Quarterly Report - Q4 2020

Dec. 31, 2020

Market Review 

Covid 19 pandemic continues to have significant negative effects on economies: The extent and the duration of the shocks remain uncertain. Some good news with the development of vaccines and now countries have started vaccinations, with different speeds and access to vaccines.  The process has not however, gone smoothly. Supply constraints of vaccines in the face of massive demand are presenting challenges to countries.  The market for vaccines, with a sizable monopoly power from suppliers of vaccines, is showing signs of strains from pricing to delivery problems (the painful price adjustment process in an unbalanced market for a critical commodity and delays in satisfying demand).  Covid 19 vaccine has a public good nature.  How to have an efficient production and delivery of the vaccine to the world?  How to reconcile private companies’ interests or incentives and the social issues and health issues surrounding vaccine market? 

The IMF latest economic outlook published in January 2021 projects the global economy to contract by 3.5% in 2020, against the 4.4% forecasted in October 2020, (4.9% projected in June 2020) an upward review, but still deeper contraction than the 3.0% projected in April 2020. The IMF projects Global growth at 5.5% in 2021, also against 5.2% projected in October 2020, and 4.2% in 2022.  The World bank projects global growth at 4.0% for 2021. 

For the domestic economy, the latest IMF revised forecast shows contraction than previously estimated, a contraction of 9.6% against a previous figure of -5.4% for 2020 (a deeper contraction than previously forecasted) and a positive growth of 8.7% in 2021 (a more optimistic than previous rebound estimate at 6.8% for 2021); while the Ministry of Finance and Economic Development sees domestic output contacting by 9.6%, against a previous forecast of -13.1% in 2020 and a recovery of 7.7%.  We still notice that the disparities in views, translated in forecasts between MFED and the IMF. But of note is that these disparities in forecast show disparities in views and more importantly the uncertainty in assessing the extent and magnitude of the crisis on the economies.  

During the fourth quarter of 2020, inflation ended the year at 2.20%, rising from 1.80% in September 2020.  At that level, it still remained below the target range of 3.0%-to 6.0% of the central bank. Inflation has had a declining trend over the past 10 years.  

Domestic Annual Inflation

Source - Morula Capital Partners

In 2020, a major development in the local bond market was the Botswana Government authorising the increase in bond issuance programme. Botswana Government increased the Bond Issuance Programme from P15 billion to P30 billion in July 2020.  It indicated in July that Government borrowing requirement for fiscal year 2020/21 is increased to a gross financing of P8 billion for bonds and P3 billion for Treasury Bills.  It indicated that while the increase in borrowing will help meet the Covid 19 related expenditures, the overall objective is supporting the development of the domestic government securities market. 


At the June 2020 auction, P1.345 billion was issued on bonds, while P1.83 billion was raised at the September 2020 auctionAs a result, the gross issuance need available for the remaining bond auctions in this fiscal year is P4.825 billion. To note also is the frequency of auctions, which are now monthly instead of quarterly as in the recent past, a move aimed at improving liquidity and price discovery. 


Bond yields have been low in the past years: a reflection of the accommodative monetary policy, liquidity and supply and demand conditions, and subdued inflationary pressures. The Covid 19 pandemic negative effects on the economy will put downward pressures on the local risk-free rates.  However, the new change in the auction program with both the quantities at auctions and their frequency increasing coupled with Government needs of financing have seen upward pressure on the yields in the last quarter of the year; this has depressed the returns of bonds to negative levels in the last quarter. 

Yield Curve 

The par yield curve movement is described in the chart below.  The yields on Government securities edged up in the fourth quarter of 2020 on the back of increased frequency of auctions and quantity of securities offered at auctions. 

Yield Curve as at Dec 31 2020

 Source:  Bank of Botswana, Morula, BSE and FABI


The year 2020 had been full of events with widespread implications for the economy. The prevailing economic developments with low inflation, low demand pressures and the economy operating below normal capacity allows accommodative monetary policies and expansionary fiscal policies in this time of Covid 19.  The central bank followed the Bank rate cut of 50bps in April 2020, by another rate cut of 50 bps on October 8, 2020.  The Bank rate is now 3.75 %.  The reasons for the October rate cut do not differ much from the April 2020 ones; they are the consequences of the Covid 19 pandemic on the domestic economy.  

The impacts of Covid 19 arising from lockdown, social distancing, restrictions on international and local travels; and international trade, have been felt and will be felt (generally) negatively on local businesses and the local economy growth. Some of these effects are beyond the scope of either fiscal and monetary authorities. Generally, then, the perception of risk has changed as underlying economic conditions have changed.  

As Covid 19 pandemic continues, complexities emanating from the vaccine distribution and vaccinations roll out issues (adding also vaccine hesitancy, and anti-vaccine groups arising) arise, and we still expect to continue to see weaker companies and increase in the price of risk for the corporate sector securities as sustainability and liquidity concerns will become prevalent.  We expect that high credit quality papers such as Government and high credit quality corporates will represent a safer bet to protect the portfolios and achieving other goals of the portfolio.