation/government raises cash by issuing a debt security to investors.

BOND MARKET CAPITALIZATION The aggregate market value of bonds.

BOND TURNOVER Refers to the monetary value of bonds that have traded.

BOND A debt security that promises to make payments periodically for a specified period of time until it matures.

CAPITAL MARKETS Segment of financial market where instruments traded have original maturities greater than one year.

CENTRAL SECURITIES DEPOSITORY (CSD)

An electronic registry for dematerialized or paperless securities. The CSD also provides custody of securities as securities are deposited into the system.

CORPORATE BONDS Debt securities issued by corporations.

DEBT MARKETS Capital markets where debt securities are issued and traded.

EQUITY MARKETS Financial markets where corporate stocks are issued and traded.

FLOATING RATE NOTES (FRNS)

A floating-rate note, also known as a floater or FRN, is a debt instrument with a variable interest rate.

GOVERNMENT BONDS Bonds issued by federal, state, or central governments.

INVESTOR A buyer of investment securities. Also known as lender in the case of debt securities

ISSUER A legal entity that issues securities to finance its operations.

LIQUID MARKETS A market in which securities can be bought and sold quickly and with low transaction costs.

LIQUIDITY The relative ease and speed with which an asset can be converted into cash or bought and sold.

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LISTING REQUIREMENTS

The criteria and disclosure requirements for the listing of debt securities on the BSE, as amended from time to time by the BSE.

OVER-THE-COUNTERA method of trading where brokers and dealers, connected electronically by telephone and computers enable trading in securities not listed on a physical stock exchange.

PRIMARY DEALERS Government security dealers, or commercial banks with which government bonds are traded.

PRIMARY MARKETS A financial market in which new issues of a security are sold to initial buyers.

PRIVATE PLACEMENT

A private placement is a capital raising event that involves the sale of securities to a relatively small number of select investors. Investors involved in private placements can include large banks, mutual funds, insurance companies and pension funds.

QUASI-GOVERNMENT BONDS

Bonds issued by non-government entities, but they are usually backed by the government.

SECONDARY MARKETS A market in which the securities that have previously been issued are bought and sold.

SHORT-TERM With reference to a debt security having a maturity of one year or less.

SPECIAL PURPOSE VEHICLE

Company created by parent to help companies securitize assets, create joint ventures, isolate corporate assets or perform other financial transactions. Therefore it is formed for a specific purpose.

STOCK A security that is a claim on the earnings and the assets of the corporation, also called share or equity.

SUPRANATIONAL BONDS

Refers to bonds issued by international organisations, often multinational or quasi-government organisations, with a purpose of promoting economic development.

YIELD CURVE A plot of the interest rates for particular type of bonds with different terms to maturity.


PART 1: BACKGROUND INFORMATION

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PART 1: BACKGROUND INFORMATION

1.1 INTRODUCTIONFollowing, its 5th Anniversary in September 2018, the Botswana Bond Market Association (BBMA) undertook a project to compile a publication profiling the Botswana bond market. The objectives of the publication were to showcase the development and evolution of the domestic bond market, strategic achievements of the BBMA and other stakeholders and practitioners in the bond market, to drive advocacy on structural impediments affecting the development of the domestic bond market and to promote the visibility of the BBMA.

This publication provides information on the domestic bond market, including but not limited to the following;

i. The history of the local bond market with key insights from industry practitioners;

ii. Overview of the structure and institutional arrangement of the local bond market;

iii. Overview of the end-to-end process of issuing both listed and unlisted bonds in the local market, as well as the trading, clearing and settlement of such bonds;

iv. Discussion of the roles of all bond market participants in the local market (from pre-issuance, issuance, post issuance, trading);

v. The development of the local bond market, showcasing the structural challenges and the achievements;

vi. Detailed profile of the BBMA; and

vii. A comparison of the development of the Botswana bond market to those of other markets in Sub-Saharan Africa.

The information contained in this publication was collected through a review of publicly available information and also through interviews with bond market practitioners.

1.2 ABOUT THE BOTSWANA BOND MARKET ASSOCIATIONThe Botswana Bond Market Association (BBMA) is a non-profit association comprising of bond market participants. Its mandate is to spearhead the development of the domestic bond market. The

BBMA was formally registered with the Registrar of Societies in September 2013. However, the formation of the association dates back to 2009 following the realisation that the bond market in Botswana was, at the time, less developed and characterised by structural impediments to its development. As part of its strategic initiative to broaden and deepen the bond market, the Botswana Stock Exchange (BSE) pioneered the formulation of the Botswana Bond Market Development Strategy of 2010 (Strategy) by compiling contributions from industry participants as regards the challenges faced and the solution thereto. Subsequently, the BSE constituted a Steering Committee whose initial task was to establish an association (BBMA) through which the bond market participants could address and lobby issues of development with relevant stakeholders.

The Strategy highlighted several key issues and to date the majority of the issues have been addressed while others are progressing. Some of the issues raised in the Strategy included the following.

The need to build a risk free yield curve and a bench mark bond

• To increase the frequency of government bonds and T-bill issuance

• To increase the liquidity of the bond market and to resolve bond pricing issues as well as advocate for rating of local bonds

• The introduction and regular updating of the bond market index

• To improve market data dissemination transparency and information systems

• To introduce code of conduct and ethics to be followed by bond market participants

• To improve the trading and settlements of bonds• To introduce long dated bonds for infrastructure

projects• To revise the brokerage fees and set a ceiling for

bond fees• To develop local human capital to be able to

equip them with skills and expertise to be able to structure debt deals

• To resolve issues relating to taxation to attract offshore investors

• To educate stakeholders and market participants to improve the efficiency of the market


The BBMA has been instrumental in driving the development of the domestic bond market. Thus far, the following are some of the accomplishments by the BBMA;

1. In 2016, the BBMA in collaboration with the BSE held its first ever Bond Market Conference under the theme “The Bond Market as a Pillar of Economic Development”. The conference attracted over 400 delegates from the region, the continent and abroad, who deliberated on pertinent topical issues, among them;

• The BSE Debt Listing Requirements • The Status of the Botswana Bond Market• Addressing the Structural Issues impeding

growth of the Botswana Bond Market • Credit Ratings and Capital Raising• How the bond market can support economic

growth and foreign direct investment• Making Fixed Income securities accessible to

retail investors• Promoting Financial Inclusion through the bond

market• Fixed Income’s Role in Asset & Liability

Management• Building Blocks of a Liquid Bond Market• Debt Finance as a viable source of infrastructure

funding• Addressing challenges in infrastructure funding

The discussions from the participants covered some of the issues raised in the bond market development strategy and gave some recommendations as to what can be done to address the issues. In essence, the conference was one avenue the BBMA uses to implement its mandate.

2. In 2016, the BBMA launched its official website, www.bbma.co.bw, which is used as an information depository about the local bond market. The Constitution of the BBMA, Programme Memorandums, Pricing Supplements and other publications about the bond market can be accessed from this website.

3. In 2017, the BBMA organised a roundtable discussion that brought together the stakeholders and bond market practitioners to discuss topics such as the cost of raising capital and ways to make the bond market cost competitive; broadening and attracting issuances by Small Medium Enterprises (SMEs), State Owned Enterprises (SOEs), Corporates, Government and International Financial Institutions); centralisation of trading, clearing and settlement in the Botswana bond market and also contributed to a BSE paper on the proposed revision of debt trading fee structure.

4. The Association has put in place a number of initiatives to promote its visibility and information dissemination, one of them being the consistent participation at the Botswana Pensions Society Annual Trustee’s Conference.

5. From time to time when issues pertinent to the bond market arise, the BBMA mobilises industry participants through roundtable discussions in order to provide a consolidated view and feedback, such as in the request for public comments put out by the BSE in 2018 in relation to the revised Debt Trading Fees Structure and the revised Debt Listings Requirements.

6. In 2018, the BBMA partnered with Moody’s Investor Services to conduct a credit ratings seminar.

7. On an annual basis, the BBMA Committee prepares an activity plan for the year for approval at the Association’s Annual General Meeting. Similarly, progress on the activities is tracked on a consistent basis throughout the year.

The foregoing highlighted the key activities coming out of the Strategy and the yearly activity plans. It is worth mentioning that from the administrative standpoint a lot has also been accomplished. In the long term and progressively, BBMA shall continually be the voice of industry participants, providing a platform through which the bond market participants can convene to address issues relating to the development of the bond market in Botswana.

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PART 2: HISTORICAL OVERVIEW OF THE BOTSWANA BOND MARKET


PART 2: HISTORICAL OVERVIEW OF THE BOTSWANA BOND MARKET

2.1 THE HISTORY OF THE BOTSWANA BOND MARKETBotswana has been internationally recognised among the fastest growing economies in the world. Botswana’s development has been particularly shown through the exponential growth in the Gross Domestic Product (GDP) in the decades following independence, infrastructure development, improved standards of living, reduction in poverty, and impressive socio-economic performance ratings by multiple international organisations, among other indicators. While the mining sector has for a long time remained the backbone of the economy, the country has made significant strides in developing its financial services sector and increasing the sector’s contribution to GDP. In the same token, the local capital markets have registered impressive growth over the years and have been an important avenue for capitalising broad-based economic growth, economic empowerment as well as economic diversification. Figure 1 illustrates Botswana’s GDP and capital markets growth over a ten year period.

FIGURE 1: GDP AND CAPITAL MARKET CAP GROWTH: 2009 - 2018

Note: Capital Market Cap include listed bonds and domestic equitiesSource: BSE, BoB

2.2 THE EVOLUTION OF THE BOTSWANA BOND MARKETAccording to the research undertaken by the BSE, the development of the bond market in Botswana commenced in 1997 with the issuance of a BWP 50 million bond by Botswana Development Corporation (BDC). By 1999, three more bonds were floated on the BSE and these were floated by Botswana Telecommunications Corporation (BTC), Investec South Africa and Botswana Building Society (BBS). During these years and leading to 2003 there was no risk-free yield curve, the only reference points were the Bank of Botswana Certificate (BoBC) rate, the Bank rate and the Prime rate. In an effort to increase the competitiveness and lure lenders away from investing in BoBCs on a recurring basis, most bonds at that time were priced with reference to the BoBC rate. Further, there seemed to be no incentive for neither the public sector nor the private sector to consistently issue debt instruments due to consecutive years of fiscal surplus. The private sector could conveniently borrow needed funds from commercial banks and as a result, the growth of the bond market was slow in the early stages of its establishment.

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In the 2002 Budget Speech, Government of the Republic of Botswana announced two major decisive initiatives which led to the issuance of bonds by parastatals and spurred the issuance momentum in the private sector. In particular, it was announced that, firstly Government will implement a bond issuance program and that, secondly Government will sell part of its Public Debt Service Fund (PDSF) loan book to the public, and subsequently list the PDSF bonds on the BSE. This was achieved by creating a Special Purpose Vehicle (SPV) backed by the future interest and principal payments on outstanding PDSF loans. These initiatives have since encouraged parastatals to look for funding from the capital markets by issuing and listing bonds on the BSE. Since 2004, the SPV has issued and listed all of its 7 bonds on the BSE.

The noticeable growth in the size of the bond market in 2003 was largely attributable to the issuance of the first 3 Government bonds (BW001, BW002 and BW003) under a Note Issuance Program which ran until 2008. The BW001, BW002 and BW003 were 2-year, 5-year and 12-year bonds of BWP 750 million, BWP 850 million and BWP 900 million respectively. The issuance of these bonds was a momentous step as it triggered a host of other issuances by parastatals, banks and larger corporate bodies. This also broadened the diversity of issuances from the private sector by retail, financial services, and property and banking entities.

In March 2008, Government launched a BWP5 billion Note Issuance Programme which was exhausted in September 2010, prompting an increase of the Government’s domestic debt limit to BWP15 billion. In order to build the yield curve further, Government started introducing semi-annual bond auctions and later transited to quarterly bond auctions. This has helped Government sustain its presence in the bond market with issuances of various maturity spectrums ranging from 3 years to 25 years. The gradual extension of the yield curve has been a welcome move that has enabled the pricing of already existing corporate bonds of such longer maturities.

In 2017, the first ever supranational bond was issued by the International Finance Corporation (IFC) and was named the Kgalagadi bond in line with IFCs naming ritual. In the same year, the first ever foreign denominated bond, issued by Investec Plc in US Dollars, was listed on the BSE. The bond was also the first ever zero coupon bond on the BSE.

Evidently, the diversity of the bond market has indeed

improved over the years. Most corporates with approved Programme Memorandums on the BSE have also issued unlisted bonds which are placed off-market. The size of the unlisted bond market is known to be significant and equally diverse.

Table 1 shows the number of bonds listed on BSE from 2006 to 2018.

TABLE 1: NUMBER OF LISTED BONDS FROM 2006-2018

YEAR GOVERNMENT NON-GOVERNMENT

TOTAL

2006 2 23 252007 2 24 262008 3 30 342009 5 27 322010 7 29 362011 6 29 352012 6 29 352013 6 29 352014 6 31 372015 6 32 382016 6 35 412017 5 38 432018 7 42 49

Source: BSE

The Botswana bond market differs from those of peer markets in the SADC region and the continent at large. In Botswana, corporate bonds make up a significant number of the bonds in issue but their share of market capitalisation is less than those of government bonds. In several SADC bond markets, government bonds issuances exceed corporate bonds issuances and this is also true in terms market capitalisation. In Botswana, the total market capitalisation of government bonds has averaged 65% following the launch of the P15 billion Note Issuance Programme in 2011. In the two years prior to this, the split was almost equal between government and corporate bonds whereas in the early 2000s corporate bonds were dominant. This evolution demonstrates the impetus by government to set the tone for the development of the bond market and her commitment to the consistent development of a risk-free yield curve on which corporate bonds could be priced.


2.3 SIZE AND LIQUIDITY OF THE BOTSWANA BOND MARKETIn terms of size, the bond market has a lower market capitalisation in comparison to the equity market as presented in Figure 2 below. This is primarily because the equity market has a longer history dating back to 1989 and has grown significantly faster over the years. If total equity market capitalisation is taken into account the bond market represents 3.6% of the total equity market and 35.7% of the domestic equity market as at the end of 2018. Relative to GDP, the bond market represents 10.0% of GDP. The domestic equity market is about 28.0% of GDP whereas the total equity market is over 2.7 times the size of Botswana’s economic output.

FIGURE 2: BOTSWANA BOND MARKET CAPITALISATION AS A PERCENTAGE OF GDP

*Note: Equity Market Cap is for Domestic Companies only

Figure 3 shows total bond market turnover from 2006 to 2018, which historically and currently remains relatively low. Generally, liquidity in the bond market is consistently low and trading activity is dominated by government bonds.

FIGURE 3: BOND MARKET LIQUIDITY (BWP MILLIONS)

Source: BSE

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TOTAL BOND MARKET TURNOVER IN BWP MILLIONS FROM 2008-2018

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757.7

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858.0

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2222.7

94.7

BondsEquities

LISTED BONDS AND DOMESTIC EQUITIES MARKET CAPITALISATION AS A % OF BOTSWANA GDP

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This volatile trend in turnover is in contrast to the nominal amount in issue which showed an upward trend over the 12 years as shown in Figure 4. Specifically, total bond capitalisation was approximately BWP 4.1 billion in 2006 and it has increased steadily over the years reaching BWP 15.1 billion in 2018. This increase is attributed to consistency in government’s tap and new issuances, as well a surge in new corporate bond listings.

FIGURE 4: BOND MARKET CAPITALISATION (BWP BILLIONS)

Source: BSE

In terms of capitalisation by category of issuer, Table 2 shows that government bonds have the highest capitalisation over the entire 12 years, increasing from P1.75 billion in 2006 to P9.6 billion in 2018. This is in contrast to the number of bonds listed as shown in Table 1. For example, in 2018 Government accounted for 63.7% of the total bond market capitalisation whereas Quasi-Government, Parastatals, Corporates and Supranationals accounted for 1.3%, 8.9%, 24.3% and 1.8% respectively.

TABLE 2: BOND MARKET CAPITALISATION PER CATEGORY OF ISSUER (BWP BILLIONS)

YEAR GOVERNMENT QUASI SUPRANATIONAL PARASTATAL CORPORATE TOTAL2006 1.75 1.00 Not listed 0.37 0.71 3.832007 1.75 0.83 Not listed 0.54 0.78 3.902008 2.30 0.83 Not listed 1.08 1.27 5.482009 3.15 0.83 Not listed 1.18 0.92 6.082010 3.49 0.64 Not listed 1.72 0.92 6.772011 5.30 0.64 Not listed 1.52 0.87 8.332012 5.33 0.64 Not listed 1.52 1.00 8.492013 6.05 0.41 Not listed 1.52 1.27 9.252014 6.69 0.41 Not listed 1.52 1.35 9.972015 6.36 0.41 Not listed 1.50 1.79 10.002016 8.30 0.19 Not listed 1.58 2.16 12.202017 9.09 0.19 0.26 1.26 3.47 14.272018 9.59 0.19 0.26 1.19 3.81 15.04

Source: BSE

The information in Table 2 is presented graphically in Figure 5.

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15.014.3

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1010.19.3

8.58.46.76

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FIGURE 5: BOND MARKET CAPITALISATION BY CATEGORY OF ISSUER (BWP BILLIONS)

Source: BSE

2.4 THE GOVERNMENT YIELD CURVE In the early years of the establishment of the bond market, the government issued bonds primarily for the development of the capital market and not necessarily to fund the budget. The issuance program was capped at 40% of GDP apportioned as 20% domestic debt and 20% external debt. Constructing a government yield curve was one of the considerations in the government issuance strategy in terms of both new and re-openings of existing benchmarks, primarily to help with re-pricing of existing bonds and to promote price discovery. At present, government securities yield curve extends to over 25 years. The yield curve is calculated and managed by Bank of Botswana (BoB) daily on the basis of the quoted yields submitted by primary dealers, and these are displayed through Bloomberg and Reuters and reported to the BSE daily.

2.5 UNLISTED BONDSInformation on unlisted bonds is difficult to access because unlisted bonds are issued outside of the BSE platform and are traded over-the-counter. However, to get an indication of the attributes of these off-market issuances, data was collected from willing institutional investors who are the dominant investors in bond issuances. The unlisted bond market is estimated to be bigger than is presented in Table 3. The challenge with sourcing information has to do with the information disclosure covenants between the lenders and borrowers as these are bilateral contractual agreement with high levels of confidentiality.

Table 3: Unlisted bond portfolio as at December 2018

FIRM NUMBER OF UNLISTED BONDS MARKET CAPITALISATION AVERAGE DURATIONAsset Manager 1 9 BWP 150 million 2.5 yearsAsset Manager 2 39 BWP 1.39 billion 2.41 yearsAsset Manager 3 30 BWP 510 million 1.8 years

Asset Manager 4 4 BWP 100 million 3.0 yearsTotal 82 BWP 2.15 billion

Source: Participating institutional investors

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FIGURE 5: BOND MARKET CAPITALISATION BY CATEGORY OF ISSUER (BWP BILLIONS)

Gorvenmant Bonds Quasi gorvenment Supranational Parastal Corporate

Bond

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The general indication is that whilst there is a perception of little activity in terms of bond issuances, there seems to be a lot of deals concluded away from the public market as it can be observed that the number of unlisted bonds is double the number that is listed on the BSE although this data does not cover all asset managers. As it can be noted from Table 3, the market capitalisation on the unlisted bonds is just over 13% of that of listed bonds giving an indication that these are predominantly customised, small packaged instruments some of which include Commercial Paper, an instrument that the BSE is strategically, through its revised Debt Listings Requirements, trying to revive and promote on the Exchange. Taking this data into account, issuers should be encouraged to move to a more transparent issuance and trading platform to stimulate the robustness and vibrancy of the domestic bond market and enhance the protection of the debtholders through the regulatory oversight provided by the BSE.

2.6 HISTORICAL BOND AUCTION AMOUNTSIn the Strategy, market participants identified the frequency of government bond auctions as an area that needed improvement. Prior to 2012, government bond auctions were held annually but they have since moved to quarterly bond auctions. In these auctions, Treasury Bills are also offered. Figure 6 presents the statistics around the auctions. Notably, following the shift to increased frequency of auctions the auction sizes of bonds have dropped from as high as over P3.0 billion in 2010 to a steady P1.0 billion in recent years.

FIGURE 6: GOVERNMENT BOND AUCTION FROM 2011 – 2018

Source: BoB

Also worth noting is that government bond auctions have historically been adequately supported by the market as demonstrated by the subscription levels in Figure 7. At most auctions, bids have come out at more than one and half times the auction size.

FIGURE 7: GOVERNMENT BOND AUCTION DEMAND FROM 2011 – 2018

Source: BoB

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Mar

- 15

Jul -

15

Nov

- 15

Mar

- 16

Jul -

16

Nov

- 1

6

Mar

- 17

Jul -

17

Nov

- 1

7

Mar

- 1

8

Jul -

18

Nov

- 18

Amou

nts

in B

WP

mill

ions

Perc

enta

ge

GOVERNMENT BOND AUCTION STATISTICS

GOVERNMENT BOND AUCTION STATISTICS

Total Auctioned Total Bid Total Allocated

Total Bids/Total Auctions Total allocated / Total Auctioned


MEMBERS

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PART 3: BOTSWANA BOND MARKET STRUCTURE The Botswana bond market institutional arrangement is depicted in Figure 4. This structure shows the key institutions and the processes that are involved in the issuance, trading, clearance and settlement of bonds in Botswana.

FIGURE 4: INSTITUTIONAL ARRANGEMENTS IN THE BOTSWANA BOND MARKET

BSE

ATS by

Brokers

NBFIRA

NTS

CSDBOB

MFED

OTC by

PD

Trading method

OTC & ATS

• Under NBFIRA’s regulation

• Surveillance

• Clearing & settlement of Corporate Bonds held in script

• Clearing & settlement of dematerialized Corporate Bonds

• Data Approval• Dealer Licence

Approval • Field Examination• Enforcement

• PD Appointment• Government Bond

Auction agent

• Government Bond Issuer

• Note Program Origination

• Government Bonds


ABBREVIATIONS

MFED Ministry of Finance and Economic Development BoB Bank of BotswanaCSD Central Securities DepositoryOTC Over-the-counterATS Automated Trading SystemBSE Botswana Stock ExchangeNBFIRA Non-Bank Financial Institutions Regulatory AuthorityPD Primary DealersNTS Nominated Transfer Securities

Source: BSE (Sub-Saharan Africa Bond Market Status, 2011)

The Ministry of Finance and Economic Development (MFED) issues government bonds through its appointed agent, the Bank of Botswana (BoB). The Non-Bank Financial Institutions Regulatory Authority (NBFIRA) is responsible for regulating the capital markets whereas the BoB regulates the banking sector of which primary dealers are a component. The primary dealers, appointed by BoB, are some of Botswana commercial banks. Primary dealers are allowed to participate directly in the Government bond auction by equally taking up the bonds in auction, being market-makers in the bonds and promoting secondary trading in government bonds. In addition, all banks can participate directly in money market instruments auctions such as BoBCs.

3.1 GOVERNMENT BOND MARKETGovernment Note Programmes are originated by the MFED after approval by Cabinet, following which the MFED handles issuances. The auctioning of the government bonds is undertaken by BoB, an agent of the MFED. The BoB has in turn appointed primary dealers who purchase government securities on behalf of investors in the primary market during the bond auctions. Currently, the primary dealer network comprises BancABC Botswana, Barclays Bank of Botswana, First National Bank Botswana, Stanbic Bank Botswana Limited and Standard Chartered Bank Botswana.

The primary dealer network is utilised by investors to trade government bonds in the secondary market. Since all government bonds are listed on the BSE, BoB reports the auctions, new issuances, additional issuances and bond trades that have been executed by the primary dealers to the BSE. Typically, the reporting of trades to the BSE is done at the end of each business day and published the following day, hence having a one day lag period.

3.2 THE PROCESS OF ISSUING GOVERNMENT BONDSGovernment bonds are issued quarterly in March, June, September and December. The MFED’s Debt Management Unit liaises with BoB’s Open Market Operations to establish their debt issuance needs. BoB would also have a meeting with the primary dealers to establish the needs and the appetite in the market. Normally, 2 weeks before the auction is held BoB would announce the issuance on Reuters and the primary dealers would also disseminate the same information to the market. On the week of the auction, institutional investors would submit their bids to the primary dealers for onward submission to BoB using the Reuters interface. Effectively, the primary dealers are expected to underwrite the auctions and pick up any bonds which have not been bid for. Auctions are held on Friday mornings at 9am and bids are open for 2 hours on the Bloomberg auction system. At the close of the auction, the system works out the close out yield and all bonds are issued at that price. The BoB and MFED will normally view and approve the results prior to publishing. Once the results are approved they are published on Bloomberg and Reuters and the primary dealers are then expected to liaise with their clients and settle on T+3 days with the BoB (the results are also reported to the BSE and CSDB on the same day). Effectively, BoB issues to the primary dealers and the primary dealers do a back to back trade with their clients, but in addition they keep in their books what has not been taken up by the market.

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3.3 CORPORATE BOND MARKETCorporations usually prepare their bond programmes and register them with the BSE for approval. After approval, the corporates would issue bonds through a private placement or an offer for subscription. A private placement is a placement with a privately selected group of institutional investors, usually insurance companies and asset managers whereas an offer for subscription is open to any member of the public. Subsequently, these issuances are listed on the BSE. Thereafter, investors who want to trade in the corporate bonds have to go through a BSE licensed broker. At present, the BSE licenced brokers are Imara Capital Securities, Motswedi Securities, Stockbrokers Botswana and African Alliance Securities. Currently, brokers employ the Automated Trading System (ATS) for loading and matching clients’ orders with clearing and settlement occurring on the Central Securities Depository (CSD) system. This is in contrast to the Over-The-Counter (OTC) trading platform used by primary dealers to trade government bonds.

3.4 THE PROCESS OF ISSUING CORPORATE BONDSFor a corporate issuer to raise funding through the bond market, they typically follow a similar process whether the bond gets listed or remains unlisted. The steps, though presented sequentially here, tend to overlap in reality.

1. Appointment of professional advisors: Initially, the issuer appoints a lead arranger who puts together a team of experts from the capital markets ecosystem and their role is to prepare the issuer for eventual issuance and listing. Ordinarily, the team comprises of arrangers or corporate finance advisors, legal advisors, sponsoring broker, accountants, transfer secretaries, receiving bank, and the issuer’s finance and compliance departments.

2. Issuer Preparation: this normally entails the arranger doing financial analysis of the issuer to establish suitability to raise funds. This includes analysis of the financing needs as well as the ability to repay. Ultimately, it establishes the most suitable funding instrument for the issuer taking into account the possibility of success with respect to issuance.

3. Preparation of issuance documents and memoranda: after establishing a suitable funding instrument with the issuer, the arranger facilitates the preparation of all documentation needed for issuing that instrument or bond, assisted with the financial and legal advisors of the issuer. A submission is then made to the BSE through a sponsoring broker (in case of listing). The BSE reviews the submission, provides an informal approval for the issuer to commence roadshows and issuance marketing, subject to the issuer meeting the minimum listings conditions upon securing the funding commitment before they an approval to list is granted.

4. Issuance Marketing: the arranger prepares a road show itinerary to meet and pitch to all the target investors for the issuance and also prepares the necessary materials to be used on the road shows. The purpose of a road show is to sensitize the investor base of the upcoming issuance and to ultimately secure their commitments to provide the funding. Usually, initial meetings are done to gauge investor interest and receive feedback. This feedback would give an indication of the demand and possible pricing for the issuance or any amendments the issuer needs to make for the issuance to be successful. Depending on the response from investors, this would normally determine whether a bond is listed via an offer for subscription (OFS), a private placement or is not listed.

5. Issuance: After gauging the demand and interest from the investor base and choosing the appropriate method of issuance, sometimes the arranger can be expected to do a vetting of investors to ensure they would be able to settle any commitments they make. On the agreed upon issuance period, the arrangers would take bids from the market and then determine the final issuance size and price. This would be announced to the market and, once the minimum conditions are met, the final listing processes would be completed and the instrument would be listed. Since all listed securities are dematerialized, custody, clearing and settlement of these instruments occur on the CSD system.


3.5 THE PROCESS OF TRADING BONDSCurrently, the process of trading bonds in the secondary market is dependent on two variables; the type of bonds and the counterparts involved in the trade. Below are the processes for the respective trades.

3.5.1 GOVERNMENT BONDS TRADED BETWEEN PRIMARY DEALERS

A trade is normally initiated between primary dealers on the Reuters trading system, as principals or on behalf of their customers. The minimum amount that can be traded is BWP2 million and a primary dealer is obligated to make a 2 way quote (bid and ask) when asked by another primary dealer. If and when a trade is completed via the system, the trade details are sent to the banks’ back offices, the client receives a dealing notification and the trade is settled through, and reported to, BoB. The BoB then reports the trade to the BSE for information purposes at the end of the trading day. The trades are settled on a T+3 days basis.

3.5.2 CORPORATE BONDS TRADED BETWEEN ANY COUNTERPARTS

Listed corporate bond trades follow the same process regardless of counterparties. Trades are initiated between any two types of counterparties via brokers. The broker works to find agreeing parties to the trade in order to match the trade. The trade is settled and cleared through the CSD system on a T+3 days basis. Unlisted bonds are traded through custodial banks.

3.6 BOTSWANA BOND MARKET PARTICIPANTS3.6.1 ISSUERS

An issuer comes to the market to borrow funds from investors and create a contractual debt obligation with the investors. Government, through BoB, is a dominant borrower in the domestic capital markets accounting for about 63.8% of the value of all listed bonds on the BSE as at the end of 2018. Other bond issuers include quasi-government institutions structured as special purpose vehicles, international institutions, parastatals and state owned enterprises, private corporations such as banks, micro-lenders, property companies and retailers, among others. A list of issuers on the BSE as at December 2018 is shown in Appendix 1.

3.6.2 INVESTORS

A large number of investors in issued bonds are institutional investors like asset managers, banks and insurance companies. Some of the investment mandates or investment policies in the pension fund industry allocate a significant portion of pension assets to debt instruments in order to take advantage of interest rate fluctuations, provide steady income in the form of interest payments and to align the riskiness of the portfolios to the profile of the beneficiaries, who are mostly an ageing population. Annuity funds in the insurance industry tend to use bonds to match assets and liabilities which in most cases are long term liabilities. Banks on the other hand use bonds for regulatory requirements, assets and liability management as well as for trading purposes to generate income for the business. A list of all the registered pension funds and all the registered fund managers can be accessed from the NBFIRA website at www.nbfira.org.bw.

3.6.3 BROKERS

Just like in equities, trading in bonds listed on the BSE is done through a broker licensed by the BSE. The broker’s role during trading is to find a party to match the trade or to right away match and execute the trade in the event that there is already a buyer and a seller. Brokers, working with settlement banks or CSD participants, also facilitate the clearing and settlement of the trade with the CSDB once the trade has been done. During issuance, a broker is also part of the team necessary for a listing as they are a conduit through which all submissions to the BSE are made. In this capacity they are referred to as Sponsoring Brokers. Prior to listing, the Sponsoring Broker assist the issuer to access their network of clients to bid for the issue in order for the listing application to meet the minimum number of investors required by the BSE.

3.6.4 ARRANGERS OR CORPORATE FINANCE ADVISORS

Most issuances require the service of an arranger to help them with increasing the chances of the issuance being successful. The role of an arranger typically involves assisting the issuer with the preparation of the documentation required for the issuance such as the Programme Memorandum, Circular and Pricing Supplement, co-ordinating the work of the various advisers involved, assisting the issuer with the preparation of presentations to potential investors, preparing and formulating a transaction timetable and marketing strategy,

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preparing roadshow documents and other marketing material, co-ordinating roadshow meetings with potential investors in consultation with the issuer, assisting the issuer in obtaining the relevant regulatory approvals for the registration of the programme and listing of the issue (if applicable), co-ordinating and managing the book-build or auction process for the issue, using reasonable endeavours to procure investors for the issue and placing of the instruments with investors. Typically, in Botswana these services are provided by investment and commercial banks as well as accounting firms with corporate advisory capacity. Normally, these institutions leverage the expertise in their group businesses located outside Botswana.

3.6.5 LEGAL ADVISORS

Bonds are contractual debt obligations between investor and issuer and therefore they are underpinned by legal documentation which require the service of legal advisors. Most issuers create an overarching Note Programme which details the borrowing limits and terms and conditions of the Note Programme normally meant to last 5 -10 years. Issuances under the Note Programme are therefore underpinned by the main prospectus or document called the Programme Memorandum. The legal advisor is therefore an essential part of the advisory team led by the arranger. Typically, the legal advisor assists with preparation of legal documents that, among others, include:

• Stock Exchange application (where applicable)• Principal terms and conditions between the

issuer and investor• Programme Memorandum (prospectus)• Trust Deed – deed of covenant (applicable if

trustee is required to act on behalf of bond holders)

• Agency agreement (where applicable) – agreement between the issuer and agency which will be paying interests to bondholders

• Subscription agreement – an agreement to be entered into with the issuer and primary subscribers of the notes or bonds

• Advisors agreements and third party roles – agreements entered between the issuer and advisors during issuances

• Issue notices – official notices from the issuer to the paying agent on each draw down or payment of interest

• Board resolutions – detailing consent by board of directors of the issuer with regards to the issuance of a bond

• Audit Comfort Letter

3.6.6 CAPITAL MARKETS REGULATORS

A well-functioning capital market is underpinned by trust, integrity and confidence gained by investors from the oversight role of competent regulators. In Botswana the regulators that enable the capital markets to function are BoB, NBFIRA and the BSE. In relation to bond markets, the BoB regulates and licences the banking industry and appoints primary dealers. The BoB also runs and regulates government bond auctions in Botswana as well as provides custody of government securities. NBFIRA is mandated to regulate and enforce compliance within the Non-Bank Financial Institutions (NBFIs) sector in order to safeguard the stability, fairness and efficiency of the non-bank financial sector. Therefore, it regulates brokers and asset managers and hence is essential in maintaining the integrity and soundness of the capital markets. NBFIRA also regulates the BSE and is responsible for approval of listings requirements promulgated by the BSE. The BSE regulates listed issuers, brokers and facilitates the trading, clearing and settlement of bonds traded through the BSE, as provided for in the listings requirements, the trading rules as well as the CSDB rules.

3.7 BOND MARKET INDICESThe two main bond market indices in Botswana are the Botswana Bond Index Series (BBIS) and the Fleming Aggregate Bond Index (FABI).

3.7.1 FLEMING AGGREGATE BOND INDEX (FABI)

According to the FABI website, the FABI was known as Fleming Andisa Bond Index and was developed in June 2003 by Fleming Advisors (Pty) Ltd and Andisa Capital Botswana (Pty) Ltd (Andisa) and is managed by Fleming Advisors (Pty) Ltd. According to its methodology statement, FABI is a total return market capitalisation weighted index comprising of fixed rate corporate, quasi-government and Botswana government bonds listed on the BSE with a tenor of more than one year at the time of rebalancing. As such the index excludes floating rate notes (FRNs) citing the interest sensitivity of the bonds and that the bonds are short term in nature (90 -180 days). The FABI is priced daily using inputs from derived risk-free yield curve. This risk free yield curve is derived by way of extrapolation functions, which make use of the inputs of BoBCs, T-Bills and government bond midpoint yields.


Addition and removal of bonds is implemented by its manager within two months of the rebalancing date or event. A rebalancing event can be established under one of three conditions. First, when a fixed rate bond is listed on the BSE. Second, when the tenor of a bond is reduced to less than 12 months. Third, when there is default or it is highly likely that default will occur on an index constituent.

3.7.2 BOTSWANA BOND INDEX SERIES (BBIS)

The BSE initiated a bond index series, called the BBIS, comprising of a Government Bond Index (GovI), Corporate Bond Index (CorpI), a Composite Bond Index (BBI – fixed and floating rate bonds) and a Composite Bond Index (BBIFixed – fixed rate bonds only). The GovI, CorpI and BBI were launched in April 2013 whereas the BBIFixed was launched in April 2018. The main purpose of the BBIS is to provide investors with a comprehensive and complementary menu of indices that measure the performance of the local bond market and its segments. These indices, represent the performance of fixed and floating interest rate bonds issued in local currency and listed on the BSE and comprise of bonds with a tenor of no less than 12 months at the time of rebalancing which is quarterly.

The BSE manages the performance of the BBIS, overseen by the BBIS Advisory Committee and in accordance with the BBIS Ground Rules. The BBIS is audited quarterly by an independent consultant. The BBIS Advisory Committee ensures that best practice is used in the construction and continuous management of the indices, including the review of audits as well as the proposed amendments to the methodology. The BSE calculates the prevailing Zero Coupon Yield Curve (ZCYC) on a daily basis. Due to the low level of liquidity of bonds listed on the BSE, the index calculations use “fair value” prices as derived from the ZCYC. This risk -free curve is derived based on inputs from BoBCs, T-Bills and government bond midpoint yields. Bids and offers are submitted by primary dealers for each respective government bond to BoB and the best bid and offer is used to determine the midpoint for inclusion in the yield curve derivation. Individual bonds are weighted according to their nominal amounts in issue in each of the component bond indices (BBI, BBIFix, GovI and CorpI) at each quarterly rebalancing date. The weight (W) applicable to each bond for each component index is accordingly determined at each quarterly rebalancing date.

3.7.3 A COMPARISON OF THE FABI AND BBIS

TABLE 4: COMPARISON BETWEEN FABI AND BBIS

FABI BBISYear of inception June 2003 April 2013Index type Market capitalization weighted total

return indexMarket capitalization weighted total return index

Composition Corporate, government and quasi-government fixed rate bonds listed on the BSE

Corporate, supranational, government and quasi-government local currency fixed rate and floating rate bonds listed on the BSE

Inclusion Critera Tenor greater than 12 months Tenor greater than 12 months

Sub-indices FGBI and FOBI GovI, CorpI, BBI and BBIFixed

Index Review Addition and removal from the Index within two months of rebalancing event

Addition on the date of settlement and removal at the quarterly rebalancing date

Index Manager Fleming Advisory (Pty) Ltd BSE

Governance None BBIS Advisory Committee

Index Audit None Quarterly, by an independent consultant

Availability of Conventions

No Available on the BSE website

Access Subscription based Freely accessible on the BSE information portals

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PART 4: THE CHALLENGES AND ENABLERS TO THE DEVELOPMENT OF THE BOTSWANA BOND MARKET – PRACTITIONERS’ PERSPECTIVES


4.1 THE DATA COLLECTION METHODOLOGYTo get a perspective as to the evolution, the challenges and enablers to the development of the Botswana bond market, ten (10) bond market practitioners were approached for participation in a semi-structured survey of interviews and a questionnaire. This approach mitigated misinterpretation of responses and provided ample opportunity to clarify responses.

4.2 PROFILE OF THE PARTICIPANTSParticipants represented a broad spectrum of the local capital markets, being fund management, banking, real estate, central bank, research and consultancy, brokerage and legal fraternity. Respondents held senior positions in their respective organizations, i.e: Chief Executive Officer/Managing Director/Partner (3); Deputy Chief Executive Officer (1); Director/Associate Director (3); Divisional Head (2) and Manager (1).

The respondents had extensive and illustrious careers in the capital markets, spanning between 3 and 23 years, with an average of 12 years’ experience. Also noteworthy are the different segments of the bond markets that the respondents have participated in. Cumulatively, their demographic covers three (3) critical markets. First are respondents that directly participated in the issuance of and trading in government securities. Second are those that were involved in the issuance of State Owned Enterprises (SOE) or parastatal bonds. Third are participants in the issuance of corporate bonds by the private sector. This represents dynamism in experience and expertise of the interviewees.

Given the diversity of capital markets representation in the sample, the seniority of position held in the respective companies, the experience and the extent of bond market involvement by the respondents, elements of data validity and reliability were considered satisfactory.

The survey probed four (4) thematic areas; (i) hallmarks in the evolution of the Botswana bond market, (ii) impediments to the development of the Botswana bond market, (iii) catalysts in the growth of the Botswana bond market, and (iv) pertinent reforms

required for future development of the Botswana bond market. The findings are discussed below.

4.3 HALLMARKS IN THE EVOLUTION OF THE BOTSWANA BOND MARKETPrior to the year 2000, the Botswana bond market was generally regarded as rudimentary due to limited issuers and few dealers. It is particularly noted that the BoBCs were the prominent instruments and that commercial banks were the primary dealers that were encouraged to support secondary markets. The turn of the century however ushered a change in fortunes as the Botswana Government took deliberate measures to deepen the market by issuing bonds for the first time. This initiative was a significant catalyst in building a ‘readable’ yield curve. Notwithstanding, the bond market of the early 2000 was described by one respondent as plagued by ‘less diversity in terms of financial instruments available, structure, maturity profiles and sectors’, particularly as the market was dominated by Government securities.

At the time, there was also an observed lack of in-house expertise on bond issuance, and hence would-be issuers in both SOEs and private sector resorted to sourcing such expertise externally and sometimes from outside the country. Lead arrangers, lawyers and calculation agents were some of the expertise that were outsourced. There is, however, an acknowledgement of skills transfer that resulted from the outsourcing. It is noted that the active role of the government in the bond market and the establishment of the government yield curve did have the desired effect as SOE bonds ‘followed quite quickly after these events’.

4.4 IMPEDIMENTS TO THE DEVELOPMENT OF THE BOTSWANA BOND MARKETOn the subject of notable challenges that have overshadowed the development of the Botswana bond market, the most prominent was the lack of liquidity in the market. One respondent attributed the lack of liquidity to two factors; first, the ‘small number of issuances’ and second, the ‘sluggish secondary market trading activity’. Another practitioner opined that the ‘lack of an active

PART 4: THE CHALLENGES AND ENABLERS TO THE DEVELOPMENT OF THE BOTSWANA BOND MARKET – PRACTITIONERS’ PERSPECTIVES

29

secondary market makes it difficult to establish true market prices for valuation purposes’. Another added that while the established yield curve has assisted with ‘price discovery that would allow other participants to use as a benchmark in issuance, these benchmark prices carry little practical currency in the absence of robust market trading. At best, these prices are described as indicative’. Worse still, another participant indicated that these prices are not competitive. In explaining this matter further, they added that:

‘At about 5% on a 25 year bond, the yield is low relative to the comparable yields in other markets. If you look at South Africa, for instance, the yield for the same bond will be about 8% or 9% and that is a huge difference compared to Botswana. And the yields are really artificial in Botswana because if you look at an auction, if the bids come out too high, the government simply will not allot the bonds. For example, if say there is BWP200 million of a certain maturity and the bids come out at, say, 6% and the government can afford to allot at 5.1%, as an example, it will simply cut the supply to, say, BWP150 million. So really, the government is not allowing the market to operate optimally and it is suppressing the yields and this causes the yield curve to be flat meaning that the yields on long term bonds also remain very low. The yield curve is therefore not realistic from the economic point of view, but from the government side it is good. Now, what this means is that the yield curve which is being used as a reference point for pricing of parastatal and corporate bonds is unrealistic and as such some issuers will not use the government yield curve as a reference point.’

Another participant blamed the absence of a standard reference rate for stimulating market pricing efficiencies. This, they contended, ‘results in improper pricing of risk: a more accurate, timely, and consistent price discovery mechanism for pricing of bonds is needed such as the interbank rate in the likes of the LIBOR in the UK and the JIBOR in South Africa’.

Prospects for substantial growth in the Botswana bond market are generally slim. One respondent reasoned that while the government has made efforts to invigorate the bond markets, these efforts fall short for two reasons. Firstly, the Botswana government fiscus rarely requires government to raise funding from the markets. Secondly, the government issuance programme is too small to support the capital market in that government is just not borrowing adequately and diversely and this brings up problems of illiquidity to an extent that when investors buy these instruments they just hold until maturity, especially the long dated bonds

because if they sell them it will not be easy for them to buy them back since the market is too shallow. They added that in Botswana the bond market as a percent of GDP is fairly small but the general norm is that it should be at least 15% of GDP.

The second most prominent response was that of a slow pace in the development of the corporate bond market. Alluding to this point, one respondent indicated that ‘the supply and the variety of fixed income instruments has been slow in coming, and in particular in the areas of long dated zero coupon bonds, and inflation-linked bonds’. This was suggestive of a market that is not only slow in development, but also slow in product innovation.

The third most pressing impediment was the seemingly lack of progress and commitment in attending to a list of long researched and talked about challenges that have lingered in the market for many years. One respondent articulated the issue as thus:

‘Most of the challenges and issues we talk about today are the exact ones we have been talking about for the past10 years and though identified, a lot of the issues are not being closed. For example lack of secondary market activity; we have done a lot of research, we have had consultancies but the buy and hold mentality still persists because of our mostly homogenous investor base. We then sat and thought that the solution was to encourage foreign participation in the market but some hindrances that were highlighted were things like the lack of delivery versus payment hence we came up with a solution to establish a single central depository platform for the market. These discussions were started more than 5 years ago and they are still on-going. We are very good as a market at identifying issues but very slow in execution.’ The expert concluded by making reference to the documentation of these issues in the Bank of Botswana Research Bulletin of December 1994.

Other noted impediments to the development of the Botswana bond market were identified as:

• Lack of origination due to limited intermediation because corporate advisory companies and investment banks do not innovate more products;

• Lack of information and education regarding the use of the bond market to raise capital;

• Lack of diversity in the large institutional investors in the market. It was raised that the market is dominated by a few pension funds, and most significantly by the Botswana Public Officers Pension Fund and the Debswana Pension Fund;


• More specific to the market segment of SOEs, there was a sentiment expressed suggesting that investors perceived SOEs as risky and hence are ‘reluctant’ to invest in their bonds in the absence of an explicit ‘government guarantee’;

• The perception that ‘bond issuances are expensive and this is sometimes a reflection of a lack of understanding of the market’;

• The decision to devalue the currency on the eve of maturity of a government bond in 2005 was highlighted as disconnect in national policies, more so that these bonds were denominated in Pula and that there was strong foreign investor participation in these bonds. This, it was opined, has diminished foreign confidence and interest in local bonds;

• Lack of credit ratings for most corporations in Botswana. As one respondent expressed:

‘One factor influencing the slow development in the secondary market in the corporate credit is that an investor has to be satisfied or comfortable with the credit and may require credit analysis if the issue is not already in the asset manager’s portfolio. Most corporations are not rated in Botswana by any international rating agency such as Moody’s or S&P, etc’

In summary, the respondents alluded to a myriad of challenges that have eclipsed the development of the Botswana bond market. Key among these is the complexities of the interplay between market size and liquidity, and their impact on the demand, supply and pricing trilogy. Another is the slow pace at which the market is addressing the problems which have been long identified. This could be a reflection of lack of dynamism in innovation and product development. The other factors were more specific to particular occurrences, events and sectors.

4.5 CATALYSTS IN THE GROWTH OF THE BOTSWANA BOND MARKETRespondents were asked to deliberate on catalysts that they deemed to have had a significant effect in the growth of the Botswana bond market. Broadly, a factor that was frequently mentioned to have been an enabler in the development of the Botswana bond market was the reforms spearheaded by the BSE. In particular the following comments were made:

• ‘The demutualisation of the BSE is a step in the right direction. The role of the BSE should be to focus on assisting companies wishing to raise capital come to market whilst a Capital Markets

Authority/ Financial Services Board should be responsible for regulating the market.’

• ‘The establishment of the Central Securities Depository (CSD) at the BSE’.

• ‘Their (BSE) passion for growing the market is what is slowly but surely moving the market forward.’

• ‘Honestly I have to commend, praise and acknowledge that the biggest drivers has been the BSE. The team has done very good work in trying to provide a platform for the market to develop but they need support and commitment from the other market participants.’

From these observations, the BSE reforms and the renewed energy at the Exchange are having a positive impact on the development of the market.

Other factors identified were:

• Increased frequency in the issuance of government bonds in the market, i.e. every 3 months.

• Increased appetite by such institutional investors as pension funds to invest locally.

It is evident from the survey that the BSE is a pivotal player in creating a conducive environment for the growth and development of the Botswana bond market.

4.6 PERTINENT REFORMS REQUIRED FOR FUTURE DEVELOPMENT OF THE BOTSWANA BOND MARKETRespondents expressed optimism in the future of the Botswana bond market. As one respondent opined;

‘We are optimistic about the development of the local bond market, considering what it looked like prior to the early 2000s in comparison to today. Substantial achievements have taken place and more will be added as time passes’.

The respondents held divergent views on pertinent reforms required for the future development of the market. Strong opinions were expressed on structural and operational issues directed at improving market liquidity and pricing efficiencies. Different approaches were suggested, such as;

Encourage corporations to consider bond issuances to raise capital. It was suggested that this could be achieved by

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• Encouraging corporations to be credit rated;• Downward revision of the BSE trading fees as a means of mitigating the barriers to entry; and• Provide standardized fee structure for listings advisory work, the legal fees in particular.

• Increase efforts directed at public sensitisation and education about the bond markets.• BSE to introduce a more robust index structure that covers the diversity of financial instruments and

Botswana’s economic sectors and industries.• Encourage diversity and creativity in listed bond instruments.• The local bond market should have an international appeal. More effort ought to be spent in drawing

in international participants either as investors or on any other capacity. It was suggested that the BSE should have a major role to play in this endeavour.

It was evident from the responses that the issue of market liquidity, efficiency and transformation are pressing. Mostly importantly, the role of the BSE as a driver is apparent. Generally, there is a sense of optimism that these pertinent improvements are achievable.


PART 5: BOTSWANA BOND MARKET IN COMPARISON TO OTHER MARKETS IN SUB-SAHARAN AFRICA

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PART 5: BOTSWANA BOND MARKET IN COMPARISON TO OTHER MARKETS IN SUB-SAHARAN AFRICAIn this section, we compare the structure of the Botswana bond market with other markets in Sub-Saharan Africa. The bond markets that we focus on are Kenya, Nigeria, South Africa, Mauritius and Eswatini. We review the market capitalisation of the six markets and their status in terms of trading processes, clearing and settlement, fee structure, and market transparency, using a similar approach utilised by the BSE (Status of the 5 Sub-Saharan African Bond Markets, 2011). However, a lot of initiatives and changes have since occurred in respective of these sovereign bond markets. The purpose of this review is to shed light on where the Botswana bond market stands in comparison to other counterparts in terms of efficiencies and optimal market structure.

5.1 MARKET CAPITALISATIONThe market capitalisation of the selected bond markets is illustrated in Table 5.

TABLE 5: SIZE OF THE BOND MARKETS AS AT DECEMBER 2017 (MILLIONS)

LISTED BONDSBOND MARKET MARKET CAPITALISATION (DOMESTIC

CURRENCIES)MARKET CAPITALISATION (USD)

South Africa 2,726,589.5 220,241.5Botswana 14,266.5 1,445.2 Kenya1 2,880,000.0 28,000.0 Nigeria 9,291,305.7 25,809.9Mauritius 24,593.5 730.0Swaziland 3,543.0 288.0

Source: Own computations, and respective Stock Exchanges websites

$28 billion (Sh2.88 trillion) in 2017, retrieved from https://www.the-star.co.ke/news/2018/01/18/vary-offerings-for-market-capitalisation-nse-told_c1699707

From Table 5, South Africa has the largest market capitalisation of approximately $220 billion followed by Kenya with approximately $28 billion and then Nigeria with approximately $26 billion. Botswana bond market came fourth with approximately $1.4 billion as at December 2017.

Meanwhile, Table 6 shows the number of listed and unlisted bonds in each of the markets as at December 2017. It has again proved difficult to get data on unlisted bonds as they are issued off-market and traded OTC, therefore data was provided subject to availability.

TABLE 6: NUMBER OF LISTED AND UNLISTED BONDS AS AT DECEMBER 2017

LISTED BONDS UNLISTED BONDSBOND MARKET GOVERNMENT

BONDSCORPORATE BONDS

TOTAL GOVERNMENT BONDS

CORPORATE BONDS

TOTAL

South Africa 159 1512 1671 290 10 300Botswana 5 38 43 n/a n/a n/aKenya1 83 26 89 n/a n/a n/aNigeria2 86 22 108 n/a n/a n/aMauritius 0 42 42 n/a n/a n/aSwaziland 16 35 51 n/a n/a n/a

Source: Own Computations and respective Stock Exchanges websites


1. Numbers given as at May 2018, Giguyu, O (2018)2. Government bonds include state government (26), federal (59) and supranational bonds (1). http://www.

nse.com.ng/issuers/listed-securities/listed-bonds

South Africa has the largest number of listed bonds among the selected markets, with 1,671 listed bonds in total. It is followed by Nigeria with 108 listed bonds, then Kenya with 89 bonds and Botswana came fourth with 43 bonds. However, it is worth noting that the number of corporate bonds in all the selected countries surpasses that of listed government bonds, except in Nigeria and Kenya. According to Deepak Dave of Riverside Capital, Kenya’s narrow range of corporate issues has made it difficult for the market to absorb persistent shocks that have resulted in a drought in the market as local corporates tend to opt for bank financing as opposed to raising money the bond market and this has literally rendered it a state bond market (Giguyu, O, 2018).

5.2 STATUS OF BOND MARKETS IN EACH COUNTRYTable 7 depicts a summary of the structure of the selected Sub-Saharan African bond markets in terms of trading processes, clearing and settlement infrastructure, fee structure, and market transparency. Detailed discussions follow thereafter.

TABLE 7: STRUCTURE OF SELECT SUB-SAHARAN AFRICAN BOND MARKETS

BOND MARKETBOTSWANA KENYA SOUTH AFRICA NIGERIA MAURITIUS ESWATINI

Trading processes

Government bonds trade OTC via primary dealers. Listed corporate bonds trade on the BSE via Brokers.

Trading is centralised at the NSE for both government and corporate bonds (ATS).

JSE has implemented the Electronic Trading Platform for both government and corporate bonds.

Trading of various fixed income instruments occurs on the NSE via the ATS.

Trading is via the ATS at the SEM.

Trading is done OTC through the Central Bank and primary dealers.

Clearing and settlement infrastructure

BoB clears and settles government bonds. CSD clears and settles listed corporate bonds.

Settlement is T+3.

CBK settles and clears government bonds. CDSC clears and settle corporate bonds.

Settlement ranges from T+0 to T+3.

STRATE clears and settles all trades.

Settlement is T+3.

CBN settles and clears government bonds while CSD clears and settles corporate bonds.

Settlement is T+2.

CDS clear and settles all trades.

Settlement is T+2.

Clearing and settlement occurs at ECB.

Settlement is T+2.

Market transparency

OTC market results in inefficient price discovery and inadequate transparency.

By far the most transparent and the most developed (in terms of infrastructure).

The deepest and broadest. ETP was aimed at improving transparency.

Provides pre and post trade transparency.

Due to centralisation, it is a bit liquid and transparent.

OTC market makes the market opaque.

1. Kenya: fees as at 2011, current fees not found

Source: Stock Exchanges publications

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5.3 BOTSWANA5.3.1 TRADING PROCESSES

According to information obtained from BSE Annual report (2012), trading of bonds in Botswana is fragmented or decentralised with two markets for bonds, i.e. one for government bonds by primary dealers and the other for listed corporate bonds by brokers. In particular, trading of BSE listed government bonds is executed by primary dealers OTC. Primary dealers receive orders from clients by telephone or email. After execution, they send the trades (by Reuters) to BoB by the end of the trading day. The BoB then reports the trades to the BSE before close of business. With listed corporate bonds, clients submit orders to brokers who then match and execute the orders on the BSE. The Exchange publishes bond trades in the BSE daily market report.

5.3.2 CLEARING AND SETTLEMENT

The BSE implemented the CSD system in 2008 and the ATS in 2012. Dematerialization of bonds in the CSD system commenced in mid-2011 and was completed in 2017. Consequently, the trading of bonds in the ATS took a long time to occur fully in the ATS. Clearing and settlement is therefore done in two ways; BoB is the settlement bank of the government bonds while the CSD system clear and settles listed corporate bonds as well provide custody services. Cash settlement of government bonds is done through BoB while that of listed corporate bonds is done through commercial banks. Effective 2016, the BSE, MFED, NBFIRA and BoB commenced a project to centralise the trading, clearing and settlement of bonds (including government bonds) at the BSE and CSDB. The entities put together and adopted a business case for this transition. As part of the transition, the BSE commenced the procurement of a new CSD system with enhanced capabilities that include DVP model 1, straight through processing and settlement in central bank money (instead of commercial bank money).

TABLE 8: FEES IN COMPARISON TO OTHER SUB-SAHARAN MARKETS

TRANSACTION TYPE

EXCHANGE FEES%

BROKERAGE FEES% CSD FEE% REGULATORY

FEE%

Botswana <BWP999, 999

>BWP1,000, 000

0.010

0.010

0.025

0.010

0.012

0.012n/a

Kenya1 0.0035 0.024 0.0002 0.04

Mauritius n/a 0.01 0.07 0.01 0

Nigeria n/a 0.3 0.75 - 1.35 0.3 0.3

South Africa n/a n/a Determined by the exchange n/a

n/a

EswatiniGovernment bonds

Corporate bonds

0.0004

0.0006E 1,500 0 n/a

Source: Own compilation and data from respective Stock Exchanges websitesAs at 2011, from BSE Sub-Saharan Market Status Report (2011)

5.3.3 TRANSPARENCY

The Botswana bond market is not transparent due to the OTC market which results in inefficient price discovery. As a result, pricing in terms of government bonds in the secondary market is unsystematic. Corporate bonds on the other hand are issued predominantly through private placements, with clients buying and holding till maturity. Similarly, there is no systematic pricing of corporate bonds in the secondary market and yields are not monitored on a daily basis. These similar sentiments were echoed in an interview with industry participants who mentioned that “lack of active secondary market makes it difficult to establish a true market price to use for valuation purposes.”


5.4 SOUTH AFRICA5.4.1 TRADING PROCESSES

Recent information from the South African National Treasury and the JSE indicates that trading is through an Electronic Trading Platform (ETP) which is aimed at centralises the trading of bonds at the JSE, and is also done through Bloomberg.


Clearing and settlement is centralised and conducted through STRATE, which is the South African Central Securities Depository (CSD) system. Meanwhile the South African Reserve Bank (SARB) only undertakes cash settlement of government bonds. The main commercial banks and the SARB are the STRATE CSD participants. The CSD participants handle the cash settlement and scrip settlements for all debt market participants.

5.4.3 TRANSPARENCY

The South African debt market is liquid and well developed in terms of the number of participants and their daily activity, with roughly R25 billion traded daily (JSE Website). The bond market is the deepest and broadest in Sub Saharan Africa. The advent of the ETP is deemed necessary to improve the levels of transparency that has been historically dampened by the prevalence of a primary dealership system.

5.5 KENYA5.5.1 TRADING PROCESSES

Trading in Kenya is centralised at the NSE’s ATS. The ATS is accessible to the members of the NSE from their offices but is not accessible to the clients. Orders for both government and corporate bonds are captured through brokers. For government bonds, the client’s order (SELL) is first sent to the Central Bank of Kenya (CBK) for verification with their Central Depository System (CDS) and then captured in the ATS for execution. The BUY order is captured in the ATS and later forwarded by the NSE to the CBK for clearing in the CDSC system after execution.


There are two clearing and settlement systems in Kenya. The Central Bank of Kenya (CBK) is the settlement bank for government bonds while the Central Depository & Settlement Corporation (CDSC) undertakes both cash and securities clearing and settlement of corporate bonds. It oversees the

conduct of Central Depository Agents comprised of stockbrokers and investments banks. The NSE’s ATS is linked to the CDS of the CBK and the CDSC.

5.5.2 TRANSPARENCY

Kenya is considered the most transparent and the most developed bond market in Sub Saharan Africa in terms of market infrastructure. For example, all government and corporate bonds are dematerialized and trade in an end-to-end automated platform, right from the placement of orders to matching and finally clearing and settlement. Pre and post-trade transparency is very high. Price discovery is highly enhanced during the Open Auction session. Orders are displayed to the market (via the ATS accessible to brokers) before, during and after trading on a real-time basis. Orders are also visible to the market through data vendors.

5.6 NIGERIA5.6.1 TRADING PROCESSES

The NSE runs a hybrid market, allowing dealing members to submit orders and market-makers to submit two-sided quotes into the order book in the ATS. The orders and quotes interact electronically to “discover” the price of the bond on a continuous basis.


All settlement of order book trades takes place within the Central Securities Clearing System (CSCS). Settlement of order book trades are instructed automatically by the ATS post-trade router into CSCS. All settlement is enabled for direct cash settlement into client’s account. Consequently, all bonds listed on the NSE settle through the CSCS as the Depository. The Central Bank of Nigeria (CBN) acts as both the Registrar and Agent Bank to the issue of federal bonds. On the other hand, Registrars such as First Registrars acts as registrar for state and corporate bonds.

5.6.3 TRANSPARENCY

The fixed income trading platform on the NSE provides for pre- and post-trade transparency. The bid-ask information and last trade information from the ATS is published to the NSE website, market data vendor terminals and available as part of the NSE real time data feeds (NSE website).

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5.7 MAURITIUS5.7.1 TRADING PROCESSES

The SEM operates the ATS which matches orders placed by investment dealers. Trading is thus centralised since the ATS can be used to trade different types of financial instruments all from the same terminal. Participation in Government of Mauritius securities sales can be achieved through 3 avenues: direct-bidding, primary dealers or secondary market trading. Direct access to primary auctions is only open to Mauritian citizens or residents. Meanwhile, Foreign Financial Institutions can submit their bids through Primary Dealers or licensed Stockbrokers. In the secondary market, individuals and corporates can purchase Treasury bills by contacting any of the twelve PDs appointed by the Central Bank of Mauritius (CBM). However, non-residents are allowed to participate in the secondary market through a Primary Dealer.


Only debt instruments deposited in the CDS Company Ltd can be traded on the debt board. Settlement for Government of Mauritius Treasury Bonds (GMTB) is T+0. The settlement cycle for all government securities but GMTB is T+2.

5.7.3 TRANSPARENCY

The market is fairly liquid and transparent primarily due to the centralised trading platform.

5.8 ESWATINI5.8.1 TRADING PROCESSES

The Central Bank of Eswatini (CBE) acts as the agent for government in the issuance of domestic debt, and undertakes the issue, placement and service of any government securities. Further, primary dealers have been appointed and these are currently limited to the four local commercial banks namely Standard Bank Swaziland, Nedbank Swaziland, First National Bank and Swaziland Development and Savings Bank. Treasury bond auctions are announced at the beginning of the financial period and bidding is open until at least 21 days before closing date. Bids may only be submitted directly through primary dealers. A book entry system is used to capture all bids. The secondary market trading of government securities is conducted on an OTC basis through dealers and stockbrokers who play the role of market-makers by quoting two-way prices for bonds for retail and interbank

transactions. The bonds are listed on the Eswatini Stock Exchange (ESE) which vets all secondary market trades to ensure that pricing is within the stipulated market bands, and to ensure compliance.


Settlement of successful bids for Treasury bills takes place on the issue date, two days following the auction date (T+2) unless announced otherwise. The Bank confirms holdings to successful bidders by authenticated notice of allotment. Primary Dealers have securities settlement accounts at the Bank which must be funded before delivery of the Treasury Bills is awarded. Failure to fund the account would lead to sanctions, including, ultimately, the loss of primary dealer status.

5.8.3 TRANSPARENCY

For primary market trading, usually the results of auction are published on the Central Bank website and also shown on the Reuters page (SWAT) immediately after launch of the auction day and local newspapers the following day after the auction day. The use of OTC market for bonds affects market transparency. For secondary trading, government bonds are listed on the ESE which vets all secondary market trades to ensure that pricing is within the stipulated market bands, and to ensure compliance.


PART 6: A LOOK INTO INITIATIVES OF OTHER BOND MARKETS

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There are several apparent issues facing Botswana bond market which need to be addressed. It turns out that these issues are not uncommon in other frontier African markets. This was revealed in a study carried out by the USAID Southern African Global Competitiveness Hub in 2009. This study was commissioned by the African Development Bank (AfDB) as part of its regional mapping studies aimed at establishing the nature and status of existing bond markets development initiatives at national and regional levels, and by international institutions. The study covered the SADC and part of the COMESA region. The issues observed in the study are similar to those found in Botswana Bond Market Development Strategy (2010), and these include; fragmentation of the bond markets, insufficient liquidity, lack of government and corporate bond issues, dissatisfaction with the primary dealer system, lack of issuance programmes, predominant buy and hold strategy, underdeveloped corporate advisory services, excessive issuing costs, very tight and restrictive regulatory environment and lack of capital for market-making activities, etc.

The discussions below therefore touch on the initiatives by the bond markets in South Africa, Kenya, Nigeria, Mauritius and Eswatini in light of the above issues comparing them to the initiatives in Botswana.

6.1 SOUTH AFRICAAccording to information from JSE website, 90% of the high liquidity inherent in the market is contributed by government bonds trading and the corporate bond market remains illiquid relative to the government bonds. However, the issuances of corporate bonds continues to increase. Most of the fixed income securities in the South African market are listed and traded on the JSE. This is not the case with Botswana, where majority of trading, especially with regards to government bonds happens OTC and the market remains fragmented between BSE and BoB with decentralised trading platforms. Liquidity also still remains a challenge in Botswana with regards to bonds, especially in the corporate bond market. To this end, BSE and the BBMA, have come up with initiatives that intend to increase liquidity and develop the market in general. These include the holding of bond market conferences and round table discussions which are targeted at increasing participation in the bond market and addressing bond market development issues.

The BSE has also included in their 5 year strategic plan (2017-2021) that they intend to increase the number of listed bonds to 50 by 2021. Regarding the issue of fragmentation of the market BSE has embarked on a project to centralise the trading, clearing and settlement of government bonds at the BSE and the CSDB. This is also expected to do away with the one day lag period regarding the reporting of trades to the BSE.

In terms of the frequency of bond auctions, South Africa carries out weekly auctions whereas in Botswana the auctions are carried out quarterly. Initiatives are in place though to increase the frequency of the auctions from quarterly to at least monthly. Other current initiatives in Botswana are the plans to introduce Retail Bonds. Retail Bonds are already traded in the South African market and they are issued by the Government as an initiative to promote retail investor participation and inclusion in the bond market since corporate issuers have their own interest and needs, hence are not interested in issuing Retail Bonds. Similarly, the BoB has agreed with the Government through the MFED to introduce Retail Bonds issued by Government. This was revealed by a highly placed BoB representative during the BBMA roundtable discussions in June 2017. This idea is highly supported by both BBMA and BSE and as it emerged during the same roundtable discussion that both BBMA and BSE were lobbying for not only the introduction of such Retail Bonds but also that they should be attractive and affordable in terms of their minimal Pula denomination in order to promote the ease of access to transact in them. In South Africa, for example, Retail Saving Bonds can be purchased online, at any post office, by telephone, with a broker, or in person at National Treasury (NT), (AfDB report on local currency issuance on African capital markets, 2017).

6.2 KENYAThe bond market in Kenya is among the most developed in terms of market infrastructure, transparency and efficiencies. Like the South African market and unlike in Botswana, the Kenyan bond market is centralised with both the corporate and government bonds traded through the NSE. However, just like in the case of Botswana the clearing and settlement of government bonds is done through the Central Bank of Kenya (CBK) and the corporate bonds are cleared and settled through the Central Securities Depository of Kenya. It emerged during the 2016 BBMA bond market conference in

PART 6: A LOOK INTO INITIATIVES OF OTHER BOND MARKETS


Gaborone, through the CBK representative, Debt Market Operations, that the Kenyan market aims to decentralise the trading platform for both corporate and government bonds and introduce a primary dealer system. The reason for this was however unclear though the Kenyan representative mentioned the aims of improving efficiencies and uptake of fixed income securities.

As discussed earlier, Botswana is in the process of centralising the trading platforms for both corporate and government bonds. This is expected to improve the efficiency of the bond market in term of increasing the speed at which trade information is availed to the market. Market observers however have reservations as to whether this will improve the performance of the market. In a recent interview with one of the economists in the country about centralising the trading platform, the sentiments shared are that centralising the trading platform may not unleash the envisaged liquidity and efficiencies in the market if the supply of bonds relative to the available capital in the market continues to remain skewed. According to the economist, if the demand-supply imbalance can be dealt with then efficiencies will improve. Also lack of foreign investor participation and pricing issues which are caused by government wanting to reduce costs and hence suppressing the yield curve especially on long dated bonds should be dealt with. On the issue of increasing foreign investor participation an abolishment of withholding tax on interest which is currently 15% for non-residents could also improve foreign investor participation.

One of the initiatives observed in Kenya was the introduction of a Retail Bond called M-AKIBA in 2017 issued by CBK. The bond was meant primarily to enable retail investors to easily access the bond market and its minimum denomination was $30. It was a three year bond with coupon rate of 10% per annum and tax free interest rate. One of its unique and attractive features was the ease of its subscription, trading and settlement as it was traded using mobile phones and using mobile money technology and could be traded 24 hours a day. These features made it more convenient to retail investors. Despite this, the trading of the bond has not been as successful as it was expected to be and this may call for rigorous financial literacy training within the Kenyan populace. Botswana on the other hand is also going in the same direction to introduce Retail Bonds as part of financial inclusion. Kenya also launched a Green Bond programme in 2017 as a way of facilitating growth in environmentally friendly investments. The proceeds from the issuance programme were earmarked for projects that have

environmental benefits like, carbon reduction in the atmosphere, reduction in soil and water pollution.

6.3 NIGERIAThe NSE provides one of the most liquid bond markets in Sub-Saharan Africa and like the South African and Botswana debt markets, this liquidity is mostly driven by the federal government bonds. The Exchange provides a platform for an array of fixed income securities issued by local and international companies and the government, hence helping both institutional and retail investors with access to these varied products. To add to this variety of fixed income products, the Debt Management Office of Nigeria in collaboration with the NSE launched the Federal Government of Nigeria Savings Bond (FGN Savings Bond) in 2017. This was an initiative by the government to encourage financial inclusion and increase participation of retail investors in the bond market. Just like the M-AKIBA in Kenya and the Retail Savings Bonds in South Africa, the minimum denomination of the FGN Saving Bond was lower at N5000 (approximately US$14) making it affordable to individuals to subscribe for the issues. The issues were made monthly just like government bonds which are issued in the primary market during monthly auctions. These monthly auctions provide improved liquidity than the quarterly auctions in the case of Botswana. However, as stated earlier the South African market is even better with the auctions taking place on weekly basis. Botswana on the other hand is yet to introduce Retail Bonds and other fixed income products that can appeal to retail investors.

Further to the developments introduced in the Nigerian debt market, in 2017 the Federal Government introduced a multi-currency listing and trading platform and listed US$1.6 billion of Sovereign Eurobonds (AfDB). In the three markets discussed so far, which are South Africa, Kenya and Nigeria, Botswana is the only market where government has not issued Eurobonds. This is despite the fact that Botswana has the top credit rating in Africa. South Africa’s issued Eurobonds account for about 10% of its GDP (according to Bloomberg) and the country continues to issue despite its junk status.

In July 2018, the Debt Management Office of Nigeria listed a N10.69billion, 5-year, Federal Government Sovereign Green Bond at a coupon rate of 13.48% on the NSE. This, according to Nigerian officials, was a way of broadening funding options available to the government and also availing alternative investment options to the majority of the Nigerian populace. According to the NSE website, this Sovereign Green

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Bond was apparently the first in Nigeria and in the African continent and its one of the first in emerging markets with Fiji also leading in the pack. In Africa alone countries which were expected to issue Sovereign Green Bonds in 2018 included Kenya, Ghana and Morocco. In Botswana, no Green Bonds are expected to be issued in the short-term although the idea has been conceived by relevant stakeholders including among others, the BSE and BoB as a long term project. The starting point is ordinarily the promulgation of a regulation framework and incentives specific to Green Bonds or Green Finance.

6.4 MAURITIUSThe SEM is almost as old as the BSE. In its earlier years it was more concentrated on providing secondary market for equities but the exchange has evolved over time to include trading of multi-asset classes which include debt securities, amongst others. According to the SEM website, the listing of debt securities continued to increase over time which called for the creation of the SEM Bond Index (SEM-BI) which was launched in November 2017. The index was created to help bond market participants with some benchmark and a reference point for bond portfolio management. It was also introduced to help investors to assess the performance of the Mauritian bond market. Though this initiative came late for Mauritius, the BSE long introduced three bond indices in April 2013, which included the Government Bond Index (GovI), the corporate bond Index (CorpI) and the composite Botswana Bond Index (BBI). The BBI provides an alternative to the Fleming Aggregate Bond Index (FABI) which has been the only bond index used in Botswana market since June 2003.

Apart from the introduction of the SEM-BI, other initiatives in the Mauritian bond market include the listing of an Exchange Traded Fund (ETF) which tracks the performance of the Indian sovereign bond as well as the listing of rupee denominated Masala bond, a bond issued outside of India by an Indian company. This listing which happened in 2016 increased the variety of investments options in terms of fixed income securities. The BSE introduced a closely similar ETF in 2015 called Newfunds Inflation-Linked Bond Index (ILBI) EFT, which is an ETF that tracks the performance of the index which comprises of the South African Government’s Inflation-Linked bonds. This ETF unlike the one on the SEM which just tracks the performance of an Indian Sovereign bond has more advantages in that it accounts for inflation from Botswana’s major trading partner and hence prices risk by automatically adjusting South African government bond prices

as inflation changes over time. The most recent development on the bond ETFs on the SEM was the admission and listing of the African Domestic Bond Fund (ADBF) which was launched in September 2018 by the AfDB and Mauritian Commercial Bank Group (MCB). According to MCB Group website, the ADBF is a Bond ETF that tracks the performance of AfDB/AFMISM Bloomberg African Bond Index 25% Capped. This index currently comprises of local currency sovereign bonds of eight African market which include, Botswana, Egypt, Kenya, Namibia, Nigeria, South Africa, Ghana and Zambia. Essentially if an investor buys this ETF, they would have invested in sovereign bonds of these eight African nations through one investment vehicle. The AfDB together with MCB undertook roadshows in Botswana in 2017 to market the Bond to potential investors but the ETF is yet to list on the BSE. The ETF is expected to be dual listed in all the countries that are represented in the fund subject to commitments from local investors.

To further develop the Mauritian debt market, the SEM launched the Green Bond Capacity Building Programme in May 2018. This initiative was taken by SEM to bring together bond market participants, including issuers and investors to lead the development of a green bond market in Mauritius. Although SEM is not expecting many issuers to come on board to issue Green Bonds in the short term, they are hopeful that in the medium to long term, issuers of such bonds will increase and the product will add value to the economic climate resiliency of Mauritius. As discussed above under the Nigerian debt market, Botswana is yet to make strides with regards to the Green Bonds market.

6.5 ESWATINIThe ESE regulates the equity and debt market and list equities, corporate and government bonds. The secondary bond market in Eswatini remains illiquid, especially the corporate bond market and there are not many initiatives that the government or ESE has embarked on to develop the bond market.


PART 7: THE FUTURE OF THE BOTSWANA BOND MARKET

43

The Botswana capital markets are awash with liquidity but in the past decade the Government of Botswana has struggled with financing infrastructure projects and its budget due to tough economic conditions. These 2 factors provide a great incentive for Government to find new innovative ways accessing capital markets for capital. Below are some possible innovations which would assist the country to grow the debt market as well as assist the Government in its development objectives.

7.1 PUBLIC PRIVATE PARTNERSHIPS (PPPS)

PPPs have proven to be an excellent model to fund development projects especially in South Africa through the National Treasury. In the South African model of PPPs, the National Treasury identifies projects which have “natural” cash flows created by the project e.g. roads with toll gates, buildings with rental income, power station with tariffs on electricity. These cash flows are bundled into a “bond” with unitary payments from the project. The bonds are then sold to investors to fund those projects and therefore these become self-funding projects which reduce the burden on the Government.

The Government of Botswana, through the MFED, announced in early 2000 that it will use PPPs as one avenue to finance its budget. It turns out however that this never happened or if it has this PPP model has minimally been used. In recent interviews with bond market participants, they expressed disappointment that the PPP model that was announced by Government as a method of procurement in 2001 has not been used. They said the market was expecting that if the model was employed there would be an increase in supply of a variety of fixed income securities, which could include long dated zero coupon bonds and inflation-linked bonds. They gave an example of Morupule B expansion project which was 100% financed by a loan from a supranational. In their view, the Government could have used the PPP model and tapped into the balance sheet of local private companies like banks or could have issued an infrastructure bond in that regard. Notwithstanding, strides have been made to intensify the use of PPP by the Government of Botswana, and in 2006 the Public Enterprises, Evaluation and Privatisation Agency (PEEPA) developed an implementation strategy for the PPP programme in Botswana informed by, among others, a review of international best PPP practices and an analysis of the application of those best practices within an African context. To this end

and since 2016 a PPP unit has been created within the MFED to spearhead the implementation of the PPP projects and for coordination and monitoring of PPP policy. According to The Patriot newspaper (September 2018), the Government has already identified 16 projects which are in the pipeline for implementation under the PPP model during the National Development Plan (NDP) 11. However, the country is yet to have a dedicated PPP legislation. Hence the need to establish a PPP legislative/regulatory framework that would strengthen the institutional capacity to handle PPP contracts (BoB Annual Report, 2017)

7.2 INFRASTRUCTURE BONDS

As alluded to in the above discussions the Government needs to tap into the private sector for funding especially given the magnitude and costs of infrastructure projects that need to be funded. As an example, in the 2018 Budget Speech delivered by the Minister in the MFED, it was indicated that a total of BWP10, 2 billion is needed for infrastructure development. This comprised of over BWP2,00 billion for the energy sector projects, BWP2,53 billion for water development programs and projects, over BWP2,00 billion for development of road networks, BWP1,5 billion for maintenance of roads, BWP461,35 million for Government ICT Infrastructure, and BWP2,23 billion for maintenance of Government facilities in the country. Trends also generally show that in future more funding will be needed for infrastructure development given the increased migration of people to cities and towns. These trends mean, for example, that a lot of funds will be needed to improve and maintain road, health facilities, schools, water and energy infrastructures.

Infrastructure bonds therefore provide an alternative source of finance for the Government in addition to other sources. The Parliament of Botswana approved the Emergency Water Security and Efficiency Project Loan Authorisation Bill in March 2017, to raise BWP1.5 billion from the World Bank to finance the funding gap in the water sector. The Government could have alternatively tapped into the local market and issued Infrastructure Bonds to raise the amount needed. The Government has for some time been contemplating issuing Infrastructure Bonds and Inflation-Linked Bonds, but to date, that has not materialised.

The BBMA has suggested that the country should introduce Infrastructure Bonds for long term projects in addition to issuing normal long dated bonds as

PART 7: THE FUTURE OF THE BOTSWANA BOND MARKET


this will provide investors with an alternative product to normal bonds. This would also assist investors in providing diversity of bond offerings away from plain vanilla Government bonds.

Infrastructure Bonds can also be made accessible to retail investors like in Kenya where the Government issued the M-AKIBA, a Retail Bond that was issued to finance infrastructure development. Moreover, it would help if these Infrastructure Bonds are rated by credit rating agencies like Moody’s and Standard and Poor’s so that they can be appetising to even foreign investors in order to improve foreign participation in the Botswana bond market.

7.3 RETAIL BONDS

Globally, individual participation in the bond market is generally low and as an intervention the bond markets across the world are working on making their bond markets accessible to everyone including individuals. Initiatives have therefore been put in place to encourage participation by individuals in the bond market. These include the introduction of fixed income products that appeal to the retail investors such as those discussed in relation to South Africa, Nigeria and Kenya. These success stories in other bonds market provide Botswana with an opportunity and motivation to also introduce similar offerings in the local bond market.

7.4 CENTRALIZATION OF THE BOTSWANA BOND MARKET

Botswana is a very small country for an already small bond market to remain fragmented. In response to this, the authorities involved in the bond market (BSE, BoB, MFED and NBFIRA) have come together to embark on a project to centralise the trading, clearing and settlement of debt securities bonds at the BSE and the CSDB. A business case has been documented for this purpose, establishing the CSDB as a single CSD in Botswana. This project is a major milestone towards improving efficiencies in the overall bond market, embracing automation, promoting the security of assets as well as promoting retail inclusion in the bond market. Under this project, the BSE and CSDB have procured a new CSD system with enhanced capabilities to improve efficiencies and bring additional products and services. The system is earmarked for implementation in 2019.

7.5 REVISION OF DEBT LISTING REQUIREMENTS

In the past, there has been no separate listing requirements documents for debt and equities as everything was bundled in one document. There have been developments towards having separate listing rules and so far a separate set of the equity listing rules has been approved by the regulator (NBFIRA), and implemented effective in 2019. Revised debt listing rules have been completed by the BSE and have been submitted to the regulator for approval. The importance of this exercise is to bring the rules up to speed with international best practice, modernise them and improve their friendlies and poise towards progressive debt market development. One of the major changes within the rules is the proposal that all debt securities issued under a BSE approved Programme Memorandum shall be listed on the Exchange. This is expected to deepen the market, and improve pricing, transparency and price discovery. At present, the market is faced with a quantum of unlisted bonds for which pricing and general information is difficult to source. Automatically, all bonds listed on the BSE will be housed in the CSD system thus improving the safety of assets and access to records by bondholders. Another development in the revised debt listing rules is the inclusion of rules for Commercial Paper. This is aimed at positioning the BSE as an avenue for raising short term capital through the issuance of Commercial Paper.

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8. THE BOTSWANA BOND MARKET IN 2025In this section, the BBMA makes an intelligent estimate of the developments that would have taken place in Botswana by 2025. It is anticipated that some of these projections would happen earlier than 2025.

• Secondary trading of bonds will be centralised at the BSE with clearing and settlement at the CSDB;• Cash settlement of bonds will be through Central Bank Money, and the CSD system will be integrated with

the Botswana Real Time Gross Settlement System (RTGSS), enabling Straight Through Processing;• Settlement will be through DVP Model 1;• Government would have issued Retail Savings Bonds and Infrastructure Bonds;• Market-making and Securities Borrowing and Lending (SBL) in fixed income instruments will be taking

place;• Diversity of Exchange traded fixed income instruments will be broad, among them Commercial Paper;• Retail investor participation in the bond market will be sizeable.


9. REFERENCES

African Development Bank (2017). AfDB Local Currency Bond Issuance on African Capital Markets.

African Development Bank Initiative. Fixed income-Kenya. Retrieved on 14.08.2018 from https://www.africanbondmarkets.org/en/country-profiles/east-africa/kenya/

African Development Bank Initiative. Fixed income-Nigeria. Retrieved on 14.08.2018 from https://www.africanbondmarkets.org/en/country-profiles/west-africa/nigeria/

African Development Bank Initiative. Fixed income –South Africa. Retrieved on 14.08.2018 from https://www.africanbondmarkets.org/en/country-profiles/southern-africa/south-africa/

African Development Bank Initiative. Fixed income –Mauritius. Retrieved on 14.08.2018 from; https://www.africanbondmarkets.org/en/country-profiles/southern-africa/mauritius/

African Development Bank Initiative. Fixed income –Swaziland. Retrieved on 14.08.2018 from; https://www.africanbondmarkets.org/en/country-profiles/southern-africa/swaziland/

Bank of Botswana Annual Report (2017), retrieved September 22, 2018 from http://www.bankofbotswana.bw/assets/uploaded/annual-report.pdf

Botswana Stock Exchange (2018). BBIS Advisory Committee Circular,4 August 2018-Insertion and Changes in Nominal Amount of BBIS Constituent Bonds. Retrieved from

Botswana Stock Exchange (2011). A Review of Bond Market Status in Sub-Saharan Africa – 5 Bond Markets.

Botswana Stock Exchange (2010). The State of Debt Market in Botswana – February 2010

Botswana Stock Exchange Annual Reports (2006-2017). Retrieved on 13.09.2018 from http://www.bse.co.bw/publications.php

Botswana Stock Exchange (2017).Status on Bond dematerialisation. Retrieved 27/09/2018 from , http://www.bse.co.bw/docs/STATUS%20ON%20BOND%20DEMATERIALISATION.pdf

Botswana Stock Exchange (2017).Amended Draft Ground Rules. Retrieved 27/09/2018 from, http://www.bse.co.bw/docs/ANNEXURE%201%20%20Amended%20Draft%20BBIS%20Ground%20Rules.pdf

Central Bank of Swaziland (2014). Media Release-Swaziland Government Bonds Issuances. Retrieved 22 September 2018, from http://www.centralbank.org.sz/media/releases/SG020_16OCTOBER2014.pdf

Central Bank of Swaziland (April 2014). Framework for issue of government treasury bills on behalf of the government of the kingdom of Swaziland. Retrieved 27 September 2018, from http://www.centralbank.org.sz/markets/bills/apply/docs/TBillsFramework.pdf

CoSSE unpublished report (2017). The committee of SADC stock exchanges’ bond market status report.

Fleming Aggregate Bond Index (FABI). Retrieved 27 September 2018 from http://www.fabi.co.bw/fabi_info

Fleming Aggregate Bond Index (FABI). Methodology Statement. Retrieved on 27 September 2018 from, http://www.fabi.co.bw/Fleming%20Aggregate%20Bond%20Index%20(FABI)%20-%20Methodology%20Statement.pdf

Guguyu, O (2018). Investors become cautious of ‘risky’ corporate bonds. Retrieved on September 21, 2018 from; https://www.standardmedia.co.ke/business/article/2001282209/investors-become-cautious-of-risky-corporate-bonds

Johannesburg Stock Exchange website. https://www.jse.co.za/trade/debt-market

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Johannesburg Stock Exchange website.https://www.jse.co.za/current-companies/issuer-regulation

Nairobi Securities Exchange Annual Report, 2017.

Nairobi Securities Exchange Regulatory framework, 2015 https://www.nse.co.ke/regulatory-framework/nairobi-securities-exchange.html

Nigerian Stock Exchange (2017).Structure. Retrieved on 14.08.2018 from; http://www.nse.com.ng/investors-site/becoming-an-investor/FAQs/The%20NSE%20Retail%20Bond%20Market%20Structure.pdf

Nigerian stock exchange (2018). 2017 Annual Review and 2018 Outlook. Retrieved on 25.09.2018 from http://www.nse.com.ng/NSEPresentation/2017%20Annual%20Review%20and%202018%20Outlook_Final.pdf

Stock Exchange of Mauritius (2018). Trading Procedures. Retrieved on 27/09/2018 from http://www.stockexchangeofmauritius.com/rules

Stock Exchange of Mauritius (2017). The Stock Exchange of Mauritius (SEM) wins the Award for the “Most Innovative African Stock Exchange for 2017”. Retrieved on 27/09/2018 from http://www.stockexchangeofmauritius.com/downloads/sem21092017.pdf

The Star (2018). Vary offerings for market capitalisation, NSE told-January 18. 2018. Retrieved 03.10.2018 from https://www.the-star.co.ke/news/2018/01/18/vary-offerings-for-market-capitalisation-nse-told_c1699707

The Patriot on Sunday, (2018). PPPs: A new Cost Effective Way, retrieved September 25, 2018 from http://www.thepatriot.co.bw/business/item/5406-ppps-new-cost-effective-way.html


APPENDICESAPPENDIX 1: LIST OF LISTED BONDS AS AT DECEMBER 2018

SECURITY NOMINAL VALUE(BWP MILLION) MATURITY DATE COUPON RATE

GOVERNMENT BONDS

BW007 1974 10-03-2025 8%BW008 2147 08-09-2020 7.75%BW011 2103 10-09-2031 7.75%BW012 1528 13-06-2040 6.00%BW013 705 07-06-2023 4.50%BW014 129 05-09-2029 4.8%BW015 301 02-09-2043 5.3%

QUASI-GOVERNMENT BONDS

DPCF005 100 02-06-2019 10.60%DPCF006 55 02-06-2022 10.75%DPCF007 35 02-06-2025 10.90%

Supranational Bonds

IFC001* 260 20-09-2024CORPORATE BONDSBBB016 156 31-10-2019 8%BBS004 75 26-11-2019 11.10%BBS005 150 03-12-2023 11.20%BDC001* 82 09-06-2029 -BDC002* 131.5 16-08-2022 -BDC003* 142.5 09-06-2029 -BHC020 103 10-12-2020 0.101FML025 150 23-10-2025 8.20%FNBB005 126 11-11-2020 -FNBB006* 112 11-11-2022 -FNBB007* 161.84 01-12-2026 -FNBB008* 40 01-12-2026 7.48%FNBB009 126.35 08-12-2024 5.95%GBL001 50 31-1-2021 18.00%GBL002 21.8 24-02-2020 15.00%GBL003 15 31-12-2020 15.00%GBL004 25 10-04-2021 15.00%GBL005 5 23-03-2019 11.00%INB001* 113.38** 28-12-2027 -LHL06 200 08-11-2023 10.50%LHL07 75 08-11-2025 10.50%LHL08 25 08-11-2027 11.00%PTP021* 96 10-06-2021 -PTP024 59 10-06-2024 8.50%

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PTP026 70 29-11-2026 9.00%SBBL063 98 15-10-2019 7.54%SBBL064* 128 18-06-2020 -SBBL065* 153 18-06-2020 -SBBL066* 140 15-06-2027 -SBBL067 60 15-06-2027 7.80%SCBB003 50 20-12-2020 10.50%SCBB006* 70 12-05-2021 -SCBB007* 50 27-06-2022 -SCBB008 127 27-06-2022 8.20%WUC002 205 26-06-2026 10.60%

BOND MARKET SUMMARY#Government Bond data is reported with a one(1) day (as updated by Bank of Botswana)*Variable Coupon Rate**United States Dollars

BOND SYMBOL FULL NAME

BW Government of Botswana BondDPCF Debt Participation Capital Funding LimitedIFC International Finance CorporationBBB Barclays Bank BotswanaBBS Botswana Building SocietyBDC Botswana Development CorporationBDCL Botswana Development Corporation LimitedBHC Botswana Housing CorporationFML Furnmart LimitedFNBB First National Bank BotswanaGBL GertBucks LimitedINB Investec LimitedLHL Letshego Holdings LimitedPTP Prime Time PropertySBBL Stanbic Bank Botswana LimitedSCBB Standard Chartered Bank BotswanaWUC Water Utilities Corporation

Source: BSE


NOTES

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NOTES


NOTES

www.bbma.co.bw

Botswana Bond Market Association,Private Bag 00417Gaborone, Botswana

Tel: +267 3674400Fax: +267 3180175

Physical AddressBotswana Stock Exchange4th Floor Fairscape PrecinctPlot 70667, FairgroundsGaborone, Botswana

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