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BoB double edged sword rate cut hovering on banking sector

Botswana and other developed economies usually take monetary decisions such as to adjust repo rate or interest-rate to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum.

As a globally recognised banking norm or custom, the repo rate determines the Bank rate to which the central bank lends money to commercial banks and this then affects the amount they lend to their consumers.  But the decision to cut or hike the repo rate may also come with disadvantages, hence central banks are often seen to be taking tough political decisions which come as a double edged sword. In the case of Botswana, a surprise development by Bank of Botswana (BoB), at the August Monetary Committee Policy meeting, decided that the repo rate be cut by 25 basis points from 5 percent to 4.75 percent, came with ripple effects according to banking and finance pundits.

According to the recent Stockbrokers Botswana banking sector study, the rate cut will result in a “squeeze” in banks’ Net Interest Margins (NIMs) with no or little pass on effect to deposit rates considering that these are already very low and the need for banks to remain competitive to attract funds. The stockbroker advised that a cut in repo rate or any future slash on the interest rate, will need the banking sector to be vigilant as there will be need to diversify and grow non-interest income.

It came as a surprise when BoB made an important development  in the banking sector by slashing the Bank rate by 25 basis points from 5 percent to 4.75 percent at August MPC meeting. The central bank August repo rate cut came as an unexpected shock to many because BoB has maintained the Bank rate for two years. The last time such a big development in Botswana’s monetary policy occurred was in October 2017, when the Bank rate was reduced by 50 basis points from 5.5 percent to 5 percent.

A lot of questions as to why the rate was cut in August were relentless, with some suspecting the move as political, given that elections were a month away. However, the central bank marshalled its position, saying the interest rate slash was more forecast based as it was a way of resuming domestic monetary policy easing in the backdrop of slow economic growth and inflation.

 Furthermore BoB also suggested that what is rolling out both for the domestic and external economic activity provides scope for easing monetary policy to support economic activity. “With inflation low and stable and inflation expectations well anchored, improving total factor productivity remains key in promoting sustainable and inclusive economic growth,” BoB Governor Moses Pelaelo told journalists after the August rate cut decision.

BoB August move to cut Bank rate was a huge leap, a jump on the bandwagon, as policy makers across were taking aggressive albeit surprise decision to cut their interest rates. Many economists believe this was a general response to the trade war between China and the US, an economic sneeze which got the entire globe to catch economic flu.

In August when Botswana slashed its benchmark rate, there have been a net 14 cuts by policy makers across the world and this is the highest number since central banks around the globe ramped up measures on how to attain growth in the wake of global financial crisis.
In October emerging market and developing economies policymakers slashed interest rates further, as their central banks were joining the US Federal Reserve Bank in efforts to shore up their economies. This month a group of 37 developing economies showed a net 9 cuts last month (October), after a net 11 cuts in September.

Botswana’s economic influential neighbor and big import player, South African Reserve Bank (SARB) in South Africa, decided to cut by 25 basis points, from 6.75 percent to 6.50 percent in July, a month later this country shed the same percent.  South Africa shed Bank rate due to inflationary and economic reasons same as Botswana.


Another surprise is coming soon as the banking sector, experts and observers have not ruled out another cut of 25(or more) basis points rate cut in the short term. BoB has not had the penchant of hiking rates since 2008; instead the central bank has always been keeping the benchmark rate at lows from the highs of 15.5 percent in 2008 to the lowest current levels at 5 percent before slashing it further to 4.75 percent three months ago.

Stockbrokers Botswana in its banking research further said it has conducted interviews, had conversations with the banking fraternities, discussing prediction on the future of the banking sector. Part of the predictions was expectation of another 25 basis points rate cute.
“Conversations with the titans of banking have also led us to believe that we have not reached the bottom of the cycle as yet. There is a general expectation of another 25 bps rate cut in the short term; which spells further pressure on industry NIMs and the increased need to diversify and grow non-interest income,” said Stockbrokers Botswana in its recent banking study.

Financial consultant Fitch Solutions in July this year had forecasted that BoB will cut bank rate by 50 basis point, from 5 percent to 4.5 percent this year and maintain the rate until 2020. Barely a few weeks in the month of August, Governor Pelaelo pronounced the 25 basis points rate. Filtch’s predictions were vindicated despite its rating cut being 25 percent less than BoB’s slash.  Fitch Solutions is the industry-leading provider of credit, debt market, and macro intelligence solutions and primary distributor of credit ratings’ sister agency Fitch Ratings.

Fitch Solutions’ forecast on Botswana that time was due to the slowed economic growth and muted credit growth that has struggled to rebound from a steady decline between May 2012 and September 2017. This year, just into the second quarter, credit growth was 6.5 percent as compared to 2011/18 average of 13.2 percent and this hindered growth of private consumption and investment.

In latest statistics, annual commercial bank credit growth for the year to September 2019 slowed to 6.1 percent compared to 8.1 percent in the same period last year.  According to Stockbrokers Botswana, this slowdown was a result of a contraction in lending to businesses on the back of decreased utilization of existing credit facilities, loan repayments by some firms in certain sectors and base effects from higher credit growth in the second half of 2018. However household credit growth continued to increase substantially as it is driven by this financial year civil servant salary increment, says Stockbrokers Botswana.

October Inflation

Latest Statistics Botswana data shows that prices have decreased to 2.4 percent from 3 percent in September 2019. This decrease in inflation during October 2019 reflects the easing in the rate of annual change in prices for some categories of goods and services, led by ‘Transport’ (from 6.2 to 2.7 percent – largely because of base effects associated with fuel price increase in October 2018). 

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Investors inject capital into Tsodilo Resources Company

25th January 2023

Local diamond and metal exploration company Tsodilo Resources Limited has negotiated a non-brokered private placement of 2,200, 914 units of the company at a price per unit of 0.20 US Dollars, which will provide gross proceeds to the company in the amount of C$440, 188. 20.

According to a statement from the group, proceeds from the private placement will be used for the betterment of the Xaudum iron formation project in Botswana and general corporate purposes.

The statement says every unit of the company will consist of a common share in the capital of the company and one Common Share purchase warrant of the company.

Each warrant will enable a holder to make a single purchase for the period of 24 months at an amount of $0.20. As per regularity requirements, the group indicates that the common shares and warrants will be subject to a four month plus a day hold period from date of closure.

Tsodilo is exempt from the formal valuation and minority shareholder approval requirements. This is for the reason that the fair market value of the private placement, insofar as it involves the director, is not more than 25% of the company’s market capitalization.

Tsodilo Resources Limited is an international diamond and metals exploration company engaged in the search for economic diamond and metal deposits at its Bosoto Limited and Gcwihaba Resources projects in Botswana.  The company has a 100% stake in Bosoto which holds the BK16 kimberlite project in the Orapa Kimberlite Field (OKF) in Botswana.

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Global CEOs Back Plan to Unlock $3.4 Trillion Potential of Africa Free Trade Area

23rd January 2023

African heads of state and global CEOs at the World Economic Forum Annual Meeting backed the launch of the first of its kind report on how public-private partnerships can support the implementation of the African Continental Free Trade Area (AfCFTA).

AfCFTA: A New Era for Global Business and Investment in Africa outlines high-potential sectors, initiatives to support business and investment, operational tools to facilitate the AfCFTA, and illustrative examples from successful businesses in Africa to guide businesses in entering and expanding in this area.

The report aims to provide a pathway for global businesses and investors to understand the biggest trends, opportunities and strategies to successfully invest and achieve high returns in Africa, developing local, sub-regional and continental value chains and accelerating industrialization, all of which go hand in hand with the success of the AfCFTA.

The AfCFTA is the largest free trade area in the world, by area and number of participating countries. Once fully implemented, it will be the fifth-largest economy in the world, with the potential to have a combined GDP of more than $3.4 trillion. Conceived in 2018, it now has 54 national economies in Africa, could attract billions in foreign investment, and boost overseas exports by a third, double intra-continental trade, raise incomes by 8% and lift 50 million people out of poverty.

To ease the pain of transition to its new single market, Africa has learned from trade liberalization in North America and Europe. “Our wide range of partners and experience can help anticipate and mitigate potential disruptions in business and production dynamics,” said Børge Brende, President, and World Economic Forum. “The Forum’s initiatives will help to ease physical, capital and digital flows in Africa through stakeholder collaboration, private-public collaboration and information-sharing.”

Given the continent’s historically low foreign direct investment relative to other regions, the report highlights the sense of excitement as the AfCFTA lowers or removes barriers to trade and competitiveness. “The promising gains from an integrated African market should be a signal to investors around the world that the continent is ripe for business creation, integration and expansion,” said Chido Munyati, Head of Regional Agenda, Africa, World Economic Forum.

The report focuses on four key sectors that have a combined worth of $130 billion and represent high-potential opportunities for companies looking to invest in Africa: automotive; agriculture and agroprocessing; pharmaceuticals; and transport and logistics.

“Macro trends in the four key sectors and across Africa’s growth potential reveal tremendous opportunities for business expansion as population, income and connectivity are on the rise,” said Wamkele Mene, Secretary-General, AfCFTA Secretariat.

“These projections reveal an unprecedented opportunity for local and global businesses to invest in African countries and play a vital role in the development of crucial local and regional value chains on the continent,” said Landry Signé, Executive Director and Professor, Thunderbird School of Global Management and Co-Chair, World Economic Forum Regional Action Group for Africa.

The Forum is actively working towards implementing trade and investment tools through initiatives, such as Friends of the Africa Continental Free Trade Area, to align with the negotiation process of the AfCFTA. It identifies areas where public-private collaboration can help reduce barriers and facilitate investment from international firms.

About the World Economic Forum Annual Meeting 2023

The World Economic Forum Annual Meeting 2023 convenes the world’s foremost leaders under the theme, Cooperation in a Fragmented World. It calls on world leaders to address immediate economic, energy and food crises while laying the groundwork for a more sustainable, resilient world. For further information,

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Electricity generation down 15.8%

9th January 2023

Electricity generation in Botswana during the third quarter of 2022 declined by 15.8%, following operational challenges at Botswana Power Corporation’ Morupule B power plant, according to Statistics Botswana Index of Electricity Generation (IEG) released last week.

The index shows that local electricity generation decreased by 148,243 MWH from 937,597 MWH during the second quarter of 2022 to 789,354 MWH during the third of quarter of 2022.

This decrease, according to the index, was mainly attributed to a decline in power supply realized at Morupule B power station. The index shows that as a result of low power supply from the plant, imported electricity during the third quarter of 2022 increased by 76.3 percent (123,831 MWH), from 162,340 MWH during the second quarter of 2022 to 286,171 MWH during the current quarter and Statistics Botswana added that the increase was necessitated by the need to augment the shortfall in generated electricity.

In the index Statistics Botswana stated that Eskom was the main source of imported electricity at 42.0 percent of total electricity imports. “The Southern African Power Pool (SAPP) accounted for 38.4 percent, while the remaining 10.1, 9.1 and 0.5 percent were sourced from Electricidade de Mozambique (EDM), Cross-border electricity markets and the Zambia Electricity Supply Corporation Limited (ZESCO), respectively. Cross-border electricity markets are arrangements whereby towns and villages along the border are supplied with electricity from neighbouring countries such as Namibia and Zambia.”

The government owned statistics entity stated that distributed electricity decreased by 2.2 percent (24,412 MWH), from 1,099,937 MWH during the second quarter of 2022 to 1,075,525 MWH during the third quarter of 2022. The entity noted that electricity generated locally contributed 73.4 percent to electricity distributed during the third quarter of 2022, compared to a contribution of 85.2 percent during the third quarter in 2022 and added that this gives a decline of 11.8 percentage points. “The quarter-on-quarter comparison shows that the contribution of electricity generated to electricity distributed decreased by 11.8 percentage points compared to the 85.2 percent contribution during the second quarter of 2022.”

Statistics Botswana meanwhile stated that the year-on-year analysis shows some improvement in local electricity generation. Recent figures from entity show that the physical volume of electricity generated increased by 36.3 percent (210,319 MWH), from 579, 036 MWH during the third quarter of 2021 to 789,354 MWH during the current quarter. According to Statistics Botswana electricity generated locally contributed 73.4 percent to electricity distributed during the third quarter of 2022, compared to a contribution of 57.7 percent during the same quarter in 2021. This gives an increase of 15.7 percentage points.

 

The entity noted that trends also show an increase in physical volume of electricity distributed from 2013 to the third quarter of 2022, thereby indicating that there are ongoing efforts to meet the domestic demand for power. “There has been a gradual increase of distributed electricity from the first quarter of 2013 to the third quarter of 2022, even though there are fluctuations. The year-on-year perspective shows that the amount of distributed electricity increased by 7.2 percent (71,787 MHW), from 1,003,738 MWH during the third quarter of 2021 to 1,075,525 MWH during the current quarter.”

The statistics entity noted that year-on-year analysis show that during the third quarter of 2022, the physical volume of imported electricity decreased by 32.6 percent (138,532 MWH), from 424,703 MWH during the third quarter of 2021 to 286,171 MWH during the third quarter of 2022. “There is a downward trend in the physical volume of imported electricity from the first quarter of 2013 to the third quarter of 2022. The downward trend indicates the country’s continued effort to generate adequate electricity to meet domestic demand, hence the decreased reliance on electricity imports.”

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