Econsult advises against P12billion China loan
Business
Introduction
Following the recent visit by President Dr Mokgweetsi Masisi and other senior officials to China, it is reported that the government intends to borrow a significant sum from China, possibly as much as USD1.1 billion, or P12 billion. The loan(s) would be applied to infrastructure development, notably the rebuilding of major trunk roads in the north and east of the country, as well to construct a new northern railway link from Mosete (north of Francistown) to Kazungula and across the new Zambezi bridge into Zambia.
Assuming that the money is indeed on offer from China – part of a reported USD60 billion offered to various African countries at the recent Forum on China – Africa Co-operation (FOCAC) – how should the government evaluate whether this is good offer to accept? As a starting point, it is important to note that the Government of Botswana has many more choices with regard to the financing of infrastructure development than most African governments.
It is not obliged to borrow from China if it deems the designated projects to be worthwhile, as it could also borrow domestically (by issuing bonds) or finance the investments from its accumulated savings in the Government Investment Account (GIA) at the Bank of Botswana. With these available choices, it is important to evaluate the various options and determine, on the basis of the costs and benefits of each, which financing option(s) to use for infrastructure financing.
Legal and Policy Framework for Project Financing
Government’s financing decisions are taken within the context of relevant laws and policies. The key law is the Stocks, Bonds and Treasury Bills Act, which specifies that the total of government debt and guarantees is limited to 40% of GDP (in two tranches, 20% of GDP each for domestic and foreign debt). The key policy is the Medium-Term Debt Management Strategy (MTDMS), 2016-2018, which lays out the principles to be followed in managing debt.
According to the MTDMS, “the primary objective of Botswana’s debt management will be to ensure that the financing needs and payment obligations of Government are met at the lowest possible cost consistent with a prudent degree of risk, and in coordination with fiscal and monetary policies… [while] the secondary objective of the debt management will be to support the development of the domestic capital market”.
As of March 2018, total government debt and guarantees totalled 21% of GDP, of which 13% was external and 8% domestic (Figure 2). The MTDMS notes that while the overall level of debt is well within statutory limits, the structure is far from ideal. In particular, there is too much foreign debt and too much debt with variable interest rates, both factors that raise the level of risk (due to fluctuations in exchange rates and interest rates). It therefore sets an objective of reversing the current composition of total debt from 30% domestic/70% foreign to 70% domestic/30% foreign.
“To achieve the goal of having a higher proportion of domestic debt in total debt portfolio would involve restricting foreign borrowing to the bare minimum in the medium term, and prepaying some of the external loans, while continuing and/or increasing with the Government Bond Issuance Programme” [para 38].
A second objective is to minimise the cost of debt issuance. The MTDMS notes that in order to make an appropriate comparison between the cost of foreign debt (mostly contracted in US dollars) and domestic debt (in Pula), it is necessary to take into account changes in the Pula/US dollar exchange rate.
Over the ten years from the end of 2007 to the end of 2017, the average annual change in the BWP/USD exchange rate was 5%; on the assumption that this trend will continue, this has to be added to the interest rate dollars) and domestic debt (in Pula), it is necessary to take into account changes in the Pula/US dollar exchange rate. Over the ten years from the end of 2007 to the end of 2017, the average annual change in the BWP/USD exchange rate was 5%; on the assumption that this trend will continue, this has to be added to the interest rate charged on a US dollar loan to determine its true cost.
Assessing the Options
So how does the proposed loan from China stack up in terms of the legal and policy parameters regarding borrowing? First, the legal limit of 20% of GDP for foreign debt and guarantees translates to around P40 billion in 2018/19; with around P23 billion currently outstanding, an additional P12 billion can be accommodated with the legal limit.
Where does it stand in terms of the Government’s debt management strategy? Clearly it conflicts with the stated objective of “restricting foreign borrowing to the bare minimum” and reversing the 70%/30% foreign/domestic mix – as it increases the foreign debt share, rather than reducing it.
How about the cost? Nothing has been said publicly about the interest rate that would be paid on Chinese loans, but we understand that the average rate would be around 2%. This may sound low, but once we add on the exchange rate impact, the total cost becomes 7% (i.e., 2% + 5%). We can compare this with the cost of domestic borrowing. At the most recent government bond auction, the benchmark 10-year bond yield was just under 5%, and even the 25-year bond had a yield of only 5.2%.
While the cost of domestic debt might increase if bond issuance jumped sharply, it is evident that domestic borrowing is significantly cheaper than borrowing from China. It is also cheaper to issue domestic bonds than to use the savings in the GIA, which we estimate to have earned an average annual return of 8.1% over the past decade (and hence have an opportunity cost higher than the bond interest rate).
Finally, how does foreign borrowing contribute to the secondary objective of developing the domestic capital market? Not at all, as capital market development depends on the issuance of debt instruments (such as bonds) in Pula. Indeed, domestic institutions such as pension funds and life insurance companies have long been requesting greater government bond issuance in order to meet their investment needs.
Estimates prepared recently by Econsult for the pension sector conclude that the industry requires P1.5 – P2.5 billion of additional bonds each year over the next five years, with a total demand of P11 – 12 billion over the borrowing from China. This is without factoring in potential demand from foreign investors in Pula bonds over the next five years – exactly the same amount as the envisaged.
So borrowing from China doesn’t appear to be a very good deal, in terms of the government’s own strategy. It does not support the stated objective of reducing foreign borrowing and increasing domestic borrowing, and does not minimise financing risks. It is probably more expensive than borrowing domestically, and so does not meet the cost minimisation objective. Thirdly, it does not meet the objective of domestic capital market development. More generally, it raises the question of what is the point of having an official debt management strategy if it is going to be ignored on implementation.
There are also other issues associated with borrowing from China, which is normally tied to procurement from Chinese firms, which may not always offer the best value. AsThe Economist wrote in September this year, when discussing the decision by the new Malaysian Prime Minister to cancel loans from China, one reason was that “we know how inflated the costs are, and how skewed the deals are in China’s favour”.
Finally, it is important to realise that the financing decision is independent of the investment decision. The infrastructure projects should be evaluated in their own right, and if they pass the economic viability tests that are (or should be) central to the development planning process, they should proceed. Once this decision is taken, the financing question can be addressed.
If they are good projects, they do not depend on loans from China, but can be financed from domestic capital markets. Indeed, financing the projects from other sources enables a much more rigorous and procurement process to be undertaken, based on competitive, open international tendering. Chinese firms would be welcome to participate in such tenders, as could firms from other countries. The pricing of projects in these circumstances is likely to be much more attractive than when procurement and project implementation is tied to specific sources of finance.
Adopted from the Econsult Economic Review.
Business
Gambling Authority expects bumper attendance at IAGR conference
With just four weeks to go, the Gambling Authority of Botswana has revealed that it is expecting a record attendance at the much anticipated International Association of Gambling Regulators (IAGR) Conference, which will be held in Botswana from 16 – 19 October 2023.
According to a communique from the IAGR, the Gambling Authority will most probably break the record in the number of accredited countries that will attend the conference in Botswana.
“We are on track to match and potentially exceed the incredible delegate turnout we saw in Melbourne last year,” read a statement from IAGR’s.
In its global reach alert, IAGR revealed a glimpse of jurisdictions that will be represented at the conference, among them Australia, Canada, Denmark, Japan, Jersey, Mauritius, United Kingdom, United States and Netherlands. African countries that have so far confirmed attendance include Zimbabwe, South Africa, Nigeria, Tanzania, Kenya and Burundi.
Commenting on the expected bumper attendance, IAGR said the amazing diversity elevates the conference to a whole new level, which will enrich discussions with a tapestry of regulatory perspectives and insights.
Botswana won the bid to host this year’s conference last year in Melbourne, Australia. The IAGR consists of representatives from gaming and gambling regulatory organizations from around the world; with a common mission to advance the effectiveness and efficiency of gaming regulation.
According to Gambling Authority Chief Executive Officer (CEO) Peter Kesitilwe, the Authority is a member of the IAGR by dictates of the Gambling Act; which compels it to align with international organizations whose objectives are to regulate gambling, and build collaboration among regulators.
“The IAGR conference is held annually and hosted by different member jurisdictions. It provides opportunities for gambling and gaming regulators from around the world to engage, learn and network with industry peers through events, workshops, research, information sharing, and the development of best practices,” explained Kesitilwe.
Funding requirements for the conference are shared between IAGR, the host country and conference participants. The government of Botswana has reaffirmed its commitment to supporting the Gambling Authority to host IAGR; as it is in line with its objectives of promoting the country as a Meetings, Incentives, Conferences, and Exhibitions (MICE) tourism destination.
According to Kesitilwe, the conference is coordinated by a Technical Committee of IAGR; together with a Local Organizing Committee (LOC) that comprises of representatives from the Ministries of Trade, Tourism, Foreign Affairs, Botswana Police Service and other stakeholders.
“We promise to deliver this hugely important event and showcase the best that Botswana has to offer. In addition to the exchange of ideas and culture capital, the Organizing Committee will also ensure maximum benefits for the tourism, hotel and hospitality industry, entertainment, transport, telecommunications, vendors, hawkers of cultural artifacts,” said Kesitilwe.
As part of preparations to host IAGR2023, the Gambling Authority recently went on a benchmarking mission to Great Britain.
“What we learnt there can assist the Gambling Authority as we enter a new era of growth and expansion. The meeting also provided a timely opportunity to catch up on preparations for IAGR2023. We are ready to host the conference and we look forward to meeting other regulators from across the world to share best practice, discuss common challenges and tackle illegal gambling,” concluded Kesitilwe.
Business
BDC on Diversity and Inclusion in the Corporate Sector and Workplace
In recent years, diversity and inclusion have emerged as crucial aspects of the corporate sector. Recognising the importance of inclusivity, the Botswana Development Corporation (BDC) has taken significant steps to signal its commitment to the inclusion of all regardless of age, gender, background. By implementing a comprehensive Diversity and Inclusion policy, BDC aims to create an environment that fosters equality, attracts top talent, and promotes creativity and innovation.
BDC has demonstrated its commitment to inclusion by crafting and implementing a bespoke Diversity and Inclusion policy. This policy recognises and values the differences within its workforce, striving to create a culture of equality. By fostering an environment where all employees feel respected and supported, BDC aims to attract and retain top talent, which in turn contributes to the organisation’s overall success.
The Corporation has implemented policies and strategies that promote diversity and inclusivity in the workplace. The Diversity and Inclusion policy emphasises the value and respect for employees from diverse backgrounds, creating an inclusive environment where everyone can thrive. By having this policy in place, BDC ensures that all employees are treated fairly and have equal opportunities for growth and development within the organisation.
In the realm of inclusivity, leading firms and companies have emerged as trailblazers, championing diversity and equity by implementing progressive policies and initiatives. These organisations have made significant strides in demonstrating their commitment to inclusivity through actions that support individuals with disabilities and foster work-life balance for all employees.
Microsoft actively recruits individuals with disabilities and fosters an inclusive workplace through accommodations and a dedicated resource group. Netflix offers generous paternity leave, Unilever supports surrogate parenthood and gender-neutral caregiver benefits, while IBM provides comprehensive adoption support. Companies like Google, Apple, and Facebook establish employee resource groups to amplify underrepresented voices. Adobe prioritises inclusive workplace design, and Accenture and Deloitte focus on diverse leadership representation. These companies set a powerful example, demonstrating the value of diversity and fostering a more inclusive corporate landscape.
Rising to the challenge, BDC has also taken several measures to respond to the different needs of its work force. These measures include fostering open and respectful communication, encouraging the formation of employee resource groups or affinity networks, and promoting diverse perspectives and contributions. The Corporation has also shown its commitment to inclusivity by recruiting persons with disabilities, providing paternity leave benefits, and recognising and supporting surrogate parenthood, primary caregiver benefits regardless of gender, as well as the adoption of children. These efforts demonstrate BDC’s progressive approach to embracing diversity and supporting employees in all aspects of their lives.
By so doing, The Corporation exemplifies the essence of progressiveness, embracing inclusivity as a core value. By championing diverse talent, providing supportive benefits, and fostering inclusive cultures, BDC is part of a movement that is shaping a future where every individual is valued and empowered.
Inclusion and diversity are not only moral imperatives but also strategic investments for success. BDC’s commitment to fostering diversity and inclusion, sets an example for other organisations in Botswana and beyond. By implementing policies and strategies that create an inclusive environment, celebrating diversity, and supporting employees from all walks of life, BDC paves the way for a more equitable and inclusive corporate sector in Botswana. Embracing diversity is not only the right thing to do; it also drives innovation, boosts employee morale, and contributes to the overall success of organisations.
Business
Sales, Profit up as Choppies new strategy pays off
Choppies Enterprises Limited, a supermarket chain led by Botswana businessman Ramachandran Ottapathu, reported an increase in profit after tax which is up 3.4%, hence improving from P145 million realized in 2022, to P150 million in 2023.
The results demonstrate sustained increases in consumer demand, improved operational flexibility, efficiency, cost-effectiveness and despite stiff competition, the Group managed reduce its debt levels by paying off P263 million debt from the previous fiscal year.
The chain supermarket realized growth in Group retail sales which went up 6.5% to BWP6 433 million compared to P6 042 recorded in 2022. The growth is attributed to a broad presence across Botswana and a growing footprint in three other African countries, being South Africa, Zambia and Zimbabwe, according to a recently financial results statement.
In Pula terms, gross profit grew by 4.0% to BWP 1 359 million (2022: BWP 1 307 million) despite the challenging economic environment. Botswana and Namibia marginally grew gross profit rates while rates in Zambia and Zimbabwe declined.
During the period under review, the group’s Group net cash generated from operating activities rose by 4.5% to P484 million, this is a significant improvement when compared to P463 million recorded in 2022. This segment was boosted by strong showing from Botswana and Namibia, which performed exceptionally despite the challenging trading conditions. Furthermore, it was driven by sixteen new stores coupled with price growth of 6.8%.
As a result of the robust financial performance, the group’s total assets increased from P1 886 million to P2 177 million, while retained losses decreased from P811 million to P664 million.
Meanwhile, the Group faced a demanding economic environment characterised by stubbornly high inflation, higher interest rates and unemployment, all of which continue to constrain consumer spending and the consumer’s ability to digest higher prices. Sales volumes were lower in many categories, exacerbated by competitor discounting, with cost pressures only partly recovered through price increases.
According to the audited results, the gross profit margin accordingly reduced to 21.1% from last year’s 21.6% due to higher supply chain costs, including fuel and managing prices in response to higher cost inflation and competitor discounting.
Furthermore, while expenses increased 5.1% excluding the depreciation restatement, expenses grew 9.8% partly due to new stores and inflation. Foreign exchange losses on lease liabilities of P31 million (against a gain of P28 million last year) were partly offset by foreign exchange gains on Zimbabwean legacy debt receipts of P18 million (2022: BWP15 million).
Operating profit (EBIT) reduced by 1.8% from BWP 279 million to BWP 274 million whilst Adjusted EBIT, which excludes foreign exchange gains and losses on lease liabilities, movements in credit loss allowances, Zimbabwean legacy debt receipts and the reassessment of depreciation, reduced by 7.5% as costs grew faster than gross profit.
CASH MANAGEMENT
According to the Choppies Enterprises financial statement commentary, the Group continues to manage its cash resources and liquidity prudently with a reduction of P132 million in debt with P87 million paid out of internally generated funds and the balance of P45 million paid out of the proceeds of the rights issue.
In addition, capital expenditure increased to P185 million when compared to 2022 fiscal year which had recorded P122 million. This was a result of the Group strategy to invest in new stores and maintaining the distribution fleet.
Choppies Enterprises raised BWP50 million from leases to fund the fleet, an improvement because in 2022 only P36 million was raised.
Despite the growth in sales, inflation and new stores, Choppies Enterprises inventory reduced by P20 million helped by more stable global supply and the benefits of implementing an inventory optimisation system.
Finally, commentary from the Choppies Enterprises Group observes that as the economies in which the Group operates recover and the new stores reach full potential, an improvement in margins is expected. “With a value proposition that resonates with customers and with the cost of everyday items still stubbornly high in too many categories, more customers are choosing Choppies for the value and assortment we are known for. While we have strong and resilient brands, affordability is a growing constraint for consumers, limiting their ability to digest higher prices,” reads a commentary on the Group’s Financial statement.
Choppies Enterprises Limited (“the Company”) is a Botswana-based investment holding company operating in the retail sector in Southern Africa. Dual-listed on the Botswana Stock Exchange (“BSE”) and Johannesburg Stock Exchange (“JSE”), its are food and general merchandise retailing as well as financial service transactions supported by centralised distribution channels through distribution and logistical support centres. Each week, approximately 2.0 million customers visit 177 stores under five formats in four countries. With annual revenue of more than BWP6 billion, Choppies employs 10 000 people and is the largest grocery retailer in Southern Africa, outside of South Africa.
EVENTS AFTER REPORTING DATE
On 19 July 2023, Choppies acquired 76% (seventy-six percent) of the Kamoso Group for BWP2.00 (two Pula) and took cession of shareholders’ loans to the value of BWP22 million. The Botswana Development Corporation (BDC) will retain its 24% stake.
This acquisition will take Choppies to become a P8 billion business in revenue with 11 000 employees and 274 retail stores.
SNEAK VIEW: COUNTRY PERFORMANCES
According to the financial results, Botswana experienced sales growth to BWP4 459 million an improvement from P4 209 million recorded in 2022. This was supported by volume growth from new stores and double-digit price inflation. Sales from Botswana increased by 5.9% and like-for-like sales growth was 2.2%, as the business continued to show strong resilience in an increasingly challenging economic environment. The Botswana economy continues to experience elevated inflation, high unemployment, and low economic growth.
EBITDA grew 5.8% and adjusted EBITDA was flat on last year. The performance for the second half was much stronger than in the first half as our strategies, leadership and inventory optimisation system have started to come to fruition.
As for the Rest of Africa being Namibia, Zambia and Zimbabwe sales increased by 7.7% to P 1 974 million, yet another improvement from 2022, which had realized P1 833 million sales. The increase was driven by the addition of nine new stores, inflationary increases in Zimbabwe and Zambia and volume growth in Namibia and Zambia. “However, this was offset by a very weak Zimbabwean Dollar resulting in Zimbabwe’s Pula sales declining by 48.3%.”
Meanwhile Namibia has successfully turned around with sales growth of 60.0% and like-for-like sales growth of 14.4%. Five new stores were opened during the year. EBITDA grew 140% with EBIT loss reducing from BWP9 million to BWP2 million. Adjusted EBIT, excluding the depreciation reassessment, reduced from BWP9 million to BWP6 million.
Connectedly, Zambia continues to grow with sales up 44.7% and like-for-like sales growth of 33.3%. Three new stores were opened during the year. While EBITDA declined by 26.4% due to the foreign exchange loss on the lease liability, adjusted EBITDA grew 27.1%. Adjusted EBIT declined marginally at 2.6%. Choppies Enterprises Directors are confident that Zambia will generate taxable profits in the foreseeable future.
Lastly in Zimbabwe, the Zimbabwean Dollar (ZWL) has significantly weakened especially in the last two months of the financial year. As a result of the above mentioned factors, Pula sales declined by 48.3%. EBIT and EBITDA declined by 151.6% and 125.5% respectively as cost inflation reduced margins. Adjusted EBIT and adjusted EBITDA declined 133.3% and 108.1% respectively.