Botswana Stock Exchange listed banker First National Bank Botswana (FNBB) faces a stubborn burden of borrowers who default on their loan payments or debtors would not pay either principal or interest of the borrowed money.
The latest unaudited half year results for the year ended December 2018 Bank reveal that FNBB has difficulty collecting interest and principal on their credits with a reflection of the non-performing loans (NPL) to gross advances ratio increasing from 6.6 percent to 7.6 percent year-on-year, with the NPL exposure increasing to P1.26 billion.
Two years ago Bank of Botswana governor Moses Pelaelo highlighted that there is a disturbing emerging trend where customers cannot pay their loan. This was after there was a trend which showed that since December 2014, the industry’s NPLs rose from 3.6 percent to 3.9 percent in 2015 and 4.9 percent in December 2016. That same year of 2017 when the central bank governor raised concern statistics shows that at July 31, 2017 the NPLs had increased further to 5.9 percent of total bank loans. Many observers believe the increase of NPLs in 2016 and 2017 were mainly due to the abrupt closure of the BCL mine which left many in financial dire straits.
Furthermore, according to the World Bank statistics, the average value for Botswana during 2012 to 2017 was 3.94 percent with a minimum of 2.62 percent in 2012 and a maximum of 5.28 percent in 2017. As suggested by the recent FNBB half year financial statement, the trend continues.
In its latest financial results which were released this week, FNBB has said consumer indebtedness in the market remains a concern and the bank will continue its cautious approach in lending into this market. The bank further explained that NPLs stubborn growth is due to the deterioration of certain high-value FNB business segment exposures.
“This significant growth in NPLs is largely due to the deterioration of certain high-value FNB business segment exposures, and the relegations that have been experienced in the FNB Retail and WesBank segments,” explained FNBB directors in the financial report. The bank gave an insuring statement that it remains wary of financial risks despite the positive focus. The bank further promised that the resolution of the NPL portfolio remains a top priority and continue to invest in the iterative refinement of processes and systems required to improve collections. On the other hand impairments increased by 23 percent year-on-year largely due to the FNB Business segment inflow into NPL according to FNBB. Impairment grew from P127 160 in 2017 to P156 112 in 2018.
FNBB lining up to cash in on anticipated unlocking business activity
Despite the bogyman of NPLs standing tall before FNBB the bank made slight improvements in the unaudited half year results for the year ended December 2018. This is highlighted by promises like the increase in tax profit after tax by 9 percent, Non-Interest Revenue growth of 10 percent and interest income increase of 6 percent. Furthermore, the half year results show a boom in the banking app, signaling the bank’s dominance in the digital space and an upper-hand in the market, which has recorded registration increase of 11 percent.
According to FNBB when announcing its unaudited condensed consolidated financial results and dividend announcement, the bank also continue to maintain its deposit market share of just below 30 percent. FNBB said it saw customer deposit growth of 3 percent as at December 2018 and it emanated predominantly from increases in transactional balances.
When explaining its increases, FNBB said the Non-Interest Revenue growth of 10 percent which is an increase from P548 811 in the unaudited results for the six months ended 31 December 2017 to P605 824 for the same period of last year (2018), was due to increases in both foreign exchange revenue and transactional revenue.
“The foreign exchange revenue growth was due to a significant increase in the value and volume of foreign exchange transactions as a result of ZAR volatility. The growth in transactional revenue was largely due to increased merchant transactional turnover,” said FNBB. For interest income to grow by 6 percent from P757 421 in 2017 to P804 772 in 2018 is because of increase in advances according to FNBB. The bank said however this increase was largely due to the optimized investment portfolio while the change in the advances portfolio mix resulted in reduced average yields on advances.
With this slight progress FNBB suggested that it is steady on its marks to cash in on anticipated increased business activity and commensurate growth in market advances which coincides with the current positive outlook for the Botswana economy. The bank further anticipates growth in targeted financing for some sectors of the economy such as agriculture, manufacturing and tourism, which are sectors expected to be supported by credit guarantees from development finance institutions.
“The Bank is well-positioned to assist customers in their participation in these developments. The Bank will continue to invest in key strategic enablers to continue to deliver a superior customer experience. Investment in digital capabilities, human capital and process re-engineering will continue,” said FNBB.
While giving an economy outlook for Botswana which gives it confidence to position itself for the time of harvest when the economic activities are ripe, FNBB expects the local economy to register a growth rate of 4.4 percent for 2018 due to higher diamond mining output. The bank’s growth forecasts for 2019 and 2020 at 4.7 percent and 4.5 percent respectively.
“The key to unlocking further growth opportunities for Botswana lies in the success of diversification initiatives such as special economic zones and public private partnerships, with consequent creation of employment opportunities. The service sector has accounted for over 50 percent of the growth in the past decade, thus reflecting some achievements in the diversification of the economy,” said FNBB in its half year results.
The bank has however noted that Botswana remains reliant on diamonds, as they account for over 85 percent of the country’s exports and contribute close to 30 percent of fiscal revenue, thus exposing the fiscus to external volatilities. FNBB says its growth forecasts therefore remain cautiously optimistic as policy implementation, together with effective infrastructure development, has historically been a challenge.
Accordingly, successful diversification will depend largely on investor-friendly regulation and effective implementation of development projects. Given that the economy remains consumer led, with household expenditure at 49.1 percent of GDP in Q3 of 2018, sustained economic growth will depend upon both employment creation and real wage increases,” said FNBB directors in its financial results.
Inflation rates remain cyclical lows
When giving health report on Botswana’s inflationary statue FNBB said headline inflation averaged 3.2 percent in 2018 compared to 3.3 percent in 2017. The inflation was subdued by lower demand-pull pressures, a reduction in the administered prices of mobile network operators and the alcohol levy, as well as continued zero-VAT rating on most staple food products. Upside pressures were mostly led by an increase in fuel prices as well as public transport fares.
“We reiterate that demand-pull pressures are likely to limit the increase in inflation as growth in real income levels remains modest. We anticipate the headline in figure of a short-to-medium-term average of 4.0% through to 2023, being within the 3% to 6% target range of the Bank of Botswana,” said FNBB directors on the half year financial report. FNBB also stated that it believes that the Bank of Botswana will continue to focus on supporting economic growth and keep its monetary policy stance accommodative for the next 12 to 15 months.
“We expect that the Bank of Botswana will leave the bank rate unchanged at 5.0 percent for the rest of 2019. We foresee overall credit extension remaining below 8 percent through to 2020, allowing for a slight increase in business credit as confidence returns, but with household credit remaining restricted by the current pressures on discretionary household income,” said FNBB.
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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.