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Masisi waging war against high wages amidst political pressure

President Mokgweetsi Masisi’s first year to lead the country into general elections comes with heavy burdens on his shoulders.

A respected think tank, Moody’s Investors Service sees a challenge of higher wages and protruding capital expenditures against an economy chiefly dependent on mineral revenue while it shows no further attempt of implementing drastic revenue-raising measures. In a bar graph representation, Moody’s demonstrates that Botswana has a higher wage bill as a percentage of the GDP. The think tank also shows that the capital expenditure and this could be due to investment on mineral projects like the recently launched P21.4 billion Cut 9 project.

Moody’s new presentation shows Botswana wage bill to be around 12 percent as almost equating with that of South Africa but lower than that of eSwatini and Namibia. The latest Moody’s report was focused on sovereigns in sub-Saharan Africa (SSA) which the think tanks said they plan further fiscal consolidation to stabilize their elevated debt burdens and reduces pressures on their credit profiles.  

It further stated that these plans are generally set under assumptions of broadly stable economic and financing conditions. In the event of shocks, scope to cut government spending rapidly and significantly, or spending flexibility, allows sovereigns to broadly adhere to their plans and lends resiliency to fiscal strength. In the latest report, Moody’s proposed a measure of spending flexibility in SSA consistent with its earlier work for other regions, to inform our assessment of the resilience of fiscal strength to potential shocks.

“Expenditure flexibility, the result of structural features and recent measures, partly determines the resilience of fiscal strength. While SSA sovereigns are generally planning to consolidate their budgets in a way that should stabilize debt, they now face potential negative economic and financing shocks with a weaker starting fiscal position than five years ago.

Expenditure cuts are often easier to implement quickly than revenue-raising measures. Fiscal strength will likely be more resilient for those with capacity to cut expenditure quickly and significantly in the face of a shock,” says Moody’s report. For this country when looking at expenditure on borrowings, Moody’s says Botswana saw only a marginal increase in their interest expenditures.

  The agency also said in some cases, higher interest expenditure offset a significant amount of the reduction to spending on wages and transfers, the other components of mandatory spending. Therefore, with Botswana having less interest expenditure pundits may argue that expenditure on wages may be raised as many believe this country’s salaries are below what is expected. Other pundits may cite Botswana’s high capital expenditure as the reason why Masisi’s regime may remain cautious when spending. In this year of elections, calls on spending remain deafening.

Moody’s shows Botswana currently lingers deep in between flexible and severely constrained SSA countries when it comes to mandatory spending. Moody’s measure expenditure flexibility as the share of discretionary spending (capital expenditures and spending on goods and services) in total expenditure. The remainder consists of spending on parts of the budget that governments generally cannot cut rapidly or which can be adjusted more easily over a longer period of time (interest payments, salaries & wages, and transfers).

The rating agency further states that higher borrowing costs and increased debt burdens saw interest expenditures increase over the four year, like it’s a case for Botswana. The time for the polls has become almost ripe with only a matter of weeks Batswana will be lined up to vote for what they expect and what they were promised. Botswana’s elections are held after every five years and Moody’s has noted that this country together with most SSA sovereigns plan to consolidate their budgets to stabilize debt as they are now more vulnerable to potential negative economic and financing because they are in a weaker fiscal position than five years ago.

In January this year Moody’s said Botswana was going at a snail’s pace in fiscal consolidation efforts and this could increase policy uncertainty ahead of the 2019 general elections. This was before Masisi increase salaries in April. According to the rating agency, ahead of elections in Botswana, the authorities have been envisaging a more gradual pace of fiscal consolidation.

The mandatory spending factor and political pressure

While Masisi may have increase salaries in April this year and adjusted wages of disciplined or armed forces later, something which some of his critics call political gimmick, he has a bigger headache of managing high wages and walking along the boundaries of mandatory spending. The International Monetary Fund (IMF) has always advised Botswana to reduce its wage bill which has been seen to be higher than expected.

April this year, the season of the national polls, Masisi led a government initiative to increase public servants salaries for financial year 2019/20 with an increment of 10 percent for scales A and B and 6 percent for scales C and D. Last year IMF suggested that Botswana cut the size of its civil service, something which Masisi appeared to have almost heeded to when he faced the international media on the issue when he said, “we are more efficient, we are leaner, meaner, and we can do business and we are more attractive to the private sector for them to invest”.

However this was quickly tackled by critics including legislator-cum-economist Ndaba Gaolathe, who said there is no compelling evidence that can suggest that Botswana is in a desperate anomaly that requires it to cut off the size of its civil service. Masisi may have toyed with the idea of trimming jobs despite him being a self-proclaimed “Jobs President” just as he assumed office. He is yet to implement National Employment Policy and has been promising jobs in the time when Botswana faces worst record of income inequality and high unemployment rate.

Meanwhile it has been reported that the April salary increment adds additional cost of a little more than P1 billion per annum to government. It is also said the government wage bill is high by international standards, as it currently stands at 11.3 percent of GDP, against the international threshold of 5.0 percent of GDP. Moody’s places the wage bill at around 12 percent of the GDP and recognizes its loftiness when compared to its Sub-Sahara Africa counterparts. Observers believe Masisi is going to be careful with his spending despite a further call for wage hike.

On the dark-point the budget proposals for the 2018/2018 overall balance is estimated at a deficit of P6.35 billion (or 3.3 percent of GDP), which is expected to worsen to P7.79 billion (or 3.8 percent of GDP) in 2019/2020. A major factor when government considers further spending, an add to Masisi’s headache. Also, government acknowledges positive growth of 4.5 percent in the domestic propelled by non-mining sectors but points to a declining global economy which grew by 3.6 percent in 2018 and is anticipated to only grow at 3.3 percent in 2019.

Bank of Botswana however has said the new salary hike will not in anytime have any inflationary effect or cause a collapse. The central bank also said the wage increase will not shake the domestic economy. Already trade unions are seeking for a further increase of salaries.

PEMANDU RECOMMEDATIONS

A Malaysian private firm Performance Management and Delivery Unit(PEMANDU) who conducted a salary adjustment on behalf of the Directorate of the Public Service Management (DPSM) “remunerations system project report for grades A to D” was unfazed by government’s lack of funds to spend on increase of wages.  Government hired PEMANDU as a consultant at a tune of P 17, 6 million.

On the issue of high wage bill, PEMANDU sees that as an excuse by government to avoid motivating its workforce. “The increase in wage bill represents approximately 10.3 percent of the country’s Gross Domestic Products (GDP), the current wage bill being 9.4 percent of GDP. This is still below the regional Sub-Saharan bench mark of 11 percent,” states the report.

The PEMANDU proposal if implemented will add an additional P1.23 billion per annum. PEMANDU has made a proposal of a salary hike of 20 percent for grades A and B; 10 percent for grades C and D and 15 percent for grade E and F. According to the Malaysian firm the new implementation was to bridge the widening gap between lower and higher paid civil servants, while higher grades of E and F should receive no increment in the proposals and keeps their range.

Government before increasing salaries for the public sector in April has always promised that the PEMANDU report will be implemented. However recently something seems to have changed, Vice President Slumber Tsogwane made an announcement suggesting that government is constrained to put more funds for increment of civil servant wages as per the PEMANDU report.

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Business

BTC profits rise to P832million

14th September 2021
BTC MD Masunga

This week, Botswana Telecommunications Corporation Limited (BTCL), the country’s only listed telecoms company, released its annual report for the financial year ended 31st March 2021.

The company, listed on the local bourse in a historic IPO in 2016, has been grappling with the uphill task of transforming from a wholly state-owned organisation to a fully commercial publicly listed entity. This excise has seen some financial years registering a decline in both revenue and profits.

On Tuesday, BTCL reported a significant rise in profits, attributable to a slight pick-up in revenue and serious cost containment measures. The beginning of the fiscal year saw the implementation of the company’s new three-year strategy, which is focused on strengthening the core business, optimising efficiencies and return on assets, and pursuing growth opportunities.

The start of the financial year coincided with the implementation of the national measures to contain the COVID-19 virus, leading to national lockdowns, which placed pressure on the BTCL performance for the first half of the year. “However, we have since seen a decent recovery in our financial performance year-on-year,” said BTCL Managing Director Anthony Masunga

BTCL Group, which comprises among other business segments: mobile, fixed and broadband, has reported revenue of P1.43 billion, which is a 1% increase over the prior year. According to BTCL directors, this increase in revenue was driven by the monetisation of significant investments in fixed and mobile broadband infrastructure in support of high-speed internet service at homes and offices across most parts of the country.

“We delivered a strong double-digit growth in profit after tax of 16% when compared with the prior year, driven by the slight increase in revenue and robust cost reduction strategies that improved EBITDA to P463 million, leading to an increase in cash,” Masunga explained. Cash and cash equivalents significantly increased by 20.4%, from P120 million in the prior year to P364 million at the end of March 2021.

The increase was driven by a positive cash conversion ratio of 52% and favourable working capital resulting from debt collection measures during the year. Masunga explained that the healthy cash balance enabled the BTCL to finance further expansion of its mobile data network and replace traditional copper connections with fibre to better support the needs of its customers.

“The uptake of our data products has been growing steadily, with the improving quality of service leading to increased revenues even as voice revenues declined,” he said. The cost of services and goods sold reduced by 3% from P612 million to P594 million when compared to the previous year, leading to an increase in gross profit for the year by 3%, an increase of P27 million to P832 million, translating to an improvement in gross profit margin from 57% to 58%.

Despite the increase in the top line, which would have led to a rise in the cost base, the Group Continued with its robust cost containment measures, leading to a slight increase in all other operating costs by P3 million. The control of costs led to an overall increase in the earnings before interest, depreciation, taxation and amortisation (EBIDTA) by P55 million, with a margin expansion of 370 basis points compared to the previous year.

The operating margin increased by 2% to 13%, coming from the earnings before interest and tax (EBIT) to P186 million, a P24 million increase compared to the prior-year figure of P163 million.
Net interest increased significantly, driven by the new accounting treatment of the IRU liability. All the above led to an overall increase in the profit before tax of P27 million, which increased to reportable gain to P166 million.

The Group ended the year with a P135 million profit after tax compared to P117 million for the same period last year with a tax expense of P31 million in the current year, which is higher when compared to the P22 million reported in 2020. Therefore, the Group delivered an impressive 16% increase year-on-year with a 9% net profit margin, compared to 8% in the prior year.

BTCL continues to dominate the fixed-line business despite a continued reduction in the demand for fixed lines globally and locally. Trends continue to show an increased shift of consumer preference to mobile communications, a direction according to Anthony Masunga is due to his company’s “increased flexibility, convenience, and innovation.’

BTCL’s mobile phone market also continued to grow during the year, with many consumers owning multiple SIM cards from the three mobile network operators. Smega, BTC’s Mobile Money Services, saw significant growth in subscriptions during the year, and we expect to attract more customers as the Group continues the Visa card rollout.

Masunga boasted that Smega could interact with traditional banking systems, offering more convenience to BTCL customers. “The platform supports greater financial inclusion for the country’s sizeable unbanked population,” he said. BTC Board Chair Lorato Ntakhwana said that in the future, the 51 percent government-owned telecom giant will bank on its new 3-year strategy for growth paths.

She revealed that the new strategy would build on the great foundation set by its predecessor, enabling BTC to reap the full benefits of its digital infrastructure investment to drive the growth of the business.

Ntakhwana explained that the digital transformation of the business underpins the strategy to realise enhanced efficiencies and continue to maximise the utilisation of its technologies. “We remain committed to transforming BTC into a digital services company, leading the Fourth Industrial Revolution to create maximum shareholder value. We see technology and digitisation as a vehicle to the provision of solutions to the nation’s challenges,” she said.

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Business

FNBB’s profit after tax down 2%

14th September 2021
FNBB CEO - Steven Bogatsu

First National Bank Botswana (FNBB) has released its audited summarised consolidated financial statement for the year ended 30 June 2021. According to the statement, the balance sheet reduced by 6% year-on-year primarily due to declining gross advances to customers. Credit risk remained heightened amid the prevalent economic uncertainty of the COVID-19 pandemic.

The bank said it continued to apply a prudent approach to lending to ensure responsible and manageable consumer exposure, which resulted in a decline in gross customer advances by 7% while gross market advances increased by 4%.

Retail advances experienced a sharp decline of 7%, while the Botswana retail market increased by 9%. According to the bank’s financial statement, the decline was driven by competitive pressures, with the market extending loan tenures, resulting in increased market debt. However, the bank maintained its existing affordability criteria and a selective approach to retail exposure.

The corporate segment experienced remarkable growth of 19% year on year. In comparison, the commercial advances portfolio reduced 19% because of a cautious lending risk appetite, a reduction in the Non-Performing Loans (NPL) and the overall lack of growth in the market.

The combined result of FNBB’s commercial and corporate advances was a decline of 7% against the overall comparable decrease of 3% in the market. While actively looking for the opportunities arising out of the anticipated recovery pattern, the bank said it would continue to be cautious in maintaining the quality of its credit book.

NPLs, according to FNBB financial declined by 11% year-on-year from P1.2 billion to P1.09 billion, resulting in a NPL/gross advances ratio of 7.3% as of 30 June 2021. FNBB stressed that reduction in NPL was primarily due to a recoverability assessment of long-outstanding NPL loans resulting in the write-off of irrecoverable loans. The closing provision levels remain appropriate.

The June 2020 deposit portfolio experienced significant growth following the reduced spending commensurate with the lockdown restrictions and deferred capital expenditure cycles by corporates. In the June 2021 results, deposits declined from P23.2bn to P21.4bn (8% decline), driven by an increase in activity following the lifting of COVID-19 restrictions and the normalisation of the market liquidity.

Investment securities declined by 17% year-on-year following the normalisation of market liquidity to pre COVID-19 levels. The decline was driven by the drop in short term assets at the back of the decrease in demand deposits.

FNBB indicated that it had demonstrated a resilient performance amid COVID-19 uncertainty shown by maintaining the profit before tax despite the significant reduction in the Bank Rate. This was underpinned by the normalisation of credit losses and a resilient non-interest revenue (NIR) base. Return on equity of 18.2% (2020: 20.1%) has declined due to the conservative level of capital held over the financial year, as well as the 2% reduction in profit after tax.

The past year has presented itself as a real and severe economic test, and FNBB has shown that its income streams are resilient while a critical focus has been on strengthening the balance sheet. A decrease of 15% in interest income was driven by the reduction in the Bank Rate, the decline in the advances book, and a change in the advances portfolio mix.

This was further driven by the fall in the cash and investment portfolio interest income due to the reduction in risk-free rates and lower yields across investment securities for a portion of the year. Interest expense decreased 22% following an 8% decrease in deposits and the Bank Rate reduction. The deposit mix shifted from overnight deposits to term deposits as clients sought higher yields.

Impairments declined by 43% year-on-year, driven by a 49% reduction in both Stage 1 and 2 impairments, as well as a 40% reduction in Stage 3 impairments. The stage 1 and 2 impairment decline followed a reduction in the gross advances exposure and the normalisation of impairments in June 2021.

The Stage 3 impairments decline, is attributed to a reduction in defaults over the period, with the bank has partnered with clients to help their businesses through the pandemic. The P180m reduction in impairments decreases the credit loss ratio to 1.6% (2020: 2.6%).

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Business

De Beers rough sales up

14th September 2021
rough diamonds

De Beers Group on Wednesday announced the value of rough diamond sales (Global Sightholder Sales and Auctions) for the seventh sales cycle of 2021.

Figures show continued growth in rough sales, bolstered by solid demand for polished goods in the key markets of the United States of America and China. The 2021 cycle seven rough sales clocked a provisional figure of $514 million, a slight increase from $513 million recorded in the previous cycle. The jump, however, is a significant increase when mirrored against the 2020 cycle 7 figure of $334 million.

Owing to the restrictions on the movement of people and products in various jurisdictions around the globe, De Beers Group continued to implement a more flexible approach to rough diamond sales during the seventh sales cycle of 2021, with the Sight event extended beyond its typical week-long duration.

As a result, the provisional rough diamond sales figure quoted for Cycle 7 represents the expected sales value for 23 August to 7 September. It remains subject to adjustment based on final completed sales. Commenting on the sales results Bruce Cleaver, Chief Executive Officer of De Beers Group, said sentiment in the diamond industry’s midstream continues to be positive, as reflected in the company’s sales for Sight 7.

Cleaver explained that demand for rough diamonds results from robust demand for polished diamonds in De Beers’sBeers’s key markets of the US and China. He highlighted that the midstream’s optimism for the remainder of the year was also evident at the recent JCK Las Vegas trade show, which was a success despite being held under challenging circumstances.

“As we now head towards a traditionally slower period for rough diamond sales, we remain cognisant of the risks to economic recovery from the global pandemic,” he said. De Beers impressive rough sales run is against the backdrop of performance come back in the first half of the year.

The revenue for the first six (6) months of 2021 demonstrated resilience and an impressive comeback following a devastating 2020. The more significant part of 2020, in particular, the first half of the year, was characterized by low demand across the entire diamond value chain due to the COVID-19 pandemic.

Countries put measures to curb the spread of the virus that broke out of China in late 2019; this came with travel restrictions that curtailed the movement of goods and people, reducing trade to record low levels. However, this year as crucial markets continue to reopen and exhibit signs of pre-covid demand levels, De Beers total revenue for the first half of 2021 increased significantly to $2.9 billion (Over P32 billion) from $1.2 billion (P13 billion), mirroring a jump of over 141%.

The growth in revenue for the first half of the year was bolstered by continued recovery in global consumer demand for diamonds, as the industry dusts itself from the impact of Covid-19, supported by fiscal stimulus in the US and the roll-out of Covid-19 vaccines. Restrictions on international travel and entertainment over the pandemic resulted in higher discretionary spending on luxury goods, including diamond jewellery.

In the first six months of 2021, the cutting centres achieved strong sales of polished diamonds in response to the ongoing recovery of consumer demand. However, the severe Covid-19 wave in India during April and May reduced capacity to cut and polish operations within the critical Indian midstream sector, further exacerbated by polished diamond grading backlogs in critical markets.

The relative shortage of polished supply contributed to a positive, polished price trend in the first half of 2021. The recovery of demand in all parts of the pipeline enabled rough diamond producers to destock at the start of 2021. This robust demand, combined with supply constraints arising from production challenges, created a favourable dynamic in the first half of 2021 that supported higher rough diamond prices.

At half-year, De Beers rough diamond sales had risen to $2.6 billion from $1.0 billion in the half-year 2020, and this was driven by robust rough diamond demand as the midstream pulled through stocks in response to the recovery in consumer demand, with rough diamond sales volumes significantly higher at 19.2 million carats from 8.5 million carats in the first six (6) months of 2020.

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