Last week Moody's Investors Service (Moody's) assigned a Baa2 long-term issuer rating to Botswana Power Corporation (BPC) with a stable outlook tag, the United Kingdom based rating agency said in a statement last Friday.
Dispatched from London, United Kingdom the communiqué says reflecting its strategic importance within the country, BPC is subject to significant government influence and further acts to implement a range of policy mandates associated with national development objectives. This is the first time Moody's has assigned a rating to BPC. Botswana Power Corporation is the national energy company in Botswana, responsible for energy production, transmission, distribution and supply. It is 100% owned by the Government of Botswana (A2 stable).
Through the Ministry of Mineral Resources, Green Technology and Energy Security, the government exercises strong oversight over the company's strategy and operations whilst also having the final say on the level of end user tariffs. In this context, BPC pursues investment projects that may not be commercial, for example, electrification of rural areas in the country, but are intended to meet policy objectives. Continuing investment against a backdrop of tariffs that are not cost-reflective is, however, underpinned by ongoing financial support from the government.
Moody’s says BPC's Baa2 issuer rating is underpinned by first the expectation that the Government of Botswana will continue to provide timely financial support to the company, as necessary, given the critical role of BPC to the country and its mission to ensure that Botswana has access to electricity, and secondly an assumption that substantially all of BPC's commercial borrowings will continue to be covered by the government guarantees.
Moody’s lead analyst for BPC rating Joanna Fic, who is Senior Vice President in Moody’s Infrastructure Finance Group says the Baa2 rating is, however, constrained by BPC's high indebtedness and weak financial profile on a standalone basis, with the company's liquidity position reliant on timely cash injections from the government. “The rating also reflects the company's significant asset concentration and poor asset quality, with multiple design and construction issues affecting output from BPC's coal fired plants.”
Joanna Fic observed that while the Morupule A power plant a 132 megawatt (MW) is expected to come back fully online in 2020 the remediation programme for the larger Morupule B power plant a 600 MW has only started and there is uncertainty around the improvement in the plant's availability once the works have been completed in 2023, as per the current schedule. Moodys also noted that on the negative the poor reliability of its BPC power plants increases Botswana's reliance on electricity imports reducing visibility over the company's internally generated cash flows.
“In addition, there are a range of Environmental, Social and Governance (ESG) related factors that weigh on BPC's credit quality, including the company's corporate governance, political sensitivity around its tariffs and its exposure to coal generation fleet,” added Joanna Fic. In the overall, under Moody's methodology for government-related issuers (GRI), the Baa2 issuer rating of BPC combines the company's baseline credit assessment (BCA) of b2, and Moody’s assessment of very high dependence and very high likelihood of extraordinary support being provided by the Government of Botswana.
Moody's assessment of a very high probability of the government support in the event of financial distress reflects firstly the strategic importance of BPC as the only energy utility in the country and secondly the government's ongoing support in the form of revenue and capital transfers as well as the government guarantees covering the bank loans.
Moody's assessment of a very high dependence takes account of BPC's domestic focus. The issuer rating expresses a view on the credit risk of BPC excluding any specific contractual credit support provided to the funders of the company through the government guarantees.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”