The results of the Bank of Botswana Business Survey suggest that firms were optimistic about economic activity in the second quarter of 2019. Overall, businesses expected an increase in sales, capacity utilisation and profits in the second and third quarter of 2019.
“Firms intended to increase investment in buildings, plant and machinery, vehicles and equipment, and ‘other’ category, despite anticipating tight access to credit in the domestic market. Meanwhile, firms expect cost pressure to rise in the third quarter of 2019, mainly reflecting the anticipated upward pressure on costs of materials, wages and transport. However, firms expect inflation to remain stable and within the Bank’s medium-term objective range of 3 – 6 percent going forward,” reads the report.
This Report presents results of the survey carried out in the second quarter of 2019, covering the second quarter of 2019 (Q2:2019 – the current period); the third quarter (Q3:2019); and M12, the twelve-month period from July 2019 – June 2020 (Q3:2019-Q2:2020). The survey samples 100 businesses from eight economic sectors and these are: agriculture; mining; manufacturing; water and electricity; construction; trade; transport and communications, and business services. The response rate for this survey is 82 percent.
Economic Growth is expected to be lower in 2019, than in 2018
Meanwhile Firms are less optimistic about economic performance in 2019 expecting a growth of 3.8 percent, which is less than the projection of 4.2 percent made in the 2019 Budget Speech and the 4.5 percent growth in 2018. According to the Survey, it was expected that economic activity in the second quarter of 2019 would be mainly driven by mining and quarrying; finance and business services; and a combination of trade, hotels restaurants and transport and communications sectors.
“The optimism in mining and quarrying, and the trade, hotels and restaurants and the transport and communications sectors could be attributable to the positive prospects for global demand, sales and prices for diamonds, as well as the improvement in tourism prospects,” says the Business Survey report. On the other hand, construction was the only sector which anticipated business conditions to remain unchanged in the second quarter of 2019.
“This is possibly due to the slowdown in the construction of projects since the completion of some major construction works (such as the Botswana Unified Revenue Services building in the Gaborone Central Business District and various Economic Stimulus Programme projects) and the lower rate of increase in funds allocated for development in the current financial year. Meanwhile, all sectors, led the by trade, hotels and restaurants and the transport and communications sectors anticipate improved economic activity in the third quarter of 2019 and the year to June 2020.”
Overall, business conditions are expected to remain positive during the second quarter of 2019, with the level of optimism at 52 percent. However, optimism eases to 48 percent in the third quarter of 2019 and 47 percent, in the twelve-month period to June 2020. Firms, mainly in mining and retail trade, hotels and restaurants intended to increase investment in buildings, plant and machinery, and vehicles and equipment during the second quarter of 2019. Furthermore, firms had also anticipated to increase: capacity/resource utilisation; production/service capacity; sales; and profitability during the same period.
According to the Survey, Firms intend to lower their levels of investment in the third quarter of 2019, possibly due to the expected dampening effect arising from the perceived tight access to credit. Furthermore, firms anticipate reduced levels of stocks/inventories in the third quarter of 2019. “The domestic market-oriented firms were confident about business conditions in the second quarter of 2019 and the optimism improves in the third quarter of 2019 and the twelve-month period to June 2020 (M12).
Confidence in the domestic market-oriented firms is mainly driven by trade, hotels and restaurants, transport and communications and the finance and business services sectors. Export market-oriented firms are more optimistic about the third quarter of 2019 compared to other periods of the survey especially those engaged in the manufacturing business.”
Domestic lending rates and borrowing are expected to rise in the year to June 2020
Firms expect the lending rates and the volume of borrowing from all markets (domestic South African and elsewhere to increase in the twelve-month period to June 2020. Notwithstanding the expected increase in lending rates, the anticipated increase in borrowing volumes is consistent with the expected rise in investment, especially in buildings. Firms in the domestic and export-oriented markets perceived access to credit to have been tight in the second quarter of 2019, mainly because they consider the cost of credit to have been high in the period.
During the year ending in June 2020, there is an inclination among firms, especially those targeting the domestic market, to borrow from domestic creditors, the Survey has found. “Conversely, export oriented firms tend to prefer to borrow from the international markets other than South Africa Looking at factors that affect borrowing decisions, most of the firms which indicated preference to borrow from a particular market (domestic, South Africa and elsewhere), cited the availability of the required loan products in the respective markets as the basis for their choice. Affordability and accessibility of credit facilities influenced borrowing plans of about 30 percent of businesses irrespective of whether funds are to be sourced from Botswana or abroad.”
According to the Survey the majority of firms prefer to finance their business operations from retained earnings and loans. Retained earnings as a source of finance is more prominent in the trade, hotels and restaurants, and the transport and communications sectors. On the other hand, most of the firms in manufacturing, finance and business services and the construction sectors plan to fund their businesses through loans.
Pressure from rising costs expected to increase in the third quarter of 2019
“Overall, there is a strong expectation of cost escalation in the third quarter of 2019, attributable to the expected rise in wages and cost of materials and transport. Firms’ expectations about domestic inflation have generally been on a downward trend since 2013, and within the Bank’s inflation objective range of 3 – 6 percent since 2014. Furthermore, uncertainty about future inflation has generally declined as shown by the narrowing standard deviation (std dev) from the average expectations. Firms’ inflation expectations for 2019 average 3.6 percent, suggesting that inflation expectations are well anchored within the Bank’s objective range.”
Lack of external financing is perceived to be a major challenge to doing business
Meanwhile a number of firms (predominantly market-oriented ones) across various sectors, cited the difficulty in accessing financing from abroad as the greatest challenge to their business operations in the second quarter of 2019. “The second major business impediment is shortage of raw materials, commonly cited by the manufacturing sector, followed by construction and trade, hotels, restaurants and transport and communications.”
On the positive side, the political climate, domestic demand and the current exchange rate are viewed as being the most supportive factors to doing business in Botswana during the second quarter of 2019. Another observation is that water and electricity sub-sectors reportedly contribute positively to economic activity. There are ongoing efforts to improve the supply of these utilities through measures such as the implementation of the North-South Carrier 2 water project and the North-West Transmission Grid electricity connection. Overall, firms are confident about business conditions in the second quarter of 2019.
However, the level of optimism declines in the third quarter of 2019, consistent with the anticipated higher cost pressures. Firms expect the economy to grow by 3.8 percent in 2019, lower than the 4.2 percent projection stated in the 2019 Budget Speech. Furthermore, on average, firms expect inflation to be slightly below 4 percent, which is consistent with the Bank’s projection that inflation will remain within the objective range of 3 – 6 percent in the medium term.
Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a 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.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.
Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio. The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.
CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.
CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.
“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.
“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”
Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities. We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.”
CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour. Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.