Gaborone — Local currency bond markets (LCBMs) play an important role in improving the resilience of the domestic economy and financial systems.
Speaking at the Botswana Bond Market Association conference last week, Macroeconomic and Financial Management Institute, executive director, Dr Michael Antigi-Ego said developed bond markets play an important role in the country's economy as they expand an opportunity for financing both government projects and the private sector.
He said local currency bond markets improve on the allocation of capital as it is easy finance government budget deficit should the need arise.
A well-developed bond market, he said has the capacity to mobilise both the domestic and foreign savings and allocate everything in the domestic market in order to attract saving from other countries.
Dr Antigi-Ego said having a strong bond market, which can be at par with the short term liabilities and short term asserts, may result in obtaining and maintaining some financial stability and contribute to financial diversification by having a series of balance sheets and various economic sectors.
"Botswana's balance of payment is fairly impressive as the financial account reflects an out flow of savings because there are not enough domestic opportunities to invest the excess savings in the economy, therefore the development of the local bond market tends to attract foreign savings, which could be channelled into the domestic economy for investment," he said.
He stressed the importance of developing the local currency bond markets since the interest on external loans appears to be low in nominal terms compared to domestic debt interest.
"There is generally a temptation on most clients to opt for external financing without factoring in the foreign exchange risks," he said.
Botswana, he said generally has excess savings over investments, which could be channelled into local currency bond market and shielded from volatile capital flows, thus enhancing the country's economy.
He said there was therefore no need for Botswana to issue out a lot of long term bonds as it currently has strong macroeconomic environment characterised by low inflation and strong fiscal balances.
He however, cautioned that there was need to develop capital markets for future needs when government surpluses decline.
Dr Antigi-Ego said Botswana's debt has declined from 25 to 18 per cent of the GDP due to a decline in the financing needs as a result of the current excellent performance of diamond sales.
In order to develop a prudent local bond market, Dr Antigi-Ego indicated that Botswana needs to establish macroeconomic stability that will be inflation resistance, since inflation shortens any planning horizon.
He said there is also need for good cash management both on commercial banks and the reserve bank capacity to be able to focus any liquidity that needs to be managed.
Given the excess surpluses that Botswana has, Dr Antigi-Ego said it was important for the country to create a stable local currency bond market and continue accumulating foreign capital reserves and maintain a permanent income hypothesis to ensure that there is sufficient stock of reserves by the time diamonds are exhausted.
He said Botswana should in her drive to transform to a high income country, develop a system of borrowing in own currency and address the frequency issuance, fragmentation and size of current bond market.
Local currency bond markets, he said, should be considered to facilitate raising long term finance for the private sector and fixing existing infrastructure gaps.
<i>Source : BOPA</i>