Development of the Botswana Bond Market in the Development of Its Financial Research Proposal

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¶ … Botswana Bond Market

The development of the bond market is critical for furthering the financial development of Botswana and for many reasons and as well the African Development Bank plays a critical role in this development.

The purpose of the research proposed herein is the examination of the Botswana financial system development and the determination of the need for the development of a bond market and the importance of that development in Botswana. Specifically, this work seeks to determine what is needed to appropriately and effectively develop the bond market in Botswana in terms of the requirements of the government and the African Development Bank.

Research questions in this study include those as follows:

(1) What role is required of the government in Botswana for effective bond market development in Botswana"

(2) What role does the African Development Bank play in the development of a bond market in Botswana?

Significance of Study

The significance of this study is the knowledge that will be added to the already existing base of knowledge in this area of study.

Methodology

The methodology proposed for the research herein is one of a qualitative nature and one that will involve an extensive review of literature that is of the nature of peer-reviewed literature of both academic and professional sources such as is published in academic journals and professional literature publications.

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TOPIC: Research Proposal on Development of the Botswana Bond Market in the Development of Its Financial Market Assignment

The work entitled: "Developing Government Bond Markets" published by the International Monetary Fund (2001) states that after the recent international financial crisis "the need to develop domestic securities markets has...increasingly attracted the attention of national and international policymakers." Because of this various policy recommendations have been made by organizations including the Asia-Pacific Economic Cooperation (APEC), collaborative Initiative on Development of Domestic Markets." Government bonds are stated to be the "backbone of most fixed-income securities markets in both developed and developing countries." (International Monetary Fund, 2001)

Furthermore, government bonds are stated to provide "a benchmark yield curve and help establish the overall credit curve." (International Monetary Fund, 2001) Government bonds are stated to be backed typically by the "faith and credit of the government, not by physical or financial assets." However, mortgage financing in the privet sector "often relies fully or partially on bonds backed by mortgages. (International Monetary Fund, 2001) Stated to be similar is "bonds securitized by receivables of various types including bonds issued to finance infrastructure projects" which represent an important part of the bond market.

It is stated that bond markets throughout the world are "built on the same basic elements: a number of issuers with long-term financing needs, investors with a need to place savings or other liquid funds in interest-bearing securities, intermediaries that bring together investors and issuers, and an infrastructure that provides price discovery information." (International Monetary Fund, 2001) The regulatory regime is stated to provide "the basic framework for bond markets, and indeed for capital markets in general. Efficient bond markets are characterized by a competitive market structure, low transaction costs, low levels of fragmentation, a robust and safe market infrastructure, and a high level of heterogeneity among market participants." (International Monetary Fund, 2001)

According to the International Monetary Fund (2001) "development of a government bond market provides a number of important benefits if the prerequisites to a sound development are in place." (International Monetary Fund, 2001) At the macroeconomic policy level it is stated that a "...government securities market provides an avenue for domestic funding of budget deficits other than that provided by the central bank and, thereby, can reduce the need for direct and potentially damaging monetary financing of government deficits and avoid a build-up of foreign currency -- denominated debt." (International Monetary Fund, 2001)

In addition "a government securities market can also strengthen the transmission and implementation of monetary policy, including the achievement of monetary targets or inflation objectives, and can enable the use of market-based indirect monetary policy instruments." (International Monetary Fund, 2001) In fact, such a market existing serves to "...enable authorities to smooth consumption and investment expenditures in response to shocks, but if coupled with sound debt management, can also help governments reduce their exposure to interest rate, currency, and other financial risks." (International Monetary Fund, 2001)

Stated lastly is that "...a shift toward market-oriented funding of government budget deficits will reduce debt-service costs over the medium to long-term through development of a deep and liquid market for government securities." (International Monetary Fund, 2001) The International Monetary Fund states that at the microeconomic level "...development of a domestic securities market can increase overall financial stability and improve financial intermediation through greater competition and development of related financial infrastructure, products, and services." (International Monetary Fund, 2001) The International Monetary Fund states that the government "In its role as regulator of the market, and in many cases, the primary issuer, the government is a central player in the government securities market. The central bank, in implementing monetary policy, will also influence market structure. Such official actions will inevitably influence the way the market develops." (2001)

In a separate report entitled: "Developing the Domestic Government Debt Market: From Diagnostics to Reform Implementation" published by the International Monetary Fund it is stated that a money market "...is the cornerstone of a competitive and efficient system of market-based financial intermediation. A country's money market must normally be operating well before a government bond market, including both an efficient primary market and a liquid secondary market, can be fully developed." (International Monetary Fund, 2008) It is stated that in a deregulated market economy a money market that is well-functioning plays the roles as follows: (1) It facilitates the conduct of monetary control through market-based instruments, anchoring the short end of the yield curve and supporting the development of the foreign exchange market; (2) It also provides the authorities with better signals of market expectations, allows banks and their customers to better manage their liquidity, and strengthens competition in financial intermediation; (3) A well-developed money market also helps promote private issuance of negotiable certificates of deposit, promissory notes, and commercial paper. As in the case of government debt, active markets in short-term instruments support the development of longer-term corporate bond markets. (International Monetary Fund, 2008)

In addition, an efficient money market "stimulates the development of more active debt securities markets by lowering liquidity risk premiums and enabling investors to hold larger portfolios of longer-term instruments." (International Monetary Fund, 2008) Countries relying greatly on short-term instruments for government borrowing the money market efficiency serves to lower financing costs of the government in a more direct manner. (International Monetary Fund, 2008, paraphrased)

There are three stated key conditions for the development of a well-functioning money market. These three key conditions are those of: (1) A shift from direct to market-based (indirect) methods of implementing monetary policy (including the elimination or significant reduction of central bank accommodation of the liquidity needs of individual banks); (2) Adequate management systems that provide reliable estimates of future government cash flows and forecasts of aggregate bank liquidity; and (3) The presence of banks and other financial institutions with incentives to develop efficient liquidity and risk management services. (Allowing direct access to the money market by nonfinancial corporations and other investors increases incentives for liquidity management.)" (International Monetary Fund, 2008)

A report published by Carana Corporation entitled: "Technical Assistance to the Botswana Stock Exchange" (2003) states that the economic environment in Botswana "is one of the most favorable in Africa as indicated by the country's long track record of rapid and sustained growth, sound economic management, strong and democratic institutions as well as political and social stability. Overall, the real GDP growth is estimated to have averaged around 9% of GDP with per capital income growth rates of 7% making Botswana the riches non-oil producing country in Africa." However it is stated that "despite these strong gains there has been minimal progress in the development of the capital markets sector." (Carana Corporation, 2003) The financial sector "can boast an independent central bank, five commercial banks, four insurance companies, one mortgage company, one hundred fifty nine pension and provident funds and several asset management companies" however, it is stated that "overall capital market development has not kept pace with this rapid development and diversification in the financial sector." (Carana Corporation, 2003) The result is that the Government of Botswana is deprived of a broader fiscal base, which in turn forces an over-reliance upon the mining sector to finance a broad array of infrastructure and social needs." (Carana Corporation, 2003)

The work of Kahn (2005) entitled: "Original Sin and Bond Market Development in Sub-Saharan Africa" states that "despite the expansion of domestic bond markets in emerging markets, it is argued that the fact that many bonds placements are linked to the exchange rate, they are indistinguishable from foreign-currency denominated issues from a currency risk point-of-view, while a large amount are indexed to the short-term interest rate, thereby providing little protection from interest rate increases." (Kahn, 2005) Kahn states that the lack of the development of… [END OF PREVIEW] . . . READ MORE

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