Government continues to issue more bonds and allot more to existing ones listed on the local market. Last week Friday Botswana Stock Exchange Limited (BSEL) notified the market of new changes following new insertions and changes on BBIS Constituent Bonds in the 2018 second quarter.
Ministry of Finance & Economic Development through Bank of Botswana (BOB) recently issued an additional total of P477 million to its existing Bonds, BW007, BW014 and BW015. A communiqué from BSE reveals that at the 31st May 2019 Government Bonds and Treasury Bill Auction, the three Bonds all of which are GovI, BBIFixed and BBI constituent bonds were re-opened and allotted additional issuances.
The BW007 bond was allotted P150.00 million, increasing its total nominal amount in issue to P2, 124 million while BW014 received additional issuance of P227.00 million, raising its total nominal amount in issue to P1, 158.00 million. In addition BW015 was reopened and additional P100 million was allotted. These additional issuances have increased the total nominal amount in issue on the BBIS by P477.00 million to P 14,193.17 million. The Constituents series currently represents 40 constituent bonds in total 33 of which corporate bonds with 24 fixed being rate bonds. The remaining 7 are government bonds.
Botswana Stock Exchange trades its Index Series (BBIS) under a series of 4 bond indices being Composite Bond Index (BBI), Government Bond Index (GovI), Corporate Bond Index (CorpI) and Composite Fixed Rate Bond Index (BBIFixed). The 1st March 2019 auction marked the first quarter of this year’s bond issuances with this 31st May insertions marking second quarter issuance.
Zooming into 2018 Bond performance the BSE Bond Index Series (BBIS) appreciated by 3.2% whereas the GovI and CorpI registered returns of 3.5% and 3.3% respectively. The BBIFixed returned 2.6% since its introduction in April 2018. Inflation averaged of 3.2% in 2018 mirrored that listed bonds provided purchasing power protection, save for the fixed rate bonds. Inflation in the year predominantly remained within the objective range of 3%-6% whereas interest rates were held constant throughout the year.
The value of bonds traded increased over four times from P535.6 Million in 2017 to P2, 222.7 Million in 2018. Government bonds continued to dominate liquidity of the market accounting for 97.9% of total turnover. The BSE registered a record number of new bond listings as 10 new bonds came on board compared to 8 in 2017. “This cushioned the impact of the 4 bond delisting in the year 2018.
Even though Government bonds accounted for the majority of trading activity corporate bonds dominated in terms of the quantity of bonds listed, a phenomenon that in most African markets is the reverse. At sector level, the profile of the bond market at the end of 2018 was such that Government bonds accounted for 63.8% of market capitalization, Quasi-Government (1.3%), Parastatals (7.9%), Corporate (25.3%) and Supranational (1.7%).
For 2019, trading activity increased significantly during 2019 Quarter 1 compared to the same period in 2018. The value of bonds traded over the period was P251.9 Million in comparison to P27.4 Million traded over the same period in 2018. At the 1 March 2019 Government Bonds and Treasury Bill auction, the Bank of Botswana (BoB), on behalf of the Government offered additional tranches of the BW013 allotting P137.00 Million , increasing its total nominal amount in issue to P1,076.00 Million as well as BW014 allotting P335.00 Million hiking up its total nominal amount in issue to P931.00 Million.
On the back of Government bonds tap issuances and new issuances, the market capitalization of listed bonds increased to P15.4 Billion compared to P14.7 Billion as at the same period in 2018. On quarterly basis Government issues long dated bonds with a view to support the local capital market, observers in the financial services industry also hold the same sentiments. Experts and service providers in the insurance industry say regular bond issuances sparks confidence and in particular boosts the annuity book across investment & insurance market.
This was also reiterated by Catherine Lesetedi Chief Executive Officer of leading financial services, insurance and investment group Botswana Insurance Holdings Limited (BIHL) late last year when delivering her company’s financial results. For 2018 H1 she highlighted that BIHL delivered satisfactory figures on the annuity front because of continued commitment to support the market by Government “we are pleased that during the first six months we realized an improvement in annuity inflows, we were able to manage the annuity risk bolstered by government quarterly bond issuing” She said.
Lesetedi further explained that the annuity book was an extremely risky segment to manage noting that for BHIL , the breakthrough would also be attributed to well structured risk management framework handled by a team of actuaries that manage the risk and meets on a monthly basis , “It would be remise of me not to mention the fact that managing the annuity book requires long dated assets and we are quite pleased as BIHL that we have seen government come to the party and issue on a quarterly basis long dated bonds which sparks confidence in the market and boost annuity inflows”
Government bond which is sometime referred to as sovereign bond is a bond issued by a national government unusually through the treasury or central bank, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date. The bonds are usually denominated in the country's own currency; the terms on which a government can sell bonds depend on how creditworthy the market considers it to be. International credit rating agencies would provide ratings for the bonds, but market participants would then make up their own minds about a particular bond. In the case of Botswana, several years ago Government decided to assist in the growth of a stable and vibrant capital market in the country.
Government through Bank of Botswana resolved to issue debt instrument in the form of bonds and treasury bills, issued on quarterly basis. Botswana Stock Exchange Limited has played a pivotal role in boosting the annuity market and the capital market at large by calling for government to issue more bonds. BSE argued that the limited availability of listed government bonds negatively impact the demand of debt instruments while also compromising the liquidity of the debt market.
In mid 2017, Thapelo Tsheole, the Chief Executive Officer of Botswana Stock Exchange now a demutualized limited company remarked that lack of adequate government bonds as well as the wide gaps between their maturity dates was posing the danger of negatively hitting the pricing of corporate bonds. “We need to have more government bonds issued to maintain a robust risk free curve and the viability of the existing BSE bond indices.
These wide gaps in the yield curve negatively impact the pricing of assets such as corporate bonds that ordinarily reference risk free assets and this brings distortions in pricing and compromises the liquidity and the appetite for debt instruments,” said the BSE Chief quoted in July 2017.
Catherine Lesetedi noted that government decision to participate more and coming up with a reviewed framework that speaks to a specified and defined interval of bond issuing was commendable “We are quite pleased that at the last auction Government came to the market with a new bond BW 0015 which is a 25 year tenure bond, and this is very helpful for anyone who is in the market for annuities to manage their liabilities,” she said.
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Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively, since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.