Moodys highlights Botswanas credit constraints
Botswana’s heavy dependence on a single commodity as a key economic driver coupled with unexplored and narrow economic base continues to feature in the country’s financial trends and analysis as a major credit constraint.
This has once again been reiterated by international finance and economic commentator and rating agency, Moody’s in their annual report released this week. Botswana is currently heavily reliant on the mining sector as the main foreign income earner and key fiscal revenue window predominantly the diamond industry.
The country’s flagship diamond company, Debswana, a 50-50 venture between global diamond giants De Beers is the largest private sector employer, only the Government of Botswana employs more people than Debswana. The mining sector accounts for almost a quarter of the national Gross Domestic Product (GDP).
This according to Moody’s and many other global finance and economic observers signals a ticking time bomb and continues to pose a threat to the country future as diamonds and minerals are finite and also vulnerable to global economic uncertainties in terms of fluctuating commodity prices.
Moody's Corporation, an American business and financial services company on an annual basis releases credit rating reports zooming into world economies and analysing global financial trends through its rating subsidiary Moody's Investors Service (MIS). In this latest report, Moody’s says Botswana's key credit strengths includes the government's large fiscal reserves and very low debt levels, “Botswana’s credit profile balances the government's strong balance sheet, net external creditor position and low debt burden against the country's small and undiversified economy”, highlights the report.
Noting in the annual credit analysis Daniela Re Fraschini, Moody's Assistant Vice President underscored that, "Botswana’s narrow economic base, with its heavy reliance on the diamond industry, remains a key credit constraint”. By the end of 2017, the mining industry’s share of nominal GDP remained high at around 18%, while diamond revenue accounted for close to 90% of export proceeds and around 35% of fiscal revenue.
“The large public sector, which has relatively weak social outcomes, and high poverty, unemployment and inequality are additional credit constraints”, submits the Moody’s Analyst. MIS estimates Botswana’s real GDP to expand by 4.5% on average in 2018-2019, supported by a recovery in the diamond sector and by an expansionary fiscal stance ahead of elections next year. Beyond the near-term recovery, growth in the mining sector is expected to be subdued, balancing the gradual expansion in diamond production against the closure of the BCL copper-nickel mine and delays in the construction of a new copper mines.
According to Re-Fraschini, Botswana's high institutional strength reflects its strong performance on the Worldwide Governance Indicators, particularly in terms of control of corruption. “Botswana pursues a monetary policy that is supported by a well-designed framework akin to inflation targeting, which has met its objective range over the past five years. The government has a transparent and rule-based fiscal policy which is commendable,” he said.
Botswana’s fiscal strength is supported by a low debt stock, with a very small foreign-currency exposure and a strong government balance sheet. According to Moody’s, general government debt is projected to remain at around 16.0% of GDP by 2019, compared with a peak of 20.7% in 2011. “The government's cost of debt is likely to remain very low in the near term”.
Moody’s also underscored other positives such as Botswana's sound external position, modest government borrowing requirements, healthy banking system and overall stable political environment with low susceptibility to event risk. The stable rating outlook reflects Moody's assessment of policymakers' continued commitment to a prudent fiscal stance while utilizing some of the significant fiscal policy space.
On key challenges, the American based rating organisation notes that Botswana‘s credit strengths are however balanced by medium- to long-term challenges to the country 's economic model, structural rigidities in the labour and product markets and weak governance of state-owned enterprises. State owned enterprises have over the years continued to remain a worrisome factor with government recapitalizing some with hundreds of millions of pulas from time to time in a bid to sustain the enterprises while containing and managing job shedding.
Moody’s notes that poor management of State owned enterprises and weak corporate governance contributes to credit constraints that continue to limit Botswana ‘s economic expansion efforts. The Government of Botswana over the years adopted various initiatives to diversify the economy beyond diamond production, Moody’s decry limited success and little return on investment from these efforts.
“While the services sectors' share of GDP has increased, the share of manufacturing, a key source of productive employment, has remained limited. A vibrant private sector with high value-adding jobs remains underdeveloped,” underscores the report. The international rating agency recommends that structural reforms that would significantly reduce rigidities in the labour and product markets, increase economic diversification and reduce inequality, boosting Botswana's growth potential, would put upward pressure on the rating.
“A broadening of the tax base that reduces fiscal vulnerability to sudden declines in Southern African Customs Union (SACU) revenue or mineral revenue would also be credit positive,” adds Daniela Re Fraschini, Moody's Assistant Vice President.
“Conversely, the prospect of a significant and lasting erosion of fiscal reserves would put downward pressure on the rating. A lack of structural reforms that would weaken potential growth in the medium term would be also credit negative,” he said
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Grit divests from Letlole La Rona
Grit Services Limited, a member of the pan African real estate group, London Stock Exchange listed Grit Real Estate Income Group is divesting from Letlole La Rona Limited (LLR), a local real estate company established by government investment arm Botswana Development Corporation over a decade ago.
The Board of Directors of Letlole La Rona Limited this week announced in a statement to Unitholders that Grit Services Limited (âGritâ) has informed them of its intention to exit its investment in the company.
Grit has been a material shareholder in LLR since 2019. On 07 March 2023, Grit sold 6 421 000 linked units, representing 2.29% of the Companyâs total securities in issue, at a market value of BWP 22 537 710.
This trade follows previous sales of 6.79% in December 2022, as communicated to Unitholders on 10 January 2023, as well as a further sale of 4.78% (representing 13 347 068 linked units) on 24 February 2023 to various shareholders.
In aggregate, Grit has sold 13.9% shareholding in the Letlole La Rona between December 2022 and March 2023, resulting in current shareholding of 11.25% in the Company.
Letlole La Rona said in the statement that the exit process will take place in an orderly manner so as to maintain stability of the Companyâs share price.
The statement explained that Gritâs sale of its entire shareholding in LLR is in line with its decision to exit investments where it does not have majority control, or where it has significant exposure to currencies other than US dollar, Euro or hard-currency-pegged revenue streams.
âGrit has announced similar decisions pertaining to certain of its hospitality assets in Mauritius recently. The Company would like to advise Unitholders that it remains focused on long-term value delivery to all stakeholdersâ LLR said
In July last year as part of their Go-to-Africa strategy Letlole La Rona acquired an initial 30% equity stake in Orbit Africa Logistics, with an option to increase this investment to 50%. OAL is a special purpose vehicle incorporated in Mauritius, owning an industrial asset in a prime industrial node in Nairobi, Kenya.
The co-investment was done alongside a wholly owned subsidiary of London listed Grit. The Orbit facility is situated on a prime industrial site on Mombasa Road, the principal route south of Nairobi center, serving the main industrial node, the port of Mombasa and the industrial town of Athi River and is strategically located 11 kilometers south of the international airport and 9.6 kilometers from the Inland Container Depot.
Grit shareholding in Letlole La Rona was seen as strategic for LLR, for the company to leverage on Gritâs already existing continental presence and expand its wings beyond Botswana borders as already delivered by Kenya transaction.
Media reports have however suggested that LLR and Grit have since late last year had fundamental disagreements on how to go about the Go-to-Africa strategy amongst other things, fuelled by alleged Botswana government interference on the affairs of LLR.
Government through LLR founding shareholder – Botswana Development Corporation has a controlling stake of around 40 percent in the company. Government is the sole shareholder of Botswana Development Corporation.
Letlole La Rona recently released their financial results for the six months ended December 2022, revenue increased by 4% to P50.2 million from P48.4 million in the prior comparative six months, whilst operating profit was up 8% to P36.5 million. Profit before tax of P49.7 million was reported, an increase of 8% on the prior comparative six months.
âWe are encouraged by the strong results, notwithstanding a challenging economic environment. Our performance was mainly underpinned by annual lease escalations, our quality tenant base and below average market vacancy levels, especially in our warehouse portfolio,â Kamogelo Mowaneng, Letlole La Rona Chief Executive Officer commented.
LLR reported a weighted average lease expiry period of 3.3 years and escalation rates averaging 6.8% per annum for the period ended 31 December 2022.Its investment portfolio value increased by 14% year-on-year to close the period at P1.4 billion, mainly driven by the acquisition of a 30% stake in OAL in July 2022.
The Company also recorded a significant increase in other income, predominantly due to foreign exchange gains on the OAL shareholder loan. âWe continue to explore pipeline opportunities locally, and regionally in line with our Go-to-Africa strategy and our interest remains on value-accretive investments,â Mowaneng said.
An interim distribution of 9.11 thebe per linked unit was declared on the 6th of February 2023 for the half-year period to 31 December 2022, comprising of a dividend of 0.05 thebe and debenture interest of 9.06 thebe per linked unit which will be paid to linked unit holders registered in the books of the Company at the close of business on 24 February 2023.
Stargems Group establishes Training Center in BW
Internationally-acclaimed diamond manufacturing company StarGems Group has established the Stargems Diamond Training Center which will be providing specialized training in diamond manufacturing and evaluation.
The Stargems Diamond Training Institute is located at the Stargems Group Botswana Unit in Gaborone.
âIn accordance with the National Human Resource Development Strategy (NHRDS) which holds the principle that through education and skills development as well as the strategic alignment between national ambitions and individual capabilities, Botswana will become a prosperous, productive and innovative nation due to the quality and efficacy of its citizenry. The Training Centre will provide a range of modules in theory and in practice; from rough diamond evaluation to diamond grading and polishing for Batswana, at no cost for eight weeks. The internationally- recognized certificate offered in partnership with Harry Oppenheimer Diamond Training School presents invaluable opportunities for Batswana to access in the diamond industry locally and internationally. The initiative is an extension of our Corporate Social Investment to the community in which we operate,â said Vishal Shah, Stargems Group Managing Director, during the launch of the Stargems Diamond Training Center.
In order to participate in this rare opportunity, interested candidates are invited to submit a police clearance certificate and a BGCSE certificate only to the Stargems offices.Â Students who excel in these programs will have the chance to be onboarded by the Stargems Group. This serves as motivation for them to go through this training with a high level of seriousness.
âCommunity empowerment is one of our CSR principles. We believe that businesses can only thrive when their communities are well taken of. We are hoping that our presence will be impactful to various communities and economies. In the six countries that we are operating in, we have contributed through dedicating 10% of our revenues during COVID-19 to facilitate education, donating to hospitals and also to NGOs committed to supporting women and children living with HIV. One key issue that we are targeting in Botswana is the rate of unemployment amongst the youth. We are looking forward to working closely with the government and other relevant authorities to curb unemployment,â said Shah.
Currently, Stargems Group has employed 117 Batswana and they are looking forward to growing the numbers to 500 as the company grows. Majority of the employees will be graduates from the Stargems Diamond Training Center. This initiation has been received with open arms by the general public and stakeholders. During the launch, the Minister of Minerals and Energy, Â Honorable Lefoko Moagi, stated that the ministry fully endorses Stargems Diamond Training and will work closely with the Group to support and grow the initiative.
âAs a ministry, we see this as an game changer that is aligned with one of the United Nations’ Six Priority Sustainable Development Goals, which is to Advance Opportunity and Impact for Diversity, Equity, and Inclusion (DEI). What Stargems Group is launching today will have a huge impact on the creation of employment in Botswana. An economyâs productivity rises as the number of educated workers increases as its skilled workmanship increases. It is not a secret that low skills perpetuate poverty and widen the inequality gap, therefore the development of skills has the potential to contribute significantly to structural transformation and economic growth by enhancing employability and helping the country become more competitive. We are grateful to see the emergence of industry players such as Stargems Group who have strived to create such opportunities that mitigate the negative effects of COVID-19 on the economy,â said the Minister of Minerals and Energy.
Food import bill slightly declines
The latest figures released by Statistics Botswana this week shows that food import bill for Botswana slightly declined from around P1.1 billion in November 2022 to around P981 million in December during the same year.
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