08 Sep 2020

Minister of Finance and Economic Development, Dr Thapelo Matsheka has asked Parliament to authorise an increase in the Bond Issuance Programme from the current P15 billion to P30 billion.

Presenting the motion for authorisation of increase of bond issuance in Parliament on September 7, he said government would need to make more use of borrowing to finance budget deficits in the short and medium term.

In this regard, he said the ability to do so was currently constrained as the existing ceiling of P15 billion in bond issuance was reached as at the June 2020 government bond auction.

Dr Matsheka also revealed that the request for increase was also a response to the COVID-19 pandemic as government had had to revisit options for funding its budget, particularly for the second half of National Development Plan 11, as shown in the mid-term review of the plan.

Dr Matsheka said one such source of funding was domestic borrowing, which was governed under the Stock, Bonds and Treasury Bills Act of 2005.

“In terms of this law, total public debt is limited to 40 per cent of GDP; 20 per cent domestic and 20 per cent external,” he said.

Regarding domestic borrowing, he stated that in 2011, Parliament authorised a ceiling of P15 billion for the Bond Issuance Programme, then equivalent to 14 per cent of GDP.

He said the objective of the Bond Issuance Programme was to assist with the development of the domestic capital market by establishing a risk free yield curve to facilitate wider bond issuance by both state owned enterprises and private sector entities.

He also said an extensive review of the Bond Issuance Programme was undertaken in 2019 to determine if the objective for the programme had been met, and the review revealed that the objective had not been fully achieved since the capital market remained undeveloped. 

“The reason for this was that liquidity in the government securities market was still low, with limited turnover leading to a tendency by investors to buy and hold”, he stated.

In addition, Dr Matsheka said because of the infrequent issuance of new bonds in the primary market and low trading volumes in the secondary market, there was limited information in the market about pricing. 

This, he stated that resulted in lack of price discovery and high transaction costs for investors and other market participants in trading.

He said as a result, the bond market was still not functioning well enough to support the pricing of financial products issued by public sector and private sector enterprises. 

“The proposal is therefore, to increase the current domestic Bond Issuance Programme from P15 billion to P30 billion, which translates to 16 per cent of GDP in current prices,” he stated. BOPA