sebate_liquid_2009

How Liquid and Efficient are Botswana Bond Markets?
Matlhogonolo Victor Sebate
Research report presented in partial fulfilment of the
requirements for the degree of Masters of Development
Finance at the University of Stellenbosch
Supervisor: Dr. C. Mlambo
Degree of Confidentiality: A December 2009

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DECLARATION
Hereby I, Matlhogonolo Victor Sebate, declare that this research report is my own original work
and that all sources have been accurately reported and acknowledged, and that this document
has not previously, in its entirety or in part, been submitted at any university in order to obtain
an academic qualification.
M.V. Sebate February 2009
Copyright University of Stellenbosch

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ACKNOWLEDGEMENTS
I wish to express my gratitude to the Department of Business, especially my research
supervisor Dr Chipo Mlambo for all her help, input and advice throughout the study. I would like
to thank my family and friends for the valuable encouragement and support.

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OPSOMMING
Die belangsikheid van die mark se mikrostruktuns in die bepaling van sulses in die effektemark
in die toewysing van finansiele bronne hang af van die maze waasin die mikrostruktuns
elemente antwup is om die eintlike prys te beprol sodat vraag en aanbod op’n duddrffnde manur
by mokaur pas.
Hierdie havuisings projek analiser sommige van die fundamentele mikrostuktuns elemente wat
vir die luidige stand van die Botawana effektemask verantwoordielik is. Die doe van die studie
was an die likwiditeit in Botswana se effiktemask te andusode. Die studie beoog ook am die
werkinge van die Botswana effekdemoskle net die in Suid Afrika te vergelyk en am verdn aam
te toon wat ayder die tevoortyntreding van die effektemask stiek. Houweling, Mentink and
Vorst’s (2003) se maatsaf is gebruik, tesam met ’n kombinasie van eenvandrge regressive en
latent modelle. Vin die effebtiwiteitstoets is ’n statiese model gebruik.
In die geheed gesien is vasgeted dat die korporatieve effektemsak minder effektief as illikied is.
Veder wordnitgewys dat Botswana nog swakker vertoon as Suid Afrika as dit kam by die vlak
van antwikkeling van die korporative effektemask.

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ABSTRACT
The importance of market microstructure in determining the success of a bond market in
allocating financial resources depends on the degree to which the microstructure elements like
liquidity, efficiency and volatility have been designed to determine the proper price at which
matching of demand and supply in an efficient and effective manner is done. This research
project analyzes some of the fundamental microstructure elements responsible for the current
state of the Botswana bond market. The Botswana bond market is still in its infant stage hence
there is little information on trades, which contributes to the liquidity problem. The purpose of the
study was to investigate the liquidity and efficiency in Botswana’s bond market. The study also
sought to compare the behaviour of the Botswana bond market to those of South Africa and
further indicate what is behind the bond market emergence. Houweling, Mentink and Vorst‘s
(2003) measure was used, in addition to a combination of simple regression and latent models.
In the test of efficiency, a static model has been employed.
Overall, it is established that the corporate bond market is less efficient and is illiquid.
Furthermore, it is revealed that Botswana is still lagging behind South Africa when it comes to
the level of development of the corporate bond market.

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LIST OF TABLES
TABLE 4.1: TRADES IN 2006 .................................................................................................. 22
TABLE 4.2: TRADES IN 2007 .................................................................................................. 23
TABLE 4.3: ISSUANCE OF THE BOTSWANA DEBT SECURITIES,1998-2008 ...................... 24
TABLE 4.4: LIST OF BONDS LISTED...................................................................................... 27
TABLE 4.5: BOND STATISTICS .............................................................................................. 29
TABLE 4.6: SOUTH SAHARA AFRICA OVERALL PERFOMANCE PER COUNTRY .............. 30
TABLE 4.7: REGRESSION OF AVERAGE TRADED VALUE ON AGE-BOND ........................ 31
TABLE 4.8: REGRESSION OF AVERAGE TRADED VALUE ON TIME-TO-MATURITY ......... 30
TABLE 4.9: REGRESSION OF LATENT LIQUIDITY ON TIME-TO-MATURITY....................... 33
TABLE 4.10: REGRESSION OF LATENT LIQUIDITY ON BOND AGE.................................... 34

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LIST OF FIGURES
FIGURE 4.1: ISSUE SIZE ........................................................................................................ 23
FIGURE 4.2: MATURITY.......................................................................................................... 24
FIGURE 4.3: BONDS LISTED FOR PRIVATE COMPANY VS PARASTATALS....................... 24

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TABLE OF CONTENTS
DECLARATION.......................................................................................................................... II
ACKNOWLEDGEMENTS.......................................................................................................... III
OPSOMMING ...........................................................................................................................IV
ABSTRACT................................................................................................................................V
LIST OF TABLES......................................................................................................................VI
LIST OF FIGURES...................................................................................................................VII
CHAPTER 1 INTRODUCTION AND BACKGROUND ................................................................ 1
1.1 INTRODUCTION.................................................................................................................. 1
1.1.1 Importance of bond markets .............................................................................................. 3
1.1.2. Trading Systems............................................................................................................... 3
1.1.3 Regulatory Framework ...................................................................................................... 4
1.1.4 Policy Issues ..................................................................................................................... 5
1.1.5 Conclusions....................................................................................................................... 5
1.2 STATEMENT OF THE PROBLEM ....................................................................................... 5
1.3 OBJECTIVES....................................................................................................................... 6
1.4 PURPOSE OF THE STUDY................................................................................................. 6
1.5 RESEARCH QUESTIONS.................................................................................................... 6
1.6 DEFINITION OF TERMS...................................................................................................... 6
CHAPTER 2 LITERATURE REVIEW ......................................................................................... 8
CHAPTER 3 RESEARCH METHODOLOGY............................................................................ 18
3.1 INTRODUCTION................................................................................................................ 18
3.2 EMPIRICAL FRAMEWORK................................................................................................ 18
3.3 VARIABLE DEFINITION..................................................................................................... 18
3.4 DATA AND SAMPLE.......................................................................................................... 21
CHAPTER 4 FINDINGS ........................................................................................................... 22
4.1 INTRODUCTION................................................................................................................ 22
4.2 EMPIRICAL RESULTS....................................................................................................... 22

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4.2.1 Summary Statistics............................................................................................... 22
4.2.2 Liquidity Analysis .................................................................................................. 26
4.2.3 Effeciency Analysis............................................................................................... 34
4.3 DISCUSSIONS.................................................................................................................. 38
CHAPTER 5 CONCLUSION, LIMITATIONS & RECOMMENDATIONS ................................... 40
5.1 INTRODUCTIONS.............................................................................................................. 40
5.2 LIMITATIONS..................................................................................................................... 42
5.3 POLICY RECOMMENDATIONS ........................................................................................ 42
LIST OF SOURCES............................................................................................................... 46
1

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CHAPTER 1
INTRODUCTION AND BACKGROUND
1.1 INTRODUCTION
A well-developed capital market is essential for promoting economic growth. It facilitates the
efficient allocation of the savings to the most productive uses. It is generally agreed that
there is a positive relationship between economic growth and financial sector development,
even though there may not always be agreement on the direction of causation (Khan, 2005:
67). For financial sector development to take its cause, the financial system has to be
somehow liquid and efficient (Borio, 2000, & Oxelheim & Rafferty, 2005: 118).
As for liquidity, previous literature suggests a number of micro-determinants, which should
have an effect on bond market liquidity. Liquidity has three broad categories, which are
product design, market microstructure, and the behaviour of market participants. Moreover,
many studies have been conducted on the importance of bond market liquidity, as well as on
the various determinants of liquidity, with varying conclusions from market to market. Borio
(2000:39) has attempted to link the increasing interest in the liquidity as following the
increased need for an efficient financial system. Borio (2000:39) further explains that liquidity
is an important factor underpinning the smooth functioning of the financial system and the
conditioning of the daily activities of the agents, including pricing, trading and risk
management. Similarly, Mohanty (2002) suggests microeconomic factors may also play a
role in determining market liquidity. Javanovic and Roussea (2001:17) have argued that the
rate of interest is the return on bonds, which depends most directly not on the supply of
money but on the supply of bonds. On using bonds, one can find liquidity effect without
introducing a host of other variables (Javanovic & Roussea, 2001: 17).
The most controversial issue in finance is, possibly, whether the financial market is efficient
in allocating or using economic resources and information or not. Other financial theory
issues, such as volatility, predictability, speculation and anomalies relate to efficiency issues
and are interdependent. Empirical evidence, provided by existing numerous tests of these
issues, is also used in supporting or rejecting efficiency in the financial market (Islam & Oh,
2003; Mills, 1999; Cuthbertson, 1996; Bollerslev & Hodrick, 1999 as referred to in Pesaran &
Wickens, 1999).
On overall, effective capital markets may play several positive roles. First, there will be
greater diversification of financing, an easier process of risk transformation and a smaller
concentration of financial risks. Second, the capital markets may check and screen financial

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risks more efficiently and quickly than bank credit departments, based on swifter flows of
information, thereby providing more expedient and appropriate financing decisions. Third,
more effective capital markets deepen the financial base, which has far-reaching positive
implications for development and resource mobilization in developing countries (Batten,
2000: 7). However, it is expected that these markets compete with one another on efficiency
criteria. Oxelheim and Rafferty (2005: 118) elucidate that an efficient bond market is one
where prices accurately reflect all available information, and quickly adjust to new
information. In the efficient market hypothesis, it is assumed that participants rationally
formulate their bond buying and selling decisions based on available information about bond
prices and their relevant determinants.
Botswana, like other countries with capital markets, also faces a situation where she has to
ensure that the capital markets are well developed in order to promote her economic growth.
In Botswana, historical factors and progressive global financial innovations over the years
have influenced the institutional structure and the type of financial services available (NDP 8:
92). At the end of 1996, the Botswana government took a deliberate action and liberalized
exchange controls (NDP 8: 92). This step removed all the restrictions on genuine current
account transactions and hence the Botswana’s capital markets seem to have experienced
growth in terms of issuance and turnover of securities (NDP 8: 92). For Botswana to
experience even better results, it would be very important to make sure that her capital
markets are liquid and efficient. In trying to develop her capital markets, Botswana has gone
through reforms particularly equity and debt markets. Prior to financial liberalization, there
was the establishment of the Botswana Stock exchange by the Act of Parliament in 1995.
To stimulate the growth in capital markets, improved macroeconomic fundamentals and
other capital market-related reforms are in the implementation process. Other capital market
related reforms include privatization of state-owned enterprises. Again, in 2002, there is a
shift to the privately managed contribution pension system. Therefore, these developments
require an efficient and liquid bond market, which is essential to facilitate this process.
Recent reforms include the development of regulatory and supervisory frameworks, which
includes the Non Banking Financial Institutions Regulatory Authority (NBFIRA). NBFIRA
plays a vital role in addressing liquidity and efficiency in Botswana’s bond markets.
Briefly, the Botswana bond market started to grow after the government took the initiative to
list the bonds given to the parastatals through the Public Debt Service Fund. The initiative
was adopted mainly in support of the capital market development by increasing the supply of
bonds in the market, which have maturities ranging from 3 to 21 years. Despite this, there is

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a huge demand for securities from pension funds and insurance companies, but little supply
of bonds. Bond markets in Botswana represent about 9 percent of GDP (Financial Sector
Assessment Program Botswana, 2007: 11). This small issuance is due to large fiscal
surpluses. On the other hand, the buy and hold strategy among institutional investors results
in an illiquid bond market. Moreover, there are no proper trading rules for bonds and most
bond trades on the BSE are through an interbank market thus creating challenges in
efficiency.
1.1.1 Importance of the bond markets
Bond markets play a very important role since they facilitate economic growth through
mobilization and allocation of savings. They also allow the performance of important activities
that are crucial to economic growth. According to Woepking (2005: 15), capital markets
promote economic efficiency by channeling money from those who do not have an
immediate productive use of it, to those who do have. Hence serving the role of an
intermediary, the capital market directs capital to most productive uses. Woepking (2005: 15)
further states that the borrowers who, in most cases, are governments, businesses, and
people whose spending exceed their income, borrow the savers’ investments that have been
entrusted to the capital markets. Lewis (1995: 18) points out that the financial services
industry is a “major engine of economic growth and also functions hand in hand with volume
of commerce”. In Botswana, since the emergence of the bond market, the government has
resorted to the facilitation of privatization through this market. In an attempt to support capital
markets development, government bonds were listed to raise money to undertake the
development projects. Banks also have shown more appetite by listing more bonds as well.
1.1.2 Trading Systems
A trading system is a process/program with specific rules that allow messages to participants
so that they can send and receive the type of information displayed (Hendershott, 2003: 10).
The systems transmit pre- and post-trade data about quotes and trades to the market
participants. The trading system facilitates a very important component in bond markets,
since it sets a platform where traders can meet to make their transactions. More over, this is
where the two characteristics namely, efficiency and liquidity interplay. Madhavan, Poter and
Weaver (2000:58) argued that while efficient price discovery is critical, liquidity is equally
important. Madhavan, Poter and Weaver (2008: 58) further explained that historically,
dealers who buy and sell securities in demand provided liquidity. In the modern world,
advances in communications technology allow buyers and sellers to interact with one
another in the electronic auction without the need for a physical exchange floor for dealer
intermediaries.

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According to Pagano and Roell (1996:1), trading systems differ in their degree of
transparency in which they are defined as the extent to which market makers can observe
the size and direction of the current order flow. Greater transparency enhances market
liquidity by reducing the opportunities for taking advantage of uninformed participants
(Pagano & Roell, 1996: 1). Ngugi and Agoti (2008: 8) linked liquidity to the institutional
structure, citing studies that looked at the implications of trading systems in liquidity, and
concluded that periodic auctions provide better price efficiency in the model but at the
expense of continuity and higher information costs.
The electronic or automated auction is widely used to trade equities, derivatives, bonds, and
foreign exchange (Madhavan, Poter and Weaver, 2000: 57). Even though debt is listed on
the exchange, the most common platform for trading debt securities is over the counter
(OTC). According to Luengnaruemitchai and Ong (2005: 8), this concentration is
predominantly attributable to diversity of debt securities (maturity, duration, coupon, credit
risk), which tends to limit the trading in most corporate debt issues. A dealership trading
system could thus improve liquidity. This is the case in Botswana, where there is no proper
trading system for the corporate bond market but the dealers search for information
themselves and carry out transactions (interbank market). They later come to the Botswana
Stock Exchange to carry out the proper trading after they have agreed on the price and
volume of bonds to trade.
1.1.3 Regulatory framework
According to the Bond Exchange of South Africa (BESA), the purpose of the legal and
regulatory framework is to strengthen and develop the debt capital market, to monitor the
debt capital market and to provide investor protection (BIS Review 50/2007:3). Watson
(2000: 2), and Luengnaruemitchai and Ong (2005:19) highlighted that for a market to foster
business development, it must be attractive to prospective investors looking for investment
opportunities. For a market to attract potential investors, it must also have earned investor
confidence, which is through effective enforcement and imposition of rules (Watson M., 2000:
2). The rules should ensure that the market operates efficiently and fairly. Therefore, the key
to a successful securities trading system is that all investors share the risks and opportunities
of investment equally.
In particular, to the Botswana bond market, the focus has been in the regulatory framework
area. The market regulator has been established and the authorities planning to pass a new
Securities Act to address existing regulatory hurdles. According to the Bank of Botswana

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(BoB) Annual Report (2007:56), the new legislation should also encourage trading of all
types of bonds in the exchange; modernize trading through the introduction of electronic
trading, streamline governance and update capital requirements for the exchange members,
while at the same time, introducing effective provisions to deter market manipulation and
insider trading.
1.1.4 Policy issue
In Botswana, corporate fundraising is predominantly through commercial loans, then equity
issues that leave a challenge for the issuers, intermediaries and regulators. For the market to
be efficient, they need to disseminate appropriate information to reassure potential investors
in their investment decision-making process. Corporate issuers must disseminate useful
information in order to gain acceptance and confidence from the market when they issue
bonds in the domestic market. In summary, a working domestic bond market is an important
part of the capital market infrastructure, and information plays a key role in its development
(Nozue, 2007:1).
The emergence of the bond market in Botswana came because of certain reforms. The
question that remains is how to improve liquidity and efficiency. As the market becomes
liquid, it facilitates more trading which in turn attracts more market participants, resulting in a
vicious circle where the market becomes liquid and more efficient over time. The introduction
of such reforms might drive liquidity hence leading to better price discovery. Therefore, in the
process of improving liquidity, the institutional framework needs upgrading to facilitate
efficiency simultaneously.
1.1.5 Conclusion
Bond market liquidity and efficiency arise as the major determinants of the development of
the bond market. There is a link between the importance of the bond market, the trading
system and the regulatory framework. In addition, the policy uses the three components in
driving its decisions. From above, it is noted that the bond markets in Botswana are used to
facilitate privatization and to channel funds from pension funds and insurance companies to
facilitate developments. Again, it became clear that these developments require a liquid and
efficient bond market. The present study, therefore, focuses on investigating how liquid and
efficient the Botswana bond markets are.

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1.2 STATEMENT OF THE PROBLEM
Despite the intense financial reform efforts that Botswana has undertaken, much is still
lacking to further address factors that have been impeding growth in the capital markets,
bond markets in particular. This includes addressing issues surrounding efficiency and
liquidity. However, the market is still small and remains important for the financing of the
economy as well as in terms of investment opportunities, but it is somewhat under-
researched. As a result, it became crucial for the researcher to find out how liquid and
efficient the Botswana bond markets are.
1.3 OBJECTIVES
The primary aim of this study, therefore, will be to address the following objectives
1. To find out how efficient the Botswana bond markets are;
2. To investigate the liquidity of the Botswana bond markets; and
3. To analyze the efficiency and liquidity of the Botswana bond markets to compare their
behaviour to that of the South African bond markets and further indicate what is
behind the bond market emergence.
1.4 PURPOSE OF THE STUDY
The purpose of the present study is to investigate how liquid and efficient the Botswana bond
markets are. The researcher was also interested in comparing the Botswana bond markets
to those of South Africa and to, further, indicate what is behind the bond market emergence.
The important variables in this study are liquidity, efficiency and the Botswana bond market.
Secondary data are used in order to meet the objectives of the present study.
1.5 RESEARCH QUESTION
How liquid and efficient are Botswana bond markets?
1.6 DEFINITION OF TERMS
Bond market: in this study, the preferred definition is a market where gilts from corporation
and parastatals are issued and traded.
Emerging bond market: the study used the definition used by Wikipedia to encompass bonds
issued by less developed countries. It does not include borrowing from government,
supranational organizations such as the IMF or private sources, though loans that are
securitized and issued to the markets would be included

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Efficiency (of bond market): A preferred definition for this study states that, “markets ensure
that resources are allocated to their most profitable expected use, and provide services at
the lowest cost” (Oxelheim & Rafferty, 2005:118). This definition is from economists who
view markets as institutions that require resources and economic agents. According to
Oxelheim and Rafferty (2005:118), Burns (1979) suggested the need for a composite
measure of capital markets efficiency and proposed the concept of operational efficiency by
employing three indicators, that is, liquidity, orderliness and organizational quality.
Liquidity (of bond markets): In this study, liquidity is the ability to transact over a short period
without adversely affecting the price of a security (Warga, 2004: 2). However, the research is
a bit lax hence accommodating trading volume in a certain year as a liquidity measure. The
more liquid a market is, the more trading it gets, and the more efficient it gets overtime.
Market Microstructure: In this study, microstructure refers to the study of the process and
outcomes of exchanging assets under specific set rules.

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CHAPTER 2
REVIEW OF RELATED LITERATURE
2.1 INTRODUCTION
There is indeed a growing body of research, which points towards bond markets
developments. Ever since the evolution of these markets in Africa, continuous research for
further improvement is essential to spur growth in African capital markets. In particular, a
functioning corporate bond market intermediates between long-term investment needs and
long-term capital for private sector activities. These roles are common in developed
economies, and are becoming increasingly relevant objectives in developing countries
(Endo, 2000:5). Therefore, in order to carry out this process, there is a need to improve
liquidity and efficiency. These are the two microstructure elements that policy framework
needs to address to enhance market performance. This chapter will therefore look at the
empirical research that has attempted to explain these microstructure elements.
According to Frimpong and Oteng-Abayie (2007: 2), a fundamental question concerning
capital markets is their efficiency, which includes operational and informational allocation.
Therefore, emerging capital market efficiency has been under serious scrutiny in recent
years. Empirical results, however, are inconclusive, mainly due to failure to consider
institutional features. In addition, efficiency tests employed have focused mainly on mature
markets such as those of the US, the UK, Japan, and Germany (Saadi & Gandhi 2004: 3).
However, Saadi and Gandhi (2004: 4) noted that emerging capital markets are increasing in
weight and importance in international portfolio diversification. According to Mobarek (2000:
2), the markets in developing and less developed countries, generally, are believed to be
inefficient in the semi-strong form or the strong form.
Research in finance has been evolving around the concept of market efficiency, a term used
to describe a market in which relevant information is incorporated timely and correctly into
the price of a financial asset. Some of financial analysts believe that markets are not 100
percent efficient while others believe markets are not 100 percent inefficient. Thus, the
theories describing efficiency of financial markets can be broken down into those who believe
markets are generally very efficient and those who believe market are generally inefficient.
Nevertheless, according to Frimpong & Oteng-Abayie (2007: 2), a market is efficient, with
respect to a set of information, and if it is impossible to make economic profits by trading
based on the information set. Since there is no arbitrage, no opportunities can be tapped
using ex ante information, after costs and after the risk premium. This is because all the
information would be discounted in the current price.

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The concept of market efficiency evolved since the beginning of the last century but can be
traced back to Bachelier’s mathematics PhD in which he concluded that commodity prices
fluctuate randomly (Dimson & Mussavian 1998: 2). The earliest empirical research using
formal statistical methods can be traced back to the works of Working (1934), Cowles (1933,
1944), and Cowles and Jones (1937). Working (1934) focused on a previously noted
characteristic of commodity and stock prices, namely, that they resemble accumulations of
purely random changes. Mills and Markellos (2008: 2), and Dimson and Mussavian (1998:
2), showed that US stock prices and other economic time series also share the same
characteristics but unfortunately the studies were overlooked by researchers until the 1950s.
Dupermex (2007: 107) confirms that, by the mid-1970s, there was strong theoretical and
empirical evidence supporting the Efficient Market Hypothesis (EMH). However, there is
currently doubt as to whether stock prices indeed follow a random walk, although there is
increasing evidence that suggest otherwise. The idea of stock prices following the random
walk is connected to the EMH. The premise is that investors react instantaneously to any
informational advantages that they may have thereby eliminating profit opportunities
(Dupermex 2007: 106). Supporting Dupermex (2007), Lo and MacKinlay (1999: 23)
emphasized that by saying prices always fully reflect available information and that no profit
can be made from information-based trading, suggest random walk behaviour. According to
Dupermex (2007: 168), the more efficient the market is, the more random the sequence of
price changes is. Dupermex (2007: 168) argued that the EMH and the random walk do not
amount to the same thing and that random walk prices do not imply that the stock market is
efficient with rational investors.
Dimson and Mussavian (1998: 1) asserts that if capital markets are sufficiently competitive,
then simple microeconomics indicates that investors cannot expect to achieve superior
profits from any investment strategies. They further alluded that, with better understanding of
price formation in competitive markets, the random walk model came to be seen as a set of
observations that can be consistent with the efficient market hypothesis.
Saadi and Gandhi (2004: 3) purport that by adhering to the original work of the French
mathematician, Bachelier, and the seminal papers of Samuel (1965) and Fama (1970),
efficient stock market prices should obey a random walk model and always fully reflect all
available and relevant information.

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Dupermex (2007: 168) highlighted that evidence suggest that markets are to a certain extent
predictable. This does not mean that there are opportunities for arbitrage because markets
operate in the real world (with taxes, transactional costs) without assuming ceteris paribas. A
market can be predictable but without arbitrage opportunities. Similarly, Fama and French
(1995: 23) argued that stock prices approximately follow a random walk, but there are other
factors, which appear to affect stock prices. One of the factors that Fama and French (1995:
23) mentioned includes the one identified by Mobarek and Keseay (2000: 18) that more
market participants in emerging markets are not well informed and behave irrationally
compared to those in well-organized markets. They attribute lack of financial development
especially in capital markets to certain imperfection such as transaction costs, lack of timely
information, cost of acquiring new information and possibly greater uncertainty about the
future (Mobarek and Keseay, 2000: 18). Moreover, traders have access to broader
information including bid and ask prices, and trading activities occur at lower costs due to the
existence of a limit order book. Such a system (computerized) is expected to attract more
investors, increase trading volume and liquidity and improve the price discovery process.
With particular reference to the efficiency of bond markets, available studies are
distinguished into two categories, which are event-oriented studies and time-horizon-oriented
studies. Event-oriented studies examine price movements surrounding official
announcements of specific kinds of information. They are concerned with the semi-strong
form of the EMH. According to (Kroon 1991:2) many researchers, who include Katz (1974),
Hettenhouse & Sartoris (1976), Grier & Katz (1976) and Weistein (1977), Urich & Wachtel
(1984) and Smirlock & Yawitz (1985), analysed price reactions as they are impacted by
changes in ratings of corporate bonds. Studies by Urich & Wachtel (1984) and Smirlock &
Yawitz (1985) deal with public disclosures of inflation figures, money supply and official
discount rate (Kroon, 1991:2).
Podpiera (2000: 27) investigated the efficiency of a financial market in a transition economy
from the viewpoint of its reaction to new information. He examined the reaction of interest
rates, the government bond yield, the stock market index and foreign exchange rates to the
announcements of consumer and producer prices, industrial production and foreign trade
figures. Podpiera (2000: 27) noted that the market does not react efficiently and that this
holds for virtually all of its segments. The results of the study indicated that the market reacts
first to the expected components of the news releases and then retain their explanatory
power for daily changes of financial variables for several days after announcements. This
lack of efficiency holds despite the money market and foreign exchange market being
developed and liquid (Podpiera, 2000: 27).

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Herring and Chatusripitak (2000: 4) studied why bond markets are underdeveloped relative
to equity markets and the banking sector. They further investigated what the absence of well
functioning bond markets may imply for savings, the quality and quantity of investment and
for risk management. Herring and Chatusripitak (2000) found that the absence of a bond
market might render an economy less efficient and significantly more vulnerable to financial
crises.
According to Eichengreen and Ashoka (1998:107), some observers emphasize that the
information relevant for forecasting returns is costly to acquire and process. Hence, the
investors price bonds based on incomplete knowledge about the countries’ economic and
financial circumstances, a practice conducive to herd behaviour and market volatility.
Eichengreen and Ashoka (1998: 107) further argued that investors have powerful incentives
to be informed and discriminating. They cited the differentials that exist between yields on
bonds issued by countries with different credit ratings and economic characteristics.
However, Tong (2004: 33) analyzed the impact of transparency standards on the information
environment. He used a sequence of models useful for analyzing the potential for private
information to crowd out public disclosure. He argued that, the representative-agent and
heterogeneous-agent models both suggested that transparency standards, which improve
agent access to public information, might, at the same time, weaken market incentives to
make costly investments in the acquisition of private information. Tong (2004: 33) also
emphasized that the overall effect of these transparency standards ranges from weak to
nonexistent. He further concluded that, this crowding out effect is larger in developing
countries, which is worrisome, as far as recent transparency-related initiatives have been
targeted at developing countries, in particular.
Mobarek and Keasey (2000:2) suggested that it is convenient to test the weak-form
efficiency of the market rather than the semi-strong form and strong-form efficiencies in less
developed countries because of the absence of sufficient data in a convenient form,
structural profile, inadequate regulations, lack of supervision and administrative laxity in the
implementation of existing rules. In addition, some companies release information and
circulate it before the annual reports are officially available. The annual reports of some of
the listed companies are mistrusted and often result from rumours circulating in the market
about the companies. Mobarek and Keasey (2000:2) cautioned that the market moved
dramatically over a period to become a speculation market and then a gamble market. That
means that there is a trend of market movement and most of the investors in the market

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become speculators. Moreover, share price indices data are available and reliable to test the
weak form efficiency of the market.
The liquidity of the bond market and its informational efficiency are key determinants of the
financing of governments and firms. Several empirical studies offer interesting evidence
about the government bond market (Fleming & Remolona, 1999: 19). It differs from the
corporate bond market. The Treasury market involves one powerful issuer, the government
repeatedly tapping the market, for large and rather standardized issues. Fleming and
Remolona (1999: 19) also explained that the corporate bond market involves a large number
of diverse issuers, some rather small, infrequently tapping the market, often for non-standard
bonds. These features of the corporate bond market impact on its liquidity.
Efficiency and liquidity plays a very vital role in the development of the bond market. Hence,
bond markets need a lot of scrutiny in terms of research to address their efficiency and
liquidity problems especially in emerging markets and particularly in Africa. Hanousek,
Kocenda and Zrmeik (2006:18) concluded that the frequency of trading and market liquidity
deeply matter for the new bond market emergence. These, together with market
transparency, are the drivers that make the market emerge.
According to Warga (2004: 2), liquidity is the ability to transact over a short period without
adversely affecting the price of a security. It has been suggested that liquidity can be
enhanced by introducing price transparency. This is because when the market demand for
trading securities is high, transparency will leads to a greater willingness to trade. However,
the opposite contention is also likely to be true. That is, a fundamental lack of demand to
trade can create a lack of transparency that is wholly independent of the presence of a
transparency-enhancing environment. Trade and liquidity in bonds decline rapidly, a short
period after a bond is first issued. This is because bonds are for the most part what is
referred to as “buy and hold” securities (Warga 2004: 2). According to Persaud (2002: 3),
liquidity and volatility are related but separate concepts. He emphasized that a lack of
liquidity will, in most cases, lead to volatility. Therefore, the rise in volatility in major markets
is supportive of trading anecdotes.
Hund and Lesmond (2007: 29) assert that liquidity matters greatly for pricing of emerging
market bonds, both corporate and sovereign. They also confirmed that at least a necessary
condition for liquidity-based contagion in emerging markets is the existence of significant
liquidity premia embedded in emerging market bond returns. According to Logana, Perina,
Koppen-Mertes & Persaud (2006: 6), a liquidity premium is the additional yield that

13
compensates investors for the risk of being unable to liquidate a position immediately.
Logana et al. (2006: 6) reiterated that their measurement is not straightforward because of
difficulties in recording and standardising liquidity measurements. In the case of bond
markets, there is an absence of published data of the same detail and frequency that retail
equity markets demand.
Besides data, another factor holding up the growth of analysis of liquidity is the lack of a
common definition and common measures. A review of the literature on liquidity in general
reveals that liquidity has many different meanings in different contexts. For example,
macroeconomists often refer to high-powered liquidity, when they refer to money supply.
They take the instruments of liquidity as activities such as open market operations by the
central bank, shifts in the level of interest rates and foreign exchange interventions, which
are totally different from the bid-ask spread quoted for a specific corporate bond issue.
However, the premium to be paid for immediate liquidation of this bond is related to how
much macro-liquidity there is in the system (Logana, et al. 2006:8).
Goyenko (2005: 28) explored a long time series, analyzing the joint dynamics of stock and
bond liquidity but found a significant causal relationship between the two assets. He further
discovered that vector auto regression (VAR) analysis shows that returns, volatility, and
momentum profits are important drivers of liquidity. Jovanovic and Rousseau (2001: 30)
shared the same sentiments but also found that bond and stock markets show a lack of co-
movement, which made it hard to explain without assuming segmentation. Goyenko (2005:
28) later concluded that monetary policy variables are important determinants of stock and
bond liquidity when they are placed first in VAR ordering but their effect almost disappears
for stock liquidity, when placed at the end of VAR ordering. Hence, the implication is that
there is a correlation between bonds and stock market liquidity.
In normal times, liquidity is driven by search costs required for a trader to find a willing buyer
for an asset he/she is trying to sell or vice versa. Search liquidity is asset specific. In stressed
times, liquidity is driven by the homogeneity of investors, that is, the degree by which one’s
decision to sell is related to the decision to sell made by other market players at the same
time. Systematic liquidity is specific to market participants. According to Persaud (2002: 3),
an ill-functioning market would be one where public announcements cause the price of an
instrument to fall, which then causes some market participants to sell, pushing the price even
lower, and driving more sales.

14
Jovanovic and Rousseau (2001:1) studied monthly data, which showed surprise bond
purchases by the Fed raising bond prices and reducing bond yields. However, the injections
did not raise the stock price or reduce stock returns. They concluded that the two markets
show lack of co-movement at high frequencies, which goes against the common view that
liquidity, is good for bond and stock prices.
Macroeconomic variables, such as inflation and federal fund rates forecast off-the-run
illiquidity significantly but have only modest forecasting ability for on-the-run illiquidity. Bond
returns across all maturities are forecastable by off-the-run short-term illiquidity but not by
illiquidity of other maturities or by on-the-run bond illiquidity. Thus, short-term off-the-run
liquidity is the primary source of the liquidity premium in the Treasury bond market (Goyenko,
Subrahmanyam & Ukhov, 2008: 22).
A key feature of this class of theoretical models is the restriction that households do not
quickly adjust their liquid asset holdings, in particular their bank deposit position, in response
to an unanticipated change in monetary policy. Without this restriction, there would be no
liquidity effect, as interest rates would rise rather than fall in response to an easing of
monetary policy due to higher anticipated inflation. A bond market that enables households
to lend directly to firms is shown to provide a mechanism that induces persistence in the
liquidity effect that is otherwise absent from the predictions of the model (Einarsson &
Marquis, 2002: 48).
Greater competition, liquidity and tighter spreads in the Euro market reflect participation by
investors and banks from many countries. Trades have significant information content,
especially for bonds with low ratings. It takes at least five trading days for the information
content of a trade to be fully incorporated in market pricing, reflecting lack of post trade
transparency (Biais & Declerck 2007: 22) .
Chordia, Sarkar and Subrahnayam (2003: 28), found that quoted spreads for a stock in one
market affects the spreads in both the stock and Treasury bond markets, and that return
volatility is an important driver of liquidity. Monetary expansion increases equity market
activities during periods of financial crises, and unexpected increases (decreases) in stock
and bond volatility. They also found that flows to the stock and government bond sectors play
an important role in forecasting stock and bond liquidity. The results established a link
between “macro” liquidity, or more money flows, and “micro” or transactions liquidity
(Persaud, 2002: 3).

15
Chordia, Roll & Subrahnayam (2006:21), emphasized that liquidity facilitates efficiency, in the
sense that the market’s capacity to accommodate order flows is larger during periods when
the market is liquid. They also found that informational efficiency increases with exogenous
decreases in the tick size suggesting that information that is more private should be
incorporated into prices as spreads decline.
Navarrete (2001:20) described the development of the Mexican bond market citing three key
components, which include completeness, liquidity and efficiency. He suggested that, in
order for completeness to be there in a market, there must be a less cumbersome way in
order to bring new financial instruments to the market. This can be achieved by setting
proper regulation regarding information disclosure. With regard to liquidity, opening of current
existing regulation in terms of investment by the Afores (pensions) was recommended. Also
recommended was the need to foster the development of new financial institutions. This can
be achieved by, for example, using money market brokers in corporate issues, and having
market makers with online quotations, etc., so that a true secondary market can be
established. Navarrete (2001:20) noted that many of the current practices done by brokerage
houses, which include price discrimination, would deter the development of an efficient
secondary market. However, he suggested that by giving more information to the market,
investors would know if the price was the correct one and that competition among brokerage
houses will make the market more efficient.
Lagos & Rocheteau (2007:38) found that by imposing severe restrictions on asset holding,
existing search-based theories of financial liquidity neglect a critical step of investor
behaviour in illiquid markets. However, they found that their mechanism, which effectively
incorporates demand liquidity at the investor level, has important implications for market
efficiency and the way trading frictions shape asset prices, trade volumes, bid-ask spreads
and trading delays. This is precisely the dimension of market liquidity which search-based
theories of financial liquidity were designed to explain.
Dunne, Moore and Portes (2006:13) investigated the key differences between electronic and
voice markets, with their implications for transparency and for market outcomes. They
emphasized that markets are not merely theoretically constructed, nor do they typically
function according to simple textbook rules. They further noted that they are complex
institutions with endogenous histories and that evolve over time, partly under the influence of
external forces like regulation. Dunne et al. (2006:13) observed processes and their current
outcomes in the European government bonds market and stressed that the problems are
posed by the winner’s curse for the dealers and the position risks they take on. According to

16
Dunne et al. (2006:13), transparency may reduce liquidity. Thus, there may be a trade-off
between the benefits of transparency and those of opacity.
Dunne et al. (2006: 26) used a game-theoretic approach to model the interaction between
issuers, dealers, and customers. The framework has an incentive structure that represents
the institutional structure of the auction and syndicate issuance systems used for European
government bonds and the interplay between them. Dunne et al. (2006: 26) found that the
introduction of full transparency in this context could drain liquidity from the government bond
market abruptly and completely.
Dunne et al. (2006: 34) concluded that the microstructure matters greatly. Dealers prefer to
operate in markets that are more opaque. Greater transparency is associated with lower
trade size and possibly with higher spreads. Some degree of opacity seems necessary to
induce dealers to supply both liquidity and pre-trade information.
In conclusion, bond market liquidity plays a very important role in the operation of monetary
policy and contributes to financial stability. If market liquidity is not sufficient, central banks
might not be able to provide or absorb the amount of funds through their open market
operations. Hence, this can make unintended effects such as excessive price volatility. Bond
market liquidity can help in the facilitation of financial instruments, which encourage efficient
market pricing and efficient borrowing and investment decisions. It can also raise the cost
effectiveness of debt financing (on demand) and this provides valuable financial flexibility. It
must be noted that lack of bond issuance is a key reason why many domestic bond markets
are illiquid. Where there is low issuance activity, some features that could augment bond
market liquidity, such as market makers and derivatives markets, tend not to develop. In
addition, a weak local institutional investor base might also be an impediment to the
development of liquid domestic bond markets.
Bond market efficiency is important for market development because the availability of
information on issuer decisions and actions and on market conditions enables better
investment decisions to be made and assists the formulation of government policies. This
encourages market participation and, therefore, market liquidity directly. Investors are able
to, confidently, compare information across markets and time. The transparency of relevant
public policy also promotes market development.
The relationship between liquidity and transparency in the secondary market is complex. If
the market is too opaque and one cannot accurately see the current market value of

17
securities, investors may exit the market. It would be difficult to, accurately, value their
portfolios. On the other hand, if the market is too transparent and the information on order
flows is immediately disseminated, some large investors may be deterred from participating
in the market for fear of revealing private information. There may be a role for regulatory
monitoring of compliance with transparency standards. Even if severe market corrections
occur only rarely, they serve to indicate that at least in the short term markets do not always
take into account all relevant information that may or may not be available. In the longer
term, markets can enforce transparency through rewarding those participants who comply
with recognized and accepted standards and penalizing those who do not.

18
CHAPTER 3
RESEARCH METHODOLOGY
3.1 INTRODUCTION
The present study intends to investigate the liquidity and efficiency of the bond market in
Botswana. The study is empirical in nature, and secondary data analysis is utilized to
analyse liquidity and efficiency of the Botswana bond market. Thereafter, its behaviour is
compared to that of the South African bond markets and indications as to what is behind the
bond market emergence investigated. The Houweling, Mentink and Vorst liquidity model is
adopted from the literature and then modified in order to be used to measure liquidity on the
Botswana bond market. As for efficiency, the study uses the static model, which is a
qualitative measure built on four indicators being transparency, number of maturities and
issuers, spread, and liquidity. The model was developed by Oxelheim and Raffety.
3.2 EMPIRICAL FRAMEWORK
The purpose of this study is to analyze the microstructure characteristics of the Botswana
Bond market. Nevertheless, the study will be confined to liquidity and efficiency. Most of the
literatures provide more sophisticated models for carrying out the analysis. Because of data
constraints, this study carries out a simple but very informative analysis about the Botswana
bond markets.
3.2.1 Liquidity
Liquidity has at least three dimensions: tightness, depth and resilience. Tightness refers to
trading costs, specifically how transaction prices diverge from the mid-market price. Depth
refers to the volume of trade possible without influencing market prices. Lastly, resiliency
refers to the speed with which a market adjusts to imbalances in order flow.
Many methods of capturing liquidity in bond markets have been employed but most of them
conform to the liquid market. Sarig and Warga (1989:369) alludes that overtime; bonds are
absorbed into investor’s inactive portfolio (e.g. pension funds, insurance) and the fraction
absorbed increases as bond issuance increases. Sarig and Warga (1989:369) further say
that bond liquidity tends to decrease with age, which implies that once the bond becomes
illiquid, it tends to stay illiquid until it matures.
Chacko, Mahanti, Mallik and Subrahmanyam (2005:14), used the statistic known as latent
liquidity to measure the liquidity of emerging corporate bond markets. They needed to be
able to determine, for each bond issue, which of many investors hold the issue and the

19
aggregated weight average turnover of all funds holding the issue (Chacko, et al., 2005:14).
This implies that, the higher the weighted average turnover the higher the latent liquidity
hence implying that the bond is more accessible compared with another bond that has lower
latent liquidity. According to Chacko, et al., (2005), a custodian is an ideal position to obtain
the information needed to calculate latent liquidity because they are informed about the
transaction level of both institutions and individual portfolio holdings. Jankowitsch, Nashikkar,
Subrahmanyam (2008: 12) quantified the price dispersion effects at the market and individual
bond level in context of the US corporate bond market. They related their measure to
conventional liquidity proxies (bid-ask spread quoted) on Bloomberg to confirm that it indeed
represent liquidity (Jankowitsch et al., 2008).
According to Houweling, Mentink and Vorst (2003: 9), in examining liquidity, one may use
direct and indirect or both measures of liquidity. Examples of direct liquidity measures are
quoted and effective bid-ask spreads, quote and trade size, quote and trade frequencies and
trading volume. In addition, indirect ones are issued amount, coupon and whether listed or
not, which are static since they are fixed characteristics of a bond or its issuer (Houweling et
al., 2003). Houweling et al. (2003) further explained that the age measure changes gradually
over time and other measures such as missing prices, price volatility and yield dispersion are
dynamic and depend on market information. Therefore, to capture the liquidity of an
emerging corporate bond market, the study will look at the traded value and turnover, which
are direct liquidity measures. The study will further use the Houweling et al. (2003)
methodology, confined to static indicators, which include measures like issue amount,
coupon and whether listed or not, that is whether the company’s equity is listed on the stock
exchange.
As stated above, the age measure changes gradually overtime and bond liquidity tends to
decrease with age. The study will therefore regress the age of the bond and average traded
value hence the model will be presented in a linear form below
Yi = ℓi + µix +ξi (1)
Where ℓi is the age of the bond 0 ≤ 30
µi is the average traded value, which is 0 ≤ ∞
ξi is the error
The study further used the latent liquidity which was calculated as µi as a fraction of the issue
size. It was then regressed with the age of the bond as well.

20
3.1.2 Efficiency
The efficient market hypothesis is a concept of informational efficiency, and refers to the
market’s ability to process information into prices. It is usually thought that there is a
connection between informational efficiency and the more standard economic concepts of
allocative/ resource efficiency. Indeed, an important economic proposition that emerges from
the (semi-strong) informational efficiency hypothesis is that prices in efficient markets adjust
quickly to reflect changing market fundamentals.
Tests for bond market efficiency are mostly inevitably tests for a joint hypothesis. Each model
of market equilibrium is examined simultaneously with the question of market efficiency.
Pesando (1978:1057) proposed a joint hypothesis that (1) the bond market is efficient, and 2)
the variation in long-term bond rates is due to the expectations effect. The Canadian data
supported the hypothesis. Under this joint hypothesis, long-term rates for any fixed maturity
follow (approximately) a martingale sequence.
Huang and Ederington (1993:89) tested efficiency using variance bound tests of the joint
hypothesis that 1) bonds market are efficient and 2) the term structure is determined by the
expectations hypothesis. They used the inequalities regarding rates and return from Flavin
(1983) and Sheiller (1979) in which they concluded that both studies were seriously biased
towards rejecting the joint hypothesis in finite samples. However, they resolved to use Flavin,
which was unbiased but has very high variance leading to many false rejections of joint
hypothesis. They also corrected Shiller’s test, which was biased but with relatively low
variance. Unfortunately, the models appear to be sensitive to measurement error (Huang &
Ederington, 1993:89). The above models are “time-horizon” oriented wherein the random
walk nature of price changes has been inferred from demonstrated statistical independence
of successive security price changes over time. According to Burns (1979: 12), there is a
need for an additional measure of capital markets efficiency. He suggested the concept of
operation efficiency employing three indicators: liquidity, orderliness, and organizational
quality.
This paper investigates a set of allocational/resource efficiency issues and proposes that a
concept of static efficiency for cross border and inter-temporal comparison of market quality
has to be adopted. A market that is efficient as regards to the processing of information into
prices may not necessarily be so in the economist’s usual sense of resource efficiency. In
this case, the concept of static efficiency introduced here is closer to the economist’s usual
understanding of the term resource efficiency, that is, provision of services at the lowest cost

21
in terms of resources employed. In the case of information needed to measure static
efficiency, we then scrutinize the problems that prevent an equalization of supply and
demand.
In this section, the Botswana market is used to highlight the value of different indicators in
assessing the quality of secondary bond markets, that is, how well these markets function.
The static efficiency of secondary bond markets is of importance to bond investors and
issuers for several reasons. Empirical evidence suggests that investors are prepared to pay
a premium for trading in a market where their investment can easily liquidate and where
transparency and investor protection is greater (LaPorta et al., 2000). That is different
‘efficient’ prices for very similar assets may arise on the basis of these qualitative market
differences (Boudoukh and Whitelaw, 1993).
Important indicators of well-functioning secondary bond markets can be listed and classified
as indicators of static or dynamic efficiency. The following four static indicators can be
identified: a high degree of transparency, a multiplicity of maturities and issuers, a low
spread, as well as high and continuous liquidity. We suggest these indicators as the pillars of
a static efficiency measure. In addition to indicators of static efficiency, an efficient market is
also one with high adaptability to innovation, reflecting the dynamic functioning of the market
(dynamic efficiency). This latter aspect is, however, developed in another paper (Oxelheim &
Rafferty, 2005).
For bond markets at a global level, the Association of International Bond Dealers and the
International Securities Markets Association (ISMA) provide benchmark market regulations,
while Euroclear and Clearstream furnish the market with the generally accepted settlement
systems. Surprisingly, a measure of the operational efficiency of bond markets is scant. In an
important sense, an appropriate national and international regulatory approach needs
qualitative and quantitative information of the sort developed in these research.
3.4 Data and Sample
The Botswana corporate bond market is hard to find. There is no central data source that
exists for all transactions in the market. Therefore, in order to consolidate the data, it was
downloaded from different sources, which include Fleming Asset management, Botswana
Stock Exchange (BSE) and Bank of Botswana Financial Statistics. When looking at liquidity
measures, the study was looking at 39 listed bonds. However, it was confined to data from
January 2006 to December 2007. For other previous years since 1998, there has been no
trading. The data were collected from annual reports, which summarized the trade value of

22
each bond yearly. It was difficult to get primary information since there is no trading platform
for the corporate bond markets yet. However, using the secondary data, posed some
difficulties in performing some further liquidity analysis since it did not present the
transactional information like bid ask information, trade size etc. The information provided by
the annual reports is taken to be of high integrity and accurate since it is verified by auditors
before it is shared with stakeholders.

23
CHAPTER 4
FINDINGS
4.1 INTRODUCTION
The following are the findings from this study carried out from the two datasets. The first
dataset is for listed bonds for the period since their inception in 1998. The second dataset is
for bonds that were traded in 2006 and 2007. The second dataset was limited by the
unavailability of information from the previous years. The other reason is that the Botswana
bond market is characterized by low trading; hence we confine the study to traded bonds.
Annualized data is used.
4.2 EMPIRICAL RESULTS
4.2.1 Summary statistics
Table 4.1 Trade in 2006
Description of statistic Values
Mean 702859.26
Standard Error 383049.52
Median 0
Mode 0
Standard Deviation 1990383.681
Sample Variance 3.96163
Skewness 3.365
Range 8760000
Minimum 0
Maximum 8760000
Sum 18, 977, 200
Count 27
Table 4.1 presents summary statistics of bond trading in 2006. On average P702 859 worth
of bonds were traded in 2006. However, most of the bonds were not traded since the median
and the mode is zero. The frequency curve is positively skewed because the mean is larger
than both the median and the mode.

24
Table 4.2 Trades in 2007
Description of statistic Values
Mean 5234178.44
Median 20000
Mode 0
Standard Deviation 13280555.33
Sample Variance 1.76373
Skewness 2.952102004
Range 55958024
Minimum 0
Maximum 55958024
Sum 141, 322, 818
Count 27
Table 4.2 present summary statistics for bond trades in 2007. On average P5 234 178.44
worth of bonds were traded in 2007. However, most of the bonds were not traded since the
mode is zero. The median, however, is 20000. The frequency curve is positively skewed
because the mean is larger than both the median and mode.
When comparing the two years, 2006 and 2007, the trading volume looks to be increasing
looking at the descriptive statistic measures. The mean in 2006 was P702 859.26 against P5
234 178.44 in 2007. In general, this reflects an increase in trade value.
Figure 4.1 Issue Size

25
According to Figure 4.1, 67 percent of bond issues ranged in size between 0 and 100 million
Pulas, followed by 15 percent of issues of size 101-200 million Pulas and 10 percent of 201-
300 million Pulas. About 8 percent of bond issues were for size ranges of 401-500 million
Pulas and 0 percent were for sizes of 301-401 million Pulas. This indicates that the majority
of the bonds issuance ranges between 0 and 100 million Pulas in size. Table 4.3, further
shows the issuance of bonds from 1998-2008. Overtime the issuance has been increasing
significantly year after year. Between 2005 and 2006, the size of bonds doubled and almost
continued doubling from one year to the next. This suggests that the issuance were growing
exponentially over the period.
Table 4.3 Issuance of the Botswana Debt Securities: 1998-2008
Year Issuance Percentage of total (%)
1998 100 0.18
2002 325 0.57
2003 1850 3.24
2004 1725 3.02
2005 3575 6.26
2006 7475 13.10
2007 14625 25.62
2008 27400 48.01
Total 57075 100
Figure 4.2 Maturity

26
Figure 4.2 indicates that 18 percent of the listed bonds have less than 5 years maturities, 56
percent have 6-10 years, another 18 percent have 11-15 years. 5 and 3 percent issues have
16-20 years and 21 years and above of maturities, respectively. This indicates that the
majority of the listed bonds have the maturities of between 6-10 years.
Figure 4.3 Bonds listed for Private Company vs. Parastatals
Figure 4.3 indicates that 44 percent of the listed bonds are from parastatals, which are partly
government and partly private. The remaining 56 percent are for privately owned businesses.
This, therefore, indicates that the majority of the listed bonds are from private companies.
Unlike at the inception of the bond market, private companies have surpassed the
parastatals as they had more listed bonds in 1998.
4.2.2 Liquidity analysis
There is some empirical research, which has examined liquidity in bond markets using both
direct and indirect measures of liquidity. The examples of direct liquidity measures are the
quoted and effective bid-ask spreads, quoted and trade frequencies and trading volume. For
corporate bonds, where most transactions occur on the over-the-counter market, these direct
measures are often difficult to obtain and not reliable. Therefore, the Botswana bond markets
are not active. Very little trading takes place. We, therefore, discovered that the liquidity of
the market has been analyzed using various measures, with all of them showing that
participation in the corporate bond market is much lower. Most of the bonds are
oversubscribed at time of issue.

27
Table 4.4 shows liquidity measures such as issue amount, coupon rate, and whether the
bond is listed or not, which are static measures since they are fixed characteristics of a bond
and its issuer. The age measure changes gradually over time. The other measures are
dynamic and depend on market information, whilst the other measures, such as the number
of contributors and yield dispersion, are considered as quote composition information.

28
Table 4.4: List of bonds listed
BSE Corporate Name Listed Issue Date
Issue Size
(Mil Pula) Maturity Redemption Date Interest Coupon
ACU001 African Copper Yes 2008 150 7 02/04/2015 14%
BBB001 Barclays Bank Yes 2002 100 12 30/10/2014 BoBC + 0.85% (1st 7 Yrs) then + 1.5%
BBB003 Barclays Bank Yes 2004 200 5 26/05/2009 11.10%
BBB003 Barclays Bank Yes 2004 50 5 13/10/2009 11.10%
BBS002 Botswana Building Soc No 2004 50 12 15/12/2016 12%
BBS004 Botswana Building Soc No 2007 75 12 26/11/2019 11.10%
BDC002 Botswana Dev Corp No 2004 75 7 01/06/2011 CPI + 3.75% p.a
BDC003 Botswana Dev Corp No 2004 125 7 01/06/2011 11.00%
BTC001 Botswana Telec Corp No 1998 50 10 30/11/2008 13.75%
BVI 001 Botswana Vaccine Inst No 2008 70 10 07/05/2018 11.23%
DON 001 Diamonex Limited Yes 2008 50 3 03/09/2011 13.20%
DPCF003 Botswana Government No 2004 225 9 02/06/2013 10.31%
BW003 Botswana Government No 2008 500 7 23/03/2015 10.25%
BW004 Botswana Government No 2008 500 3 12/03/2011 10.50%
BW005 Botswana Government No 2008 500 10 12/09/2018 10%

29
NDB001 National Dev Bank No 2007 100 10 01/08/2017 11.25%
SBB001 Stanbic Bank Botswana No 2001 50 12 12/12/2013 BoBC + 1.25% p.a
SBBL003 Stanbic Bank Botswana No 2005 100 12 01/06/2017 10.50%
SBBL006 Stanbic Bank Botswana No 2006 50 10 01/06/2016 BoBC+ 0.5%
SBBL046 Stanbic Bank Botswana No 2008 50 10 11/06/2018 BoBC+ 0.2% (1st 5 Yrs) then + 0.95%
SBBL047 Stanbic Bank Botswana No 2008 70 3 11/06/2011 11%
SBBL048 Stanbic Bank Botswana No 2008 175 7 11/06/2015 10.70%
SBBL049 Stanbic Bank Botswana No 2008 50 10 13/08/2018 BoBC + 0.05% p.a
SCBB002 Std Chartered Bank Yes 2005 50 7 20/12/2012 10.30%
SCBB003 Std Chartered Bank Yes 2005 50 10 20/12/2015 10.50%
SCBB004 Std Chartered Bank Yes 2005 50 10 20/12/2015 BoBC + 0.7% (1st 5 Yrs) then + 1.2%
SCBB005 Std Chartered Bank Yes 2007 75 10 27/11/2017 BoBC + 0.4% (1st 5 Yrs) then + 0.9%
WUC001 Water Utilities Corp No 2008 195 10 26/06/2018 10.65%
WUC002 Water Utilities Corp No 2008 205 18 26/06/2026 10.60%
CBH010612 Cash Bazzar Holdings No 2005 30 7 04/07/2012 10.65%
CBH280909 Cash Bazzar Holdings No 2005 30 4 01/07/2009 10.75%
KBL001 Kgalagadi Breweries No 2004 60 7 03/07/2011 11.35%
PGB001 Piermont Global No 2004 25 5 02/07/2010 12.25%
Source: 2007 BSE Annual Report

30
Table 4.5 Bond Statistics
Source: 2007 BSE Annual Report
4.1.2.1 Traded Value
Table 4.5 summarizes the traded values for the period 2006-2007 annually. In terms of the
traded values of bonds over that period, 11 corporate bonds were traded in both 2006 and
2007. In addition, the traded value increased by around 87 percent, which is a generous
increase in trade for corporate bonds. There are also varied maturities across various types
ISSUE SIZE TRADE(P)-2006 TRADE(P) -2007 MATURITY
BW 002 850 000 000 0 37 132 794 7
BW003 900 000 000 0 55 958 024 7
DPCF 001 170 000 000 240 000 0 10
DPCF 002 195 000 000 20 000 0 6
DPCF 003 225 000 000 3 020 000 64 020 000 9
DPCF 004 220 000 000 20 000 22 530 000 12
DPCF 005 100 000 000 20 000 16 150 000 15
DPCF 006 55 000 000 8 760 000 0 18
DPCF 007 35 000 000 5490 000 0 21
BBB 001 100 000 000 0 0 12
BBB 002 63 750 000 0 240 000 25
BBB 003 50 010 000 0 0 5
BBB 004 80 000 80 000 110 000 7
BBS 002 115 000 000 25 000 000 150 000 12
BBS 004 75 000 000 0 70 000 12
BDC 002 75 000 000 0 0 7
BDC 003 125 000 000 0 0 7
BTC 001 50 000 000 0 0 10
NDB 001 100 000 000 0 210 000 10
SBB 001 50 000 000 0 100 000 12
SBBL002 100 000 000 300 000 0 10
SBBL003 50 000 000 0 0 12
SBBL 006 50 000 000 14 000 000 20 000 10

31
of bonds. Corporate bonds show more traded value, in particular the BBS 002, belonging to
Botswana Building Society (BBS) in 2006, which is a financial institution. In 2007, it was
DPCF 003, which belonged to the Botswana government, which showed more traded value.
Further analysis shown in Table 4.5 shows that a 9-year tenor is the most traded, and is then
seconded by the 7-year tenor, followed by the 12-year tenor, while the 15-year tenor is,
relatively the least active. Most of the bonds are oversubscribed upon issue but then there is
no trading afterwards because of the buy and hold approach from the fund managers.
Table 4.6 South Sahara Africa overall performance per country
4.1.2.2 Turnover
Looking at the evolution of turnover in Botswana corporate bonds, there is a definite
improvement in the early years of the sample period since there is trading though it is done
only once. Consistent with the pattern in other countries, corporate bonds in Botswana are
less actively traded than government securities. Table 4.6 indicates that by 2006, in terms of
the turnover on bond markets, Botswana was trailing at US$ 13.2 million and South Africa
was standing at US$1 971 305 million in 2007. Botswana was the least liquid when
compared to other SADC countries such as Namibia whose turnover was standing at
US$180.7 million and Zambia at US$43 583.4 million.

32
Table 4.6 indicates that Botswana, as compared to other countries such as South Africa, has
a low number of listed corporate bonds. In 2006, Botswana had 22 listed bonds, while South
Africa had 862. Botswana was second in terms of listing for the market reported in the table.
Other countries in Southern Africa, for example, Namibia have 9, and Zambia had 2
corporate listings. The Public Debt Service Fund (PDSF), which was formed to raise funds
from the market to finance Parastatals, has also shown a tremendous growth and the bonds
issued by PDSF have been oversubscribed.
It is observed that capital market development through the Botswana Stock Exchange is at
an infant stage, based on the trading data as well as the measures like market turnover ratio,
ratio of volume traded to GDP, etc.
Table 4.7 Regression of Average trade value on Bond age
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.13
R Square 0.02
Adjusted R Square -0.02
Standard Error 4.59
Observations 27
ANOVA
df SS MS F
Regression 1 9.21 9.21 0.44
Residual 25 526.20 21.05
Total 26 535.41
Coefficients Standard Error t Stat P-value
Intercept 11.112 0.967 11.497 1.79
Bond age -8.8942 1.34 -0.661 0.514
Table 4.7 indicates that there is a negative relationship between the bond age and the
average traded value. That is the bond age has a negative impact on the traded value. The
R Square is 0.02, which means that 2 percent variation in average traded value is explained
by bond age, a proxy for liquidity. The R Square is very low.
H0: β2 = 0 (bond age has no impact on traded value)

33
Vs
Ha: β2 ≠ 0 (bond age has impact on traded value)
We further look at the Anova,
The calculated F = 0.44
Tabulated F(0.05, 1, 25) = 4.24
Since the 0.44 < 4.24, we do not reject H0 at the 5 percent significant level.
The probability of getting a t-value of -8.8942, given that the null hypothesis is true is high
looking at the P-value of 0.514 > 0.05. Therefore, the study fails to reject the null hypothesis
and we conclude that there is no relationship between the average traded value and the age
of the bond.
Table 4.8 Regression of Average trade value on Time to maturity
SUMMARY OUTPUT
Multiple R 0.340889251
R Square 0.12
Adjusted R Square 0.080853701
Observations 27
ANOVA
Df SS MS F
Regression 1 9.77 9.77 3.29
Residual 25 74.30 2.97
Total 26 84.07
Intercept 4.547 0.36 12.52 2.88
Time to maturity 9.161 5.05 1.81 0.082
Table 4.8 indicates that there is a positive relationship between average traded value and
time to maturity. That is the time to maturity has a positive impact on the traded value. The R

34
Square is 0.12, which means that 12 percent of the variation in average trade value is
explained by the time to maturity of the bond, a proxy for liquidity. The R Square is very low.
H0: β2 = 0 (time to maturity has no impact on traded value)
Vs
Ha: β2 ≠ 0 (time to maturity has impact on traded value)
We further looked at the Anova,
Tabulated F (0.05, 1, 25) = 4.24
Since the 3.29 < 4.24, we do not reject H0 at the 5 percent significant level.
However, the study also shows that the probability of getting a t-value of 9.161, given that the
null hypothesis is true, is high looking at the P-value of 0.082 > 0.05. Therefore, the study
fails to reject the null hypothesis and conclude that there is no relationship between the
average traded value and the time to maturity.
Table 4.9 Regression of Latent liquidity on Time to maturity
SUMMARY OUTPUT
Multiple R 0.14
R Square 0.02
Standard Error 1.82
Observations 27
ANOVA
df SS MS F
Regression 1 1.651 1.651 0.501
Residual 25 82.423 3.297
Total 26 84.074
Intercept 4.684 0.395 11.846 9.47

35
Time to maturity 1.067 1.508 0.708 0.49
Table 4.9 indicates that there is a positive relationship between latent liquidity and time to
maturity. That is, time to maturity has a positive impact on latent liquidity. The R Square is
0.02, which means that 2 percent of the variation in latent liquidity is explained by time to
maturity, a proxy for liquidity. The R Square is very low.
H0: β2 = 0 (time to maturity has no impact on latent liquidity)
Vs
Ha: β2 ≠ 0 (time to maturity has impact on latent liquidity)
Tabulated F (0.05, 1, 25) = 4.24
Since the 0.501 < 4.24, we fail to reject Ho at the 5 percent significance level.
The study also show that the probability of getting a t-value of 1.067, given that the null
hypothesis is true, is high looking at the P-value of 0.49 > 0.05. Therefore, the study fails to
reject the null hypothesis and we conclude that there is no relationship between latent
liquidity and the time to maturity.
Table 4.10 Regression of Latent liquidity on Bond age
SUMMARY OUTPUT
Multiple R 0.041
R Square 0.002
Observations 27
ANOVA
df SS MS F
Regression 1 0.143 0.143 0.043

36
Residual 25 83.931 3.357
Total 26 84.074
Intercept 4.99 0.9289 5.374 1.42
Bond age -0.02 0.0792 -0.206 0.84
Table 4.10 indicates that there is a negative relationship between latent liquidity and bond
age. That is, the age of the bond has no impact on latent liquidity. The R Squared is 0.002,
which means that 0.2 percent variation in latent liquidity is explained by bond age, a proxy for
liquidity. The R Square is very low.
H0: β2 = 0 (bond age has no impact on latent liquidity)
Vs
Ha: β2 ≠ 0 (bond age has impact on latent liquidity)
Tabulated F (0.05, 1, 25) = 4.24
Since the 0.043 < 4.24, we fail to reject H0 at the 5 percent significance level.
The study also show that the probability of getting a t-value of -0.02, when the null
hypothesis is true, is high looking at the P-value of 0.84 > 0.05. Therefore, the study fails to
reject the null hypothesis and we conclude that there is no relationship between latent
liquidity and bond age.
4.2.2 Market Efficiency
The static efficiency model that has been adopted by this research (Oxelheim and Rafferty,
2005:120) states that the important indicators of well functioning secondary markets can be
listed and classified as indicators of static or dynamic efficiency. The following four static
indicators can be identified: a high degree of transparency, multiplicity of maturities and
issuers, a low spread, as well as high and continuous liquidity. Problems of state intervention
and regulation are also considered to be important factors that need to be taken care of
when performing the analysis. It is understood that a market that is too heavily (or poorly)
regulated on both the demand and supply sides, and with regard to prices, is not a well

37
“functioning market”. However, the first pre-requisite of a well-functioning market is that a
“market” does in fact exist and that the forces behind demand and supply are actively
engaged in price formation.
4.2.3.1 Transparency
Since it has been established that bond markets exists in Botswana, the study will now
proceed with the first indicator of their quality, which is transparency. According to Oxelheim
and Rafferty (2005:121), this indicator has been pin-pointed as one of the twin-principles of
the General Agreement on Trade and Services (GATS) of 1999, as another aspect of the
financial infrastructure of crucial importance to the functioning of markets. The way in which
trading is organised and information disseminated together constitute the transparency of the
market. Goldstein et al. found that depending on trade size, increased transparency has
either a neutral or a positive effect on market liquidity, as measured by trading volume of
estimated bid-ask spreads. There have been some studies, which were concerned with
differences between geographical markets or tried to determine their attractiveness to
issuers. In that regard, research on transparency examines the different changes in the
market microstructure and its effect on factors such as liquidity and informational efficiency.
As for the Botswana bond markets, ever since their inception, the listing systems and rules
have been relaxed a bit in order to attract issuance of bonds. However, it has now been
made voluntary with the government taking the responsibility of leading by example by listing
its bonds with the Botswana Stock Exchange. This also is encouraging the issuance of
bonds by parastatals, which are also taking their bonds to the exchange. It has also been
very difficult to regulate the market since dealers were making their transactions on their own
due to the absence of proper trading systems. Ever since the government has shown its
commitment in developing the market, this has seen the participants supporting the initiatives
as well.
4.2.3.2 Multiplicity of maturities
According to Oxelheim and Rafferty (2005:124), another indicator of a well functioning
market is the multiplicity of alternative maturities and issuers in the supply of the bonds. This
multiplicity involves a trade-off between an extra yield premium to investors that do not find
the desired issuer or maturity structure, and the size and liquidity of each individual bond
issue. The Botswana bond market fell short of the US treasury market with trading in twelve
slices, that is, 3, 4, 5, 6, 7, 9, 10, 12, 15, 18 and 21-years bond. This is even slightly short of

38
the South African bond markets, which are trading the 30-year bonds. However, there is also
a negative side to the Botswana market in the sense that there is more or less a negligible
amount of bonds issued directly in the domestic market by the Botswana non-financial
corporate sector. Though the amount of issuance has been growing, on overage, in the
corporate bond market, there are no issuances in the non-financial corporate bond market.
The indicator of multiplicity of maturities has invited definitional questions. They include what
actually can be seen as the national secondary bond market and if it should be the market
place for issues with the pre-fix “domestic”, that is , a domestic issuer, domestic trading,
domestic currency etc? (Oxelheim & Rafferty, 2005:124). The research believes that relevant
requirement should be that the bond be traded at that market place, irrespective of the
designation of the participant or denomination of the bond. The domestic issues of the bond
should be treated as the domestic bond market unless it is denominated in a foreign
currency.
4.2.3.3 Spread
Low spread is another indicator of the efficiency in a secondary market. Like in liquidity, with
respect to the Botswana bond market, there is no available data on trading in the secondary
market, hence it is difficult to compute the spread. It must be noted that the spread comes
because of pricing differences due to inefficiencies. According to Oxelheim & Rafferty
(2005:124), spreads typically vary with maturity, size of deal, type of issue and minimum tick
size, and with market structure characteristics (O’Hara, 2001). Oxelheim and Rafferty,
(2005:124) further states that when markets are to be compared in terms of spreads, either
the spread of representative species of similar issues or some form of average spread can
thus be used. A low representative spread is an indicator of cost efficiency and a competitive
market. With regard to Botswana, where there is absence of trading, assessing this indicator
is very difficult if not impossible.
Another way of measuring spread is to disaggregate the spread into different liquidity
sectors, since some issued bonds are not intended to be traded on the secondary market,
while others are highly traded. (Oxelheim & Rafferty, 2005:124). Consequently, quoted
spreads may vary widely and simply averaging these is misleading, but due to the absence
of an active bond market in terms of trading, contemporary data is lacking to permit
disaggregated comparisons still.

39
4.2.3.4 Liquidity
The fourth and perhaps the most significant indication that the market is functioning well is
the high and sustainable level of liquidity that has been under scrutiny in the above analysis.
The model that has been employed also reveal that the available information in the absence
of the trading activity is more static than dynamic, such as issue amount, coupon rate and
whether the company is listed or not. According to Oxelheim and Rafferty (2005:125), the
stability of liquidity deserves further consideration since it provides information about the
continuity of the market and how it might function under different circumstances. Therefore,
among other things, such a stability measure would signal the degree of risk inherent in a
market, that is, the risk of its breakdown in a situation of general financial distress.
4.3 DISCUSSION OF FINDINGS
The study investigated the liquidity and efficiency of the Botswana bond markets. Overall, the
results revealed that the markets are illiquid and inefficient. A number of factors that drive low
liquidity on the Botswana bond market have been identified. Ever since the bond market
commenced, there have been little trading, if any at all.
However, since 2006, when little trading started to be recorded, there has been an increase
in trading value as shown in Table 4.1 and 4.2. It must be noted that, previously, trading was
carried out on the interbank market; hence, it was not recorded by the BSE. Lack of a trading
system might have resulted to this observation.
Figure 4.1 shows the issue size of bonds listed with the BSE. The study observed that the
majority of the bonds are below 100 million Pula and these constitute 67 percent of the bond
issuance. Only 8 percent of issuances have values ranging from 401 to 500 million Pula.
Figure 4.2 shows that 56 percent, which is the majority of the bonds, have the maturity period
between 6-10 years. Only 3 percent of the bonds have maturities of 21 years and above.
Figure 4.3 shows that the majority of listed bonds are from private companies.
Generally, the measures indicate an improvement of the Botswana corporate bond market.
However, Table 4.5 shows that the Botswana bond market is below par when compared to
other SADC countries like Namibia, Zambia and South Africa. South Africa, especially, has
far much better performance in terms of turnover in the bond markets.
Table 4.6 indicates the negative relationship between the traded value and the age of the
bond. The regression was used to explain liquidity. Table 4.7 regressed the time to maturity

40
and average traded value, which indicates that the two measures have a positive
relationship.
Table 4.8 and 4.9 were an extension of the analysis with the use of latent liquidity, which is a
fraction of average trades on bond issuance. Table 4.8 indicates that there is a positive
relationship between the time to maturity and the latent liquidity. Table 4.9 indicates that the
latent liquidity and bond age have a negative relationship.
The common factor with this regression analysis is that they are both having a negative, but
insignificant, relationship with bond age as an explanatory variable. This results in the
conclusion that bond age has no influence on the liquidity of the bond markets. Using time to
maturity as an explanatory variable has yielded positive results. Chordia, Roll and
Subrahmanyam (2000: 20) supported the same result. The explanatory variables include
short- and long-term interest rates, default spreads, market volatility and other
macroeconomic announcements.
The research further analysed the efficiency of the bond markets. The static indicator model
was used and under the static measures, transparency was the first to be scrutinized. Under
transparency, the study discovered that, ever since the inception of the bond markets, the
listing systems and rules have been relaxed in order to attract issuance of the bonds. With
the second measure, multiplicity of maturities, it is found that Botswana was trading on
twelve slices, which included 3, 4, 5, 6, 7, 9, 10, 12, 15, 18 and 21-year bonds. This is good
for an emerging market economy such as Botswana. However, in comparison to South
Africa, the maturities are slightly short since South Africa has bonds with 30-year tenors.
The third indicator is the spread and due to lack of data on trading on the secondary market,
it was difficult to calculate the spread in the Botswana market. The last indicator is liquidity,
which has also been investigated in this study. Therefore, the conclusion is that there is lack
of trading and hence liquidity.

41
CHAPTER 5
CONCLUSION, LIMITATIONS & RECOMMENDATIONS
5.1 INTRODUCTION
The main question of the study is how efficient are Botswana’s bond markets? We
summarize by comparing the Botswana bond markets with those of South Africa and other
countries in the region. Lack of bond issuance in Botswana is the main reason why the
Botswana domestic bond markets are illiquid. Many corporations have preferred other
sources of funding to bond issuance. It must be noted that, where issuance is low, the
features that could augment bond market liquidity, such as market makers and derivatives
markets, tend not to develop (Podpiera, 2000: 27). Having observed that there is generally
lack of trading, we conclude that the market is illiquid. This is because the emerging
Botswana bond market has low trading activity, liquidity is difficult to measure, there is low
turnover and bid-ask spread is hard to determine. Luengnaruemitchai and Ong (2005:19)
also concluded that core aspects such as improvements in market regulation and
infrastructure are crucial for the development of local securities markets. They cited
benchmarking, corporate governance and disclosure, credit risk pricing, the availability of
reliable trading, clearing and settlement system, and development of hedging instruments to
be the key elements for the development of the corporate bond markets.
This study has adopted the approach of static market efficiency, which is a qualitative
approach. The absence of liquidity has also led to the difficulty in using the static efficiency
model hence the conclusion reached is that the market is less efficient. There is difficulty in
applying this model in practice because although there can be a high issuance of corporate
bonds, they need to be traded to increase liquidity.
With regard to who the major players are in the market, it was found that the fund managers
and custodians play a very important role and they are the one who also supply the market
with liquidity since they sometimes trade for themselves (interbank). There is too much
activity when the bonds are being listed. From there the fund managers play the buy and
hold strategy. There is also insufficient information especially on how the trades are being
conducted and how the price is formed due to the absence of the proper systems and
infrastructure. The results are inconclusive due to lack of information. However, for
investigating liquidity in markets like the Botswana one, I will recommend the use of latent
liquidity, which unlike conventional measures such as trading volume and bid-ask spreads, it
does not use transactional information.

42
5.2 LIMITATIONS
Obtaining data on the Botswana bond markets was problematic. Some of the information
was deemed to be only used by the asset management companies hence not available for
public consumptions. From the Botswana Stock exchange (BSE), some of the statistics are
compiled for reports at the end of the year. Therefore, during the year they do not have the
statistics that they could share. However, on overall, the Bank of Botswana Financial
Statistics was helpful.
5.3 POLICY RECOMMENDATION
The role of the policy could be critical in several directions such as the extent to which the
bond market can function according to market clearing principles and the nature of policy
coordination between government and the central bank. However, financial sector policy
affects the investor base and the conduct of monetary policy. It also has significant
implications on the depth and maturity of the bond markets. Nevertheless, poor bond market
liquidity like for Botswana is associated with lack of depth of the secondary markets. Hence,
this prompts the policies that could assist in improving the depth of the secondary market
and their role in the economy. The study will take into consideration, some elementary
reforms that are in place thus far. The following are the suggested policies.
5.3.1 Increase of financial instruments in the market
Broadening the range of instruments can help deepen the secondary market. However, the
choice of debt instruments typically depends on several considerations: market preference,
cost to government, and in some cases, monetary policy objectives. In Botswana, There is a
need for more instruments such as Exchange Traded Funds (ETFs), Securitized Products
and Contracts for Difference (CFDs), REPOs and Reverse REPOs, short selling, securities
borrowing and lending, bond futures and options and interest rate swaps. Moreover,
developing the forward and futures market in government bonds constitutes another strategy
of enhancing liquidity in secondary markets. They increase hedging activity and promote risk
management practices. Cash and futures markets are linked by the flow of information and
expectations. Therefore, the overall liquidity effects of futures markets on government bonds
could be substantial. Lack of financial instruments exists since some organizations are
justifying the “buy and hold approach” by saying that there is absence of alternative
instruments. We, therefore, believe that adding some of the above instruments in the market
will spur the market activity hence encourage market participation.

43
5.3.2 Greater attention in developing the bench marks
There has been evidence that there is an appetite for long tenor bonds. Therefore, this study
recommends that the government should support a move to increase the tenors in an
attempt to assist build the yield curve. Corporations should also be encouraged to launch
longer tenor bonds in an effort to make attractive premiums and to improve the vibrancy in
the bond market. Overall developing certain benchmark securities with high liquidity
characteristics is being considered very important in improving liquidity in corporate bond
markets. Benchmarks are important not only for developing a risk-free yield curve but also for
reducing the serving costs to government. Moreover the availability of benchmark securities
with different maturities (regarded as on-the-run issues) helps develop hedging markets and
improve trading since the prices of these securities trade close to par and are thus better
able to capture the market interest rates. Another important benefit of benchmark securities
is that they are preferred by active traders and are less likely to be cornered by investors who
hold to maturity see CGFS (1999). In addition, development of the yield curve could
encourage market-to-market practices and increase trading volumes.
5.3.3 Improve dissemination of information
To, further, materialise the related development of capital markets, security law, as well as
the company law, should promote the development of the corporate bond market continually.
The Bank of Botswana should publicise the announcement on related matters regarding
corporate debt, which are entering the Inter-bank Bond Market for transaction and circulation.
This will encourage the forward measures good for standardizing transactions and circulation
of corporate bonds as well as advancing the development of the corporate bond market. The
announcement should simplify the procedures by changing the examination of corporate
bond transactions and circulation from a prior approval; approach to a verification approach
and allowing all investors in the inter bank bond market to invest in corporate bonds.
Among other things, this will require issuers to conduct continued information disclosure and
track credit rating agencies to, continuously, provide credit ratings of the bonds and to
encourage market makers and underwriters to make bilateral quotations. Bank of Botswana
Policy announcements should embrace the philosophy of relying on OTC markets and
improving market discipline mechanisms such as information disclosure and credit rating to
promote the development of the corporate debt market. They should also encourage
fostering institutional investors.

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