As the demutualization of the Botswana Stock Exchange (BSE) ensues, prospective investors are advised to be well informed about the intricacies of the capital markets. The Botswana Stock Exchange Act under the old dispensation did not make accommodations for individual shareholders. Therefore, it is necessary for the BSE to demutualize to separate membership from ownership.
Currently there are four-member brokers who have agreed to demutualize from the Stock Exchange as per the Transition Act. Shareholding has been allocated according to proprietary trading rights and share premium, as per the agreement. Stockbrokers Botswana received (5.75%), followed by Imara (5.75%), Motswedi (4.32%), and African Alliance (2.88%). Consequently, there are some perks to being the first members of the Botswana Stock Exchange – starting with the reception of funding from government coffers leading up to the signing of the agreement, we have done away with conjecture and moved to an environment that is more intuitive.
A Rand Merchant Bank (RMB) report nixed any possibility of the brokers’ ability to serve as anchors in a demutualized Stock Exchange. Anchor status would favor the hands of member brokers in directing the growth prospects of the Stock Exchange. However, that status remains the purview of government – a benevolent shareholder that while endowed with the wherewithal to further the development of the Stock Exchange, may be bogged down in too much bureaucracy to propel significant growth prospects for the Stock Exchange.
The appeal for a look through the demutualization exercise aimed to determine whether it would not be in the best interests of both groups to have a more equitable shareholding structure. While the brokers would have hoped to have a more equitable shareholding structure and a pipeline of growth prospects to look forward to, the BSE is holding its cards close to its chest.
The RMB report, which forms the basis of the Botswana Stock Exchange’s valuation, outlines the framework for a demutualized exchange but falls short of offering visibility on the prospects of a demutualized Stock Exchange. A more transparent outlook of a demutualized exchange warrants some attention, as the spin-offs are innumerable. Naturally the public can then have a premise on whether to have an inclination towards investing in a demutualized exchange or not. Under the status quo, the Stock Broking community is compelled to curtail their expectations for a more equitable shareholding, as plans are already in place to float the BSE’s shares.
Traditionally precedent has dictated that member brokers nominate Directors onto the BSE Main committee. However, the new dispensation has made way for a new system to be employed selecting board members. That system, which employs a voting methodology, was put in place during the maiden board of directors meeting towards the end of August. New board members were proposed after having been nominated by shareholders.
The proposed directors were subjected to a vote and a new Constitution was adopted. Certain board members were cut and pasted from member brokers while others were not. Juggling executive functions, board duties and lobbying for BSE initiatives to be adopted will be the order of the day. The CEO of the newly incorporated company, Thapelo Tsheole, who owes his comeuppance to such juggling acts, will have to dig in his heels to strike a balance. Whether its punting exotic equities or rough and tough fixed income securities, there remains an incessant appeal for a certain kind of aesthetic within the BSE – permanent and pensionable!
Given that the BSE is at the epicenter of capital markets, the BSE will be looking to present a new face to the investment community. While having received the short end of the stick, the broking community will be looking to firm up support with investors to prepare for the initial public offering of Botswana Stock Exchange Limited. The CEO and the new board of directors will be charged with spearheading the floating of BSE shares on the stock exchange.
Such a task will come with its fare share of challenges given the limited public float that will be made available. However, fresh capital will give the Stock Exchange the shot in the arm it needs to pursue its long-term goals. Similarly, the cash hoard that the BSE is sitting on might be used to inject some ingenuity into the capital markets. For example, the BSE has not inducted a new broker dealer into the membership of the Stock Exchange in over 10 years.
Surely the stock exchange will be looking to groom new member brokers amongst the fresh crop of graduates. Most candidates might be overwhelmed with anxiety at the thought of embarking on a career within the capital markets space. While daunting, it is manageable for those who are conscientious about their craft. Firstly, one would need to become a dealer. Thereafter, candidates can pursue the rigorous RPE exams. RPE’s consist of two exams administered by the BSE.
However, for eligibility to be a dealer, an individual must have a degree as well as two years in a relevant field, of which one year must have been served with a stockbroking firm or a securities exchange. The one year allows for one to be well acquainted with the Stock Exchange’s Automated Trading System (ATS), a trading platform that has the capability to interface with users at the front end and facilitate administration at the back end.
I can vividly remember the workshops that ushered in the BSE’s ATS. Invitations were extended to all participants to convene at Kgale Mews to learn about the intricacies of ATS. As fate would have it, it’s a one-shot deal. When indoctrinated into the workshop; in not getting the first pitch, there’s bound to be collateral damage. In not getting the second pitch, a flaw is inevitable. The brokers that attended the workshop took to the platform like fish to water.
Ultimately, the BSE pulled off a miraculous launch that saw volumes increase exponentially. Naturally as technological innovations become more advanced, brokers, through workshops offered by the BSE, will have new opportunities to spruce up their core competencies in Trading, Research, or Client Servicing Initiatives.
Several stock exchanges have been through the process that is demutualization. The most notable on the continent being the Johannesburg Stock Exchange. The stakes are high in any case, as one may expect, a demutualized exchange looks to offer technological innovations necessary to compete on a global scale with other exchanges. It would not be far-fetched to see the BSE partnering with other Stock Exchanges which have demutualized. The demutualization of the New York Stock Exchange is exemplary of the value that can be unlocked via demutualization of a stock exchange.
However, studies show that not much value has been unlocked when members remain shareholders in the Stock Exchange. Demutualization further enables management to operate the affairs of the stock exchange unhinged providing scope for growth. One need only observe the dynamic environment wherein other demutualized Stock Exchanges operate to get an idea as to how demutualization will pan out. Either government or the brokers will need to cede ownership of their shares towards the introduction of an IPO. A deadlock between the two groups of shareholders might see either side being diluted to provide impetus for the public to invest.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at 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. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”