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Moody’s cautions Letshego over credit risk from Pan African expansion

Botswana Stock Exchange (BSE) listed pan African services group Letshego Holdings Limited has maintained its credit rating Ba2 Corporate Family Ratings (CFR) from Moody’s , a US Bases international credit rating agency.

In a rating assessment published by Moody’s on Monday, the New York headquartered agency says their credit analysis assign a Ba2 Corporate Family Rating (CFR) and Ba3/Not Prime issuer ratings to Letshego Holdings Limited because the company’s outlook is stable.
 “The stable outlook reflects our expectation that the company's financial fundamentals will remain robust over the next 12 to 18 months, despite elevated credit risks from its regional expansion,” says Moody’s.

The Agency notes that Letshego’s credit strength are in particular the company’s gradual diversification of its business model across products and countries as well as solid capitalization buffers and profitability, supported by high margins. Moody’s underscored Letshego’s credit challenges as predominately the fact that the company’s credit profile is  sensitive to changes in regulatory and legal frameworks  as it continues on Pan African expansion wave. “Capital is sensitive to Letshego's large foreign currency exposures and asset quality risks will remain elevated as well as high reliance on wholesale market funding and weak liquidity metrics,” explained the US based International finance & economic observer.

On the negative credit fronts Moody’s says  negative pressure could be exerted on Letshego's rating if regional authorities in the company's main operating markets change the terms of, or impose restrictions on, the deduction  of loan repayments at source ,  from the wages of public-sector employees, leading to a sharp rise in bad debts and impairment costs.

 In addition, negative pressure could be exerted on the rating if Letshego’s expansion in other sub-Saharan markets, client segments and products, results in a material weakening of asset quality and profitability metrics and if Letshego’s capitalization metrics were to materially weaken. “Letshego's issuer ratings could be downgraded due to adverse changes to its debt capital structure that would lower the recovery rate for senior unsecured debt classes,” reads a comment in the rating assessment.

Letshego has a niche franchise specializing in unsecured loans to government and quasi-government employees under the payroll deduction model accounting for around 86% of its total loans. Under this model, loan repayments are taken directly from the employer prior to the distribution of monthly salaries. Letshego’s business model benefits from a quick and efficient loan-approval and disbursement process and has historically led to fairly low credit costs and strong profitability.

Moody’s however says the company’s concentration to payroll deduction products exposes the company to adverse developments in the regulatory and legal framework that may either hamper the payroll deduction process   impose or lower caps on the effective interest rate the company can charge on loans.

To counter these risks, Letshego has been increasing its geographical diversification and has a strategy to diversify its business model by becoming a pan-African financial services company. As part of this strategy it has completed various acquisitions across Africa by acquiring banking and deposit taking licenses in several territories including Ghana, Mozambique, Rwanda, Tanzania, Nigeria, and Namibia, and aims to convert its loan-only clients into transactional clients.

 However, the company has experienced high rotation among top management positions over the last 12 months which may slow down the implementation of its strategy. Currently, the company has operations in eleven sub-Saharan African countries with a strong niche franchise within Botswana, Namibia and Mozambique where it offers payroll loans to around 20%, 51% and 22% of all government employees as of June 2018, respectively. Outside these three markets, Letshego currently exhibits a lower franchise sustainability given its weaker brand name and lower market penetration

“Letshego's expansion will gradually reduce its overall dependence on payroll lending by broadening customer segments and products; at the same time supporting its deposit mobilization capabilities,” shared Moody’s. The credit rating agency further says going forward; the company will need to manage potentially elevated credit losses from riskier non-payroll related loans, albeit compensated by higher margins higher sub-Saharan Africa country risks and its relative inexperience in these newer markets and product offerings.

According to the agency‘s detailed rating analysis the Ba2 CFR captures Letshego’s solid capitalization and profitability, supported by its niche, low-cost, franchise. They also capture Letshego's growing diversification across regional countries. These strengths are balanced against Letshego's  narrow, albeit gradually diversifying, business model with a high reliance on payroll deductions for loan repayment collections, high exposure to foreign exchange risk, elevated asset quality risks  and  dependence on market-sensitive wholesale funding, although actions are being taken to address this weakness.

No external support has been considered in Letshego's ratings given its limited importance to Botswana’s payment system and its immaterial holdings of customer deposits. Letshego's Ba3 issuer ratings are positioned one notch below its Ba2 CFR given the structural subordination of unsecured obligations under Moody's Loss Given Default (LGD) model for speculative grade companies.

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China’s GDP expands 3% in 2022 despite various pressures

2nd February 2023
China’s Gross Domestic Product (GDP) expanded by 3% year-on-year to 121.02 trillion yuan ($17.93 trillion) in 2022 despite being mired in various growth pressures, according to data from the National Bureau Statistics.

The annual growth rate beat a median economist forecast of 2.8% as polled by Reuters. The country’s fourth-quarter GDP growth of 2.9% also surpassed expectations for a 1.8% increase.

In 2022, the Chinese economy encountered more difficulties and challenges than was expected amid a complex domestic and international situation. However, NBS said economic growth stabilized after various measures were taken to shore up growth.

Industrial output rose 3.6% in 2022 over the previous year, while retail sales slightly shrank by 0.2% data show that fixed-asset investment increased 5.1% over 2021, with a 9.1% hike in manufacturing investment but a 10% fall in property investment.

China created 12.06 million new jobs in urban regions throughout the year, surpassing its annual target of 11 million, and officials have stressed the importance of continuing an employment-first policy in 2023.

Meanwhile, China tourism market is a step closer to robust recovery. Tourism operators are in high spirits because the market saw a good chance of a robust recovery during the Spring Festival holiday amid relaxed COVID-19 travel policies.

On January 27, the last day of the seven-day break, the Ministry of Culture and Tourism published an encouraging performance report of the tourism market. It said that domestic destinations and attractions received 308 million visits, up 23.1% year-on-year. The number is roughly 88.6% of that in 2019, they year before the pandemic hit.

According to the report, tourism-related revenue generated during the seven-day period was about 375.8 billion yuan ($55.41 billion), a year-on-year rise of 30%. The revenue was about 73% of that in 2019, the Ministry said.

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Jewellery manufacturing plant to create over 100 jobs

30th January 2023

The state of the art jewellery manufacturing plant that has been set up by international diamond and cutting company, KGK Diamonds Botswana will create over 100 jobs, of which 89 percent will be localized.

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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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