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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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P230 million Phikwe revival project kicks off

19th October 2020
industrial hub

Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status.  The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.

This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago.  In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.

However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced.  Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.

The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.

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IMF projects deeper recession for 2020, slow recovery for 2021

19th October 2020

The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.

On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April.  For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.

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Botswana partly closed economy a further blow of 4.2 fall in revenue

19th October 2020

The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.

Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.

Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).

“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.

Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.

This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.

For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.

Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers.  “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.

‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’

According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.

Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.

“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.

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