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Kgori Capital economic insights

A conversation with Kgori Capital’s Portfolio Management Team

QUESTION: What is your latest outlook for the domestic economy in 2018 following the appointment of His Excellency Mokgweetsi Masisi as President of the Republic of Botswana?
    
ANSWER: Our inflation view remains unchanged from the start of the year. We still expect inflation to increase to the mid-range of the Bank of Botswana’s 3-6% objective range with risks balanced. The main upside risk relates to administered prices. Electricity and public transportation prices were increased by 10% and 14%-25% respectively, effective April 2018. Further price increases in water and fuel prices may drive inflation further up. The main risk to the downside emanates from continued tepid domestic demand.

We expect the Central Bank to maintain its current accommodative monetary policy stance in order to support economic growth. That said, we do not expect the Bank of Botswana to reduce rates further unless inflation continues to trend below its objective range. We do not expect this to be the case on account of increases in administered prices.

We are projecting GDP growth of about 4.0% for 2018 compared to the latest MFDP’s forecast of 5.3%. This represents solid but unremarkable growth. Any significant upside surprise will be driven by a combination of a spike in Government spending, the continued revival of the diamond market, above trend growth in the non-mining sector and the stability of water and electricity supply.

The newly inaugurated fifth President, H.E. Mokgweetsi Masisi, and his Administration accept that, now more than ever, there is a dire need to improve economic diversification execution. This will direct economic policy and strategy formulation during his term. Government has publically committed to a partnership with the private sector that focuses on giving Batswana an opportunity to set up industries that empower themselves and, in turn, to create much needed employment.

QUESTION: What are the biggest risks in your view to local banks?

ANSWER: The key issue facing the local banking sector remains the implementation and impact of IFRS 9. The implementation will affect retained earnings, and therefore capital adequacy, as well as increase the impairment charge for the year. Due to the large component of unsecured loans on bank balance sheets, we anticipate the impairment impact will be large and may alter the product mix of banks going forward.

Given the current rate environment, coupled with a lower-for-longer expectation, players are looking to ramp up their non-interest income to fuel top-line growth. We expect banking stocks to continue the decline in the short-term, with FNB faring better than competitors because it has a larger non-interest income earning base and it has more attractive valuation metrics.

QUESTION: Would you agree that the property sector is likely to continue to outperform?

ANSWER: We are seeing increased deal activity in the property space as companies poise for growth and currency exposure diversification. Zambia seems to be a favoured destination regionally due to attractive USD linked yields coupled with the relatively underdeveloped nature of the market.

Locally, property prices and rentals are under pressure due to the constrained consumer environment, thereby presenting acquisition opportunities. Property counters continue to deliver stable price returns and attractive dividend yields and thus remain in favour.

QUESTION: Have recent economic data releases impacted Kgori Capital’s view of retail companies?

ANSWER: The formal sector is under pressure, wage inflation remains low, jobs are being shed and companies rationalised; however consumption continues to grow. This growth is fueled by the informal sector whose spending habits and preferences differ; it is no longer about whether people are spending but what people are spending on. Consumption shifts have resulted in consumers moving to lower margin products and loss-leaders, impacting company profitability. Regional expansion has cushioned the impact to some degree but the consumer retail sector remains stressed. We maintain our unfavourable view of the sector.

QUESTION: How are fundamentals looking for the hospitality and leisure sector?

ANSWER: The trends in travel are shifting and competition is heating up. The entrance of more hotel chains, mushrooming of guest houses and adoption of alternative accommodation means such as Air BnB has put Cresta under pressure. We expect the luxury tourism sector to remain buoyant given positive global growth trends; therefore, the sector will continue to outperform.

QUESTION: What are Kgori Capital’s expectations for prospective local equity market returns?

ANSWER: Since the DCI peak in August 2015, local equity investors have suffered from low to negative returns. On a total return annualised basis for the last 1 year, 3 years, and 5 years local stocks have returned -3.7%, -0.7%, and 4.2% respectively. On a relative basis, local equities have underperformed local bonds, cash and most global asset classes. Unfortunately, we expect the slump for local stocks to continue in the short-term, based both on continued weak fundamentals and negative retail investor sentiment.

However, looking further out and more importantly in line with Kgori Capital’s investment horizon of three to five years, we are a lot more positive on prospective local equity market returns improving. By combining our bottom up analysis and top down insights on the key fundamental drivers for equity returns of price/earnings (P/E) ratio, earnings growth, and the dividend pay-out ratio, we have determined that the forward looking return profile is starting to make holding local equities a much more attractive proposition.

This is underpinned by one of our main investment themes of improving earnings momentum on more attractive entry valuations. We believe investors should focus more on what we expect will be the real driver of the markets going forward, earnings growth.

In recent years, domestic economic growth has often been patchy and corporate earnings fitful, but growth in 2018 is expected to be more broad-based, while corporate earnings should improve. As investors, we can never afford to let optimism compromise our approach, but we do at least recognise that we are probably about to experience the best economic backdrop seen for several years.

In recent years, domestic economic growth has often been patchy and corporate earnings fitful, but growth in 2018 is expected to be more broad-based, while corporate earnings should improve. As investors, we can never afford to let optimism compromise our approach, but we do at least recognise that we are probably about to experience the best economic backdrop seen for several years.

The Kgori Capital team: Alphonse Ndzinge, CFA – Managing Director;
Tshegofatso Tlhong, CFA – Portfolio Manager; and Kwabena Antwi, CFA, MBA, FCCA

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P230 million Phikwe revival project kicks off

19th October 2020
industrial hub

Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status.  The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.

This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago.  In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.

However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced.  Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.

The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.

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IMF projects deeper recession for 2020, slow recovery for 2021

19th October 2020

The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.

On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April.  For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.

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Botswana partly closed economy a further blow of 4.2 fall in revenue

19th October 2020

The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.

Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.

Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).

“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.

Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.

This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.

For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.

Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers.  “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.

‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’

According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.

Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.

“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.

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