The macroeconomic outlook remains positive onto 2019 underpinned by the anticipation of sustained growth in the mining sector, particularly diamonds, as the global economic recovery ensues. At the same time, the non-mining sector is expected to drive growth, largely from the services sectors. The projected accommodative monetary conditions, expansionary fiscal policy, stable water and electricity supply, should all serve to add impetus to economic growth.
The country is set to go to the polls this year with the general elections marked for October. Notwithstanding increased factionalism within the ruling Botswana Democratic Party (BDP) we anticipate the party will retain power come elections. The new political administration’s approval of key legislation aimed at improving the business environment could serve to attract much needed Foreign Direct Investment (FDI) into Botswana.
The Bank of Botswana September 2018 Business Expectations Survey also highlights the positive prospects of 2019. Businesses have indicated positive expectations about 2019 business conditions, which they expect to improve further, with the main drivers being increased demand for consumer products and sustained growth in global demand for mining output.
Over the surveys of recent years, constrained domestic demand has consistently been cited as one of the biggest challenges facing businesses. It is particularly encouraging to note that increased demand for consumer products is now expected to be a key driver of growth. Furthermore, firms expect wages to increase in the first half of 2019, likely premised on the anticipated public service salary increment.
From a global viewpoint, the year has begun with much uncertainty. Key events, including Brexit, the US-China trade war, China’s economic slowdown and the Italy debt crisis, will likely result in investors shying away from equities and parking their money in safe haven assets. The outcome of these events will be pivotal in determining the direction equity markets will take and could influence whether liquidity from foreign investors will return to our local stock market. However, considering the positive domestic macroeconomic outlook, improved fundamentals and attractive valuations on the DCI, investors should see our local stock market as a good buying opportunity.
The Banking Sector
The performance of the banking sector is largely tied to the health of the economy. With ensuing growth anticipated for 2019, demand for credit should remain strong. 2018 saw a recovery in credit growth from the lows seen in 2017 in line with improved economic performance. We anticipate 2019 will be another year of solid credit growth, with businesses acting as the primary driver.
The aforementioned Business Expectations Survey indicates local firms expect a rise in domestic borrowing this year. Meanwhile, consumers are currently under pressure from constrained disposable incomes and there is the general perception of household debt being at high levels. However, the anticipated increase in wages should serve to provide some relief to households and increase their borrowing capacity, albeit to a limited extent.
With the economy only recently beginning to pick up steam and the subdued inflationary environment, we expect the Central Bank will maintain an accommodative monetary policy stance throughout the year. We therefore see the bank rate maintained at 5% in 2019. The monetary policy environment substantiates our expectations of decent credit growth.
Non-interest income growth remains a key focus for the banks. Increased development and enhancement of digital banking channels are driving transactional income growth, with self-service banking increasingly being utilized by customers due to its convenience of 24 hour access and mobility. On the brick and mortar front, banks appear to be adopting a model of leaner branches, with increased self-service access points.
FNBB, the largest bank and market leader in innovation, is well poised to continue driving solid non-interest income growth underpinned by aggressive rollout of digital platforms and initiatives aimed at increasing penetration of clients’ use of the bank’s products. FNBB has targeted particular business sectors for credit extension, while it intends to lend cautiously to households.
Barclays is set to experience a change in leadership with Managing Director, Reinette Van Der Merwe’s tenor coming to an end in the current financial year. The bank’s strategy of growing its fee income will result in ensuing investment in digital solutions in line with increased use of these channels by its clients. Barclays has made it clear it intends to grow its advances market share, with a strong focus on growing its book via client penetration and acquisition. The cost impact of the separation from Barclays PLC however, does bring some uncertainty.
Following the de-risking of its balance sheet, Stanchart should be positioned to drive growth that doesn’t compromise on asset quality. Given its elevated cost/income ratio of 95% as at June 2018, the bank finds itself under immense pressure to bring this metric down and grow its income lines. Newly listed BancABC will largely be focused on the rollout of new and enhanced product offerings and extensive marketing to drive its envisioned transactional banking proposition. The bank significantly lags its more established peers with regards to non-interest income contribution, currently at 16.4% of total income. This indicates the scope that ABC has to grow and diversify its revenue streams.
The Financial Services Sector
Blue chip financial services giant BIHL is set to launch a new strategy this year following the end of its 5 year twin strategy of growth and profitability in 2018. The group’s segmentation approach under the life business has made good in-roads and we believe this will remain a key part of the new strategy with innovation likely to play an ever increasing important role amidst the competitive environment. We anticipate that the affluent segment will continue to be a key driver of growth in value of new business given its low penetration and higher average size premiums.
Asset management arm, BIFM, faces an increasingly challenging landscape. Ex-BPOPF pension funds have followed suit in adopting the measure of splitting mandates amongst asset managers. This development makes it more difficult to grow assets under management. Further, the entry of new asset managers will over time intensify competition for assets as these firms build track records and acquire mandates. On a group level, business development initiatives aimed at marketing BIHL as a “one stop financial services shop” should serve to further harness synergies between the underlying subsidiaries and associate businesses.
Letshego’s broad geographical footprint across Sub-Saharan Africa (SSA) has the group well positioned to scale its operations further. According to IMF statistics, GDP growth for SSA is expected to improve to 3.5% (2018: 2.9%) and 3.6% in 2020. Letshego appointed Smit Crouse as the new group Managing Director late in Q3 2018. Mr. Crouse has extensive experience in finance, commerce, and law, including advising on and managing African banking investments.
Access is the focal point for the firm in driving its strategic agenda of becoming the continent’s leading inclusive finance group. Letshego’s agency network, mobile digital banking solutions, strategic partnerships, new products and cross selling initiatives have substantially increased access and driven customer acquisition. We expect the continued rollout and promotion of these initiatives to drive further growth momentum going forth. With increased diversification into MSE lending, Letshego would do well to monitor the composition of its loan book in order to simultaneously drive growth and keep loan loss rates in check. 5
The Property Sector
The listed property companies are increasingly diversifying across our local borders. The Botswana property market has seen varied dynamics. Demand for retail space has been strong and is still rising with further mall developments and expansions having been recently completed and some underway. This sector is enjoying good occupancy rates and escalations. The industrial sector is seeing solid demand, especially in Gaborone. Developments have reportedly been low; however, demand for prime location space is expected to improve further.
The office market’s state of oversupply has put downward pressure on rentals. Considering the number of new developments and ongoing construction (particularly in Gaborone Central Business District) coupled with subdued employment creation, this sector is likely to remain under pressure. The residential sector has seen improved conditions for the low to middle income segment of the market, while the high end remains weak.
NAP, which has bucked the trend of diversification with an unchanged property portfolio, has nonetheless been a consistently solid performer. The retail property giant should see sustained top line growth from escalations. The weak economic conditions in Selebi Phikwe however will likely remain a drag, with the area currently accounting for 43% of vacancies across the portfolio.
The evolved dynamics of the hospitality sector have forced Letlole management to dispose of its hotel portfolio (which contributes 30% to rental revenues and 28% to the consolidated property portfolio) to related party and incumbent tenant Cresta, subject to unitholders approval. The BWP235 million to be raised from the transaction (a 10% discount to book value) is intended to be reinvested in new acquisitions. Given the length of time acquisitions normally take, investors will likely suffer the opportunity cost of the difference in rental yield and return on cash until the proceeds are utilized.
RDCP has been a significant benefactor of regional diversification on the back of its investments in South African based Capitalgro. South Africa is to be of increasing importance to the company as management has emphasized the number of opportunities being evaluated by Capitalgro. The Xai Xai shopping centre will give RDCP a foothold in Mozambique, while further developments there and in Namibia are still in early stages.
Turnstar has been experiencing prolonged tepid demand, and rightfully so given its challenges in Tanzania. Vacancies at the Mlimani office park have been a major drag on revenues, and pose a significant downside risk to performance. Locally, the expanded area of Gamecity is now largely occupied and should boost retail revenues.
Primetime’s regional and sectoral diversification has been bearing fruit. Three retail developments, Chirundu mall and Munali Mall (Zambia), and Design Quarter (Botswana) were completed late in the previous fiscal year. The revenue impact from these developments will largely be reflected in the current financial year, with management focusing on tenancies in Chirundu and Munali. A further 1,100 sqm extension of Pilane Crossing is currently underway, scheduled for completion in Q2 2019.
Brewery behemoth, Sechaba, has been under the torment of a harsh regulatory environment which saw its profitability decline over the years. The company’s fate has taken a turn for the better with the new political administration’s decision to reduce the alcohol levy from 50/55% to 35% late in 2018, a development which we expect will prove earnings accretive for the beverages giant. A further regulatory change was the extension of liquor trading hours, which should be positive for Sechaba’s volumes.
Shareholders approved of the related party transaction between Sechaba and AB InBev Africa BV which resulted in Sechaba shareholders (excluding AB InBev Africa BV) effectively retaining their financial interest in the sparkling soft drinks business. This segment accounts for roughly 30% of volumes and is thus a paramount part of the business. However, it remains to be seen what the implications of the restructuring of KBL will be following this transaction.
Ecotourism counters Chobe and Wilderness delivered excellent numbers for their interim reporting periods, which include peak season. This should translate to a solid full year performance for their respective reporting periods ended February 2019. The outlook for the Southern African tourism industry is robust and is anticipated to remain so over the medium term.
Locally, the government’s recent policy decision to simplify VISA applications is anticipated to expedite turnaround times and potentially result in increased tourist arrivals into Botswana, particularly from the Far East. We do have some reservations on the sector however, considering the uncertainty around several global events which could dampen consumer confidence in some key markets. The IMF has projected that global output will slow to 3.5% (2018: 3.7%). Risks to this outlook are largely tilted to the downside which could result in an even sharper slowdown in growth if outcomes to several events prove unfavorable.
The Retail Sector
With Choppies yet to release results and Sefalana being the only other listed counter in the retail sector, we have limited indication of developments in this space. Following a period of continued pressures on its local FMCG margins, Sefalana has posted positive performance under its Sefalana Cash and Carry Botswana unit. The improved performance has been attributed to a gradual uptick in consumer spending and confidence. Given the optimism amongst businesses with regard to consumer product demand going forth, we are cautiously optimistic that these improved dynamics will ensue.
Sefalana’s focus going forth will largely be on its core FMCG and supporting businesses. The group plans to open 3 further stores in Botswana this year and to continue its efforts to provide its customer base with a wider product and service offering. The group is also looking to expand its manufacturing business into bottled water and fruit juice manufacturing over the next 12 – 18 months.
The high level of dependence on government tenders remains a key risk for the manufacturing arm, as well as for the smaller Commercial Motors subsidiary. There is however, a general anticipation of a boost in government spending over this election year, which could act as a boon for these segments.
Choppies remains in limbo, yet to release its full year financial results, while its Dec interim results are due for release soon as well. Amidst this debacle, the group appointed a new Finance Director, Heinrich Mathiam Stander effective 15 December 2018. Shareholders recently found some relief following Choppies statement announcing that the Zimbabwe litigation issue has been resolved. The Mphokos, former minority shareholders, have disinvested from the subsidiary and have no further interests in Choppies. Given this was a legal matter; it is likely it was the largest impeding factor with regards to release of Choppies financials.
As the largest retailer in Botswana, Choppies is well positioned to benefit from a recovery in consumer spending. Meanwhile, the civil unrest in neighboring Zimbabwe has exacerbated the difficulties of conducting business, the country battling with foreign exchange shortages and exorbitant inflationary pressures. For now, the market waits with angst for release of the group’s financials to get an indication of the current standings of the business and management’s outlook. (Adopted from SBB Market Outlook for 2019)
As COVID-19 and its variants continue to cast a shadow over the world’s health systems and economies, the level of uncertainty and strength of the economic recovery will vary across countries. The real GDP in all G-20 countries is expected to grow compared to the previous year, but some countries will take longer than others to return to full capacity.
According to Mooody’s Global Macro Outlook 2021-22 report released this week, precautionary behavior and official restrictions are still hampering interpersonal interactions. The resulting toll on global economic activity has been staggering, even as the economy has also shown a remarkable degree of resilience.
Overall economic outcomes in 2020 exceeded Moody’s forecasts in most countries because of stronger-than-expected rebounds in the second half of the year. Aided by technology, many people and businesses quickly adapted so that they could carry on with daily activity with reduced in-person interactions.
However, Moody’s says the recovery remains unbalanced, with the pandemic affecting individual businesses, sectors and regions very differently. According to the group, goods demand has almost fully recovered because goods can be produced and consumed with limited in-person interactions, while the recovery in service continue to lag.
Within services, businesses that were able to effectively deliver their products at arms-length have stabilized, if not prospered. Large businesses with access to cheap funding have performed better than small and mid-sized firms. According to the report, the transportation, hospitality and leisure and arts sectors continue to languish, but the information technology, consumer goods, pharmaceuticals and financial sectors have thrived.
According to the report, many individuals around the world (including Botswana), have lost their jobs and continue to face employment uncertainty, but on the flip side, the forced decline in household consumption and the rise in asses prices have buttressed household financial balances at an aggregate level. Moody’s reported that all G-20 countries will post growth rates in 2021 and 2022, but the pace of recovery will vary significantly.
“The COVID-19 shock has exposed differences between countries in terms of political leadership, community health management, fiscal and monetary policy response, economic structures and inherent economic dynamism. Public health considerations drove the economic shock of the pandemic. In that sense, the steep declines in GDP in 2020 across advanced and emerging market countries were less a reflection of underlying weaknesses in the economy, and more a function of the combined effects of the spread of the virus and the stringency of lockdown measures,” says Moody’s.
Economic outcomes will remain closely tied to the pandemic, Moody’s said. “The quicker countries can curb the spread of the virus, the faster their economic activity will recover. Otherwise the costs of keeping parts of the economy shut, in terms of lost income and revenue, will keep adding up. The longer the crisis lasts, the more difficult it will be for governments to compensate the private sector for its continuing losses.”
Without adequate government support, Moody’s predict that large-scale deterioration in asset quality will ensue. Such detrimental effects, it says, could eventually transmit the shock through financial channels to other parts of the economy.
“We have cut or estimate of the 2020 contraction for the G-20 countries. We now expect a collective contraction of 3.3%, compared with our previous estimate of 3.8%, because of a better-than-expected recovery across a wide range of advanced and emerging market economies in the second half of the year. We expect the G-20 countries to grow by 5.3% in 2021 and 4.5% in 2022, up from our prior forecasts of 4.9% and 3.8% respectively.”
US ECONOMY TO LEAD THE GLOBAL SERVICES DEMAND RECOVERY
The US economy advanced at a 4.0% annualized rate in the fourth quarter 2020, but the headline figure masks the fact that the economy has lost momentum since November, when COVID-19 cases began to rise. Moody’s says it expects this current moderation in economic growth to be temporary. Economic momentum will likely puck up pace over the course of 2021 and 2022, supported by: enhanced pandemic control, significant additional fiscal support to the economy and a more predictable policy environment.
With infection rates now starting to fall, economic momentum should naturally pick up in the second quarter and into the summer as individual states progressively ease up social distancing restrictions, Moody’s reports. “We believe that a stronger pandemic management response from the Biden administration, will increase public confidence and allow for a relation of restrictions over this year and next.”
COVID-19 SHOCK EXACERBATES EXISTING STRUCTURAL CHALLENGES IN SOUH AFRICA
South Africa’s economy is expected to growth by 4.5% in 2021 and by 11% in the following year, following an estimated 7.0% contraction last year. According to Moody’s, this will make South Africa’s recovery one of the weakest among emerging market countries. The economy has struggled to build momentum for many years, and as a result suffers from chronically high unemployment. The COVID-19 shock has made the economic situation all the more challenging, says Moody’s.
Reconnaissance Africa, a Canadian exploration company has started piercing the natural resource-rich lands of Kavango basin in Namibia, the company in searching for oil and gas.
The prospective area stretches into North West district of Botswana, the company through its local subsidiary Recon Africa Botswana has been given the nod by Ministry of Mineral Resources, Green Technology & Energy Security to explore petroleum mineral for four (4) years.
Amid all the negative reports around the company’s drilling activities in the Kavango basin, which covers ecosystem components feeding into the mighty Okavango Delta, the bottom line is that there are prospects of billions of dollars beneath the area in form of oil and gas-and Recon Africa is out to unearth the treasures.
Member of Parliament for Selibe Phikwe Dithapelo Keorapetse says Botswana should strive to participate in the exploration and development of these potential oil and gas deposits in the North West district. Contributing to the 2021/22 budget speech on Monday Keorapetse cautioned government against watching from afar while a potential multi-billion pula industry unfolds in the Okavango area.
He implored Botswana Oil Limited(BOL) and Mineral Development Corporation Botswana (MDCB) both state owned enterprises, to take up equity stakes in the exploration activities as early as now to “ rather than being spectators and waking up late when the foreigners are enjoying the billions”.
ReconAfrica through its subsidiary Recon Botswana was issued an exploration license under the Petroleum Act to explore for petroleum minerals in the North West District of Botswana, on 1 June 2020, for a period of four years.
“Botswana Oil as the country ‘s petroleum investment company together with MDC-a state owned mineral interest holding company must come together and acquire a stake in the ongoing exploration activities ,not to wait until Recon is making money and you say you want shares”. Keorapetse made reference to Karowe mine which Botswana’s diamond mining partner De Beers Group sold to Lucara over a decade ago while still at exploration stage.
Lucara bid on the site, and its internal partner Lundin provided a bank guarantee to De Beers for fifty million dollars, capturing some seventy per cent of the stake.Soon afterward, Lucara bought the remaining stake by acquiring De Beers’s London-based junior venture partner, African Diamonds. Lucara now owns AK6 (now Karowe Mine), having spent a little more than seventy million dollars.
The mine has since developed into a prolific rare gem producer celebrated worldwide, having unearthed some the world’s largest diamond ever in history , such as the over 1000 carats Lesedi La Rona, Sewelo and the magnificent 813 carats Constellation.
“We are now mulling acquisition of shares in Lucara but when transactions were happening in 2009 we were just spectators, we could have acquired shares back then when they were affordable now it is expensive to buy into Karowe mine, we must not make the same mistake with this oil and gas projects” said Keorapetse urging Government to be pro-active and move quickly to approach Recon Africa for a stake in Recon Africa Botswana.
ReconAfrica is a junior oil and gas company engaged in the exploration and development of oil and gas in North East of Namibia and North West of Botswana—the Kavango Basin. The company officially launched the oil and gas exploration project in Namibia in early January 2021. The exploration activities are taking place in the Kawe area, Kavango East Region, Namibia.
ReconAfrica holds a 90% interest in a petroleum exploration license in Namibia which covers the entire Kavango sedimentary basin in Namibia, the remaining 10% is owned by Government of Namibia. The exploration licence covers an area of 25,341.33 km2 (6.3 million acres), and based on commercial success, it entitles ReconAfrica to obtain a 25-year production license.
Further, ReconAfrica holds a 100% interest in petroleum exploration rights in Botswana over the entire Kavango sedimentary basin in the country. This covers an area of 8,990 km2 (2.2 million acres) and entitles ReconAfrica to a 25-year production license over any commercial discovery. The company acquired a high-resolution geomagnetic survey of the license area and conducted a detailed analysis of the resulting data and other available data, including reprocessing and reinterpretation of all existing geological and geophysical data.
The survey and analysis confirm that the Kavango Basin reaches depths of up to 9,000 m (30,000 feet) under optimal conditions to preserve a thick interval of organic rich marine source rock, and is anticipated to hold an active petroleum system.
“We believe that the Kavango Basin is another world class Permian basin, analogous to the Permian basin in Texas It is estimated that the oil generated in the basin could be billions of barrels. Recon Africa’s initial goal is to establish the presence of an active petroleum system with its fully funded 3-well drilling program starting early January 2021.
Canadian mining company, Lucara Diamond Corporation, well known globally for producing rare gems of unprecedented quality, has not been spared by the 2020 global market downturn caused by the COVID-19 pandemic.
In their financial results for the year ended 31st December 2020, released from Vancouver Canada late Monday, the junior minor reported a significant net loss of $26.3 million for the year (approximately P287 in Botswana currency).
This according to the financials is a loss of $0.07 loss per share, which is a significant decline when compared to net income of $12.7 million ($0.03 per share) in 2019. The company which wholly owns and runs Botswana’s Karowe mine registered total revenues of $125.3 million (over P1.3 billion), a 34 percent drop compared to $192.5 million (almost P2 billion) recorded in 2019 or $335 per carat from $468 per carat in 2019.
The decrease in revenue resulted in adjusted EBITDA of $18.4 million, a decline when compared to adjusted EBITDA for the same period in 2019 of $73.1 million. Lucara executives explained that total revenue decline was a result of challenging market conditions, a longer ramp-up for production and polished sales in the latter half of 2020 under the HB supply agreement.
“As a result, revenue from certain polished diamonds from Lucara’s highest value stones that would otherwise have been recorded as revenue in 2020, is now expected to be realized in 2021.” reads a commentary alongside the figures.
During the year ended December 31, 2020, Lucara sold 373,748 carats at an average price of $335 carat. Diamond sales for the fourth quarter of 2020 were held through a combination of regular tenders, Clara, for diamonds less than 10.8 carats, and through HB under the supply agreement for those diamonds greater than 10.8 carats.
The Company recognized revenue of $42.4 million or $402 per carat from the sale of 105,648 carats. Price recovery was observed in most size and quality classes. Of note, prices achieved for goods sold on Clara (under 10.8 carats in size) in January 2021 have now recovered to the level of pricing achieved early in 2020.
For the year ended December 31, 2020, Lucara registered revenue totaling $55.2 million from the two agreements with HB, including an accrual for variable consideration of $7.2 million related to “top-up” payments arising from polished diamond sales in excess of the initial purchase price paid to Lucara.
With global restrictions impeding travel for many diamantaires, Lucara says interest in Clara grew significantly in 2020 and the number of buyers on the platform increased from 27 to 75. During 2020, Clara began selling stones on behalf of third party sellers, which was a significant objective for the year.
“As Clara becomes the online marketplace of choice for rough buyers, discussions are underway with several producers to begin trials for the sale of their diamonds on Clara” the company said Amidst challenging circumstances for the diamond industry in 2020 Lucara forged ahead with the Karowe mine underground project.
During the year period under review $18.7 million (over P190 million ) was spent on project execution activities including the following: Site earthworks (consisting of laydown preparation and clearing of shaft and surface infrastructure locations), geotechnical test pitting and drilling, and completion of two pilot holes at the shaft locations, a 746 metre hole for the ventilation shaft and a 768 metre hole for the production shaft.
The Company was able to complete on-site earth works and geotechnical studies by using local contractors while a State of Emergency remained in effect in Botswana. Long lead time item orders were also placed for shaft muckers, and hoist and winder refurbishment was initiated. In addition, power line engineering and detailed shaft design and engineering (consistent with original targets for 2020) progressed.
In Q4 2020, the Government of Botswana approved the proposed powerline route and granted a 25-year extension to the Karowe Mine License to 2046, sufficient to cover the remaining open-pit life (to 2026) and the expected life of the proposed underground expansion, currently planned to 2040.
Lucara says it’s currently actively exploring opportunities to arrange debt financing for the underground expansion for those amounts which are expected to exceed the Company’s cash flow from operations during the construction period. The underground expansion program has an estimated capital cost of $514 million (over P5 billion) and a five year period of development.
President & Chief Executive Officer of Lucara Diamond Corporation, Eira Thomas said the measures that Lucara took early in the pandemic, including the decision not to sell rough diamonds in excess of +10.8 carats after Q1, helped protect and support prices for large, high value diamonds that account for more than 70% of the company’s revenues.
“These efforts in conjunction with our transformational supply agreement with HB Antwerp executed in July, resulted in strong price recoveries by Q4, a trend which has continued into 2021.” Thomas said the recent recovery of two, high value +300 carat stones “continue to highlight the extraordinary nature of the Karowe resource and underpin the rationale for underground expansion, extending our mine life out to at least 2040”.