An investment analyst with Stock Brokers Botswana, Donald Motsomi has said conversations with industry leaders in the banking sector give credence to an expectation of higher credit growth in 2018 largely on the back of increased government spending which is also expected to boost business activity in the economy.
This comes on the backdrop of a harsh 2016 that saw the sector’s profitability came under pressure with net income declining by 9.6% and ROE falling to 7% (2016: 14.4%). Writing in the Stockbrokers Botswana Banking Sector review report, Motsomi indicates: “We are therefore cautiously optimistic of a pickup in credit growth and have factored this into our forecasts. Rates are expected to remain unchanged, and we have also factored the October rate cut to translate to a slight reduction in interest margins.”
He says given the low interest rate environment and tight competition in the sector, banks are looking to increase the contribution of non-funded income to their revenues. The SBB analyst furthers states that there is an increased focus on digitization through numerous initiatives including mobile technology, enhanced ATM functionalities, online banking, and partnerships with merchants through point of sale machines. There is growth potential from leveraging on these initiatives. Further, banks are increasingly diversifying their services through offering insurance and wealth management services.
“The commercial banking segment of the sector could see the entry of a new player in the short to medium term. Botswana Building Society (BBS), a statutory bank registered as a society, is currently undergoing demutualization and conversion into a public limited company with the intention to obtain a commercial banking license from the Bank of Botswana. BBS, although looking to focus mainly on the unbanked, would intensify competition in the sector through financing banked individuals and SMMEs given they obtain the license. The bank has an established customer base from its property finance loans and saving and investment products, which it could leverage on.”
According to Motsomi, the implementation of IFRS 9 is set to impact the banks, with some more poised to withstand the hit than others. Banks’ capital is set to be negatively impacted. “FNBB and Barclays both have strong capital positions, while Stanchart’s capital levels were weakened by the heavy loss incurred in 2017. The bank is currently looking at various options to enhance its capital base in preparation for the standard’s implementation. The standard will also require impairment recognition to be incurred in a timelier manner.”
Motsomi argues that the banking industry landscape has changed over the last five years with credit growth slowing from double digit growth to the lows seen in 2017. Furthermore, the Monetary Policy has been accommodative over the period with the bank rate coming down from 9.5% in 2013 to 5% in 2017. He states that the decline in credit growth and rates over the years, as well as increased competition has seen the industry’s profitability normalizing, as seen from some of the listed banks’ ROEs coming down from as high as 30 – 40% to regions of 18 – 24%.
“The period under review, 2017, was a challenging one for the sector characterized by slower GDP growth of 2.4% (2016: 4.3%), weak business confidence, and marginal growth in employment creation and wages. These factors translated to credit growth of 5.6% (2016: 6.2%), with reports of businesses generally holding back on utilizing facilities and the aforementioned pressures on households limiting their capacity to take on more debt,” writes Motsomi in the SBB Banking Sector Review.
Going forward, Motsomi and the SBB analysts expect household credit growth to moderate on the back of the pressures faced as well as higher expected inflation for 2018. They stress that Business credit growth should be more robust given higher levels of business confidence for the year as per Bank of Botswana Business Expectations Survey, and increased government spending in the run up to next year’s general elections.
Commenting on the 2017 decline in credit growth to 5.6% (2016: 6.2%), Motsomi says it was attributable to a slowdown in lending to both businesses and households. Annual credit growth to businesses was 3.2% (2016: 4.2%), which was largely due to loan repayments by parastatals. Household credit growth was 7.2% (2016: 7.6%), the lower growth largely attributable to lower growth in mortgage lending of 4.8% (2016: 6.3%) while in contrast; unsecured loan growth was higher to 8.8% (2016: 8.3%).
Total deposits growth was sharply lower at 1.8% (2016: 4.1%) owing to a reduction in household deposits of -8.4% (2016: -3.6%) indicative of the pressures consumers are facing. Business deposits growth albeit lower was robust at 5.1% (2016: 7.2%). According to the SBB Banking Sector review, the higher growth in credit compared to funding saw the sector Loan to Deposit ratio increase to 85.2% (2016: 82.2%).On the backdrop of an economy operating with a negative output gap and the positive inflation outlook, the Central Bank cut the Bank rate by 50 bps to 5% (Prime rate: 6.5%) in October 2017.
“The impact on credit growth, if any, will be seen in 2018 as well as further squeeze on the sector’s margins. Lower deposit rates in line with the rate cut could act as a disincentive for households to save, which would exacerbate the reduction in household deposits further. A continuation of this trend would make it particularly difficult for banks to constrain their cost of funding given that 75.8% of total deposits are business deposits, which are relatively costlier.”
The Review states that Sector net interest income rose 3.4% on the back of higher interest income growth of 3.0% in comparison to interest expense growth of 1.7%. Non-interest income increased 3.0%. Despite this growth, the sector’s profitability came under pressure due to higher provisioning and operating expense growth.
Meanwhile Provisions increased 17.9%, with NPLs/Total Loans rising to 5.3% (2016: 4.9%). The higher NPL ratio was a result of higher NPLs/Total Loans for businesses, which increased to 6.4% (2016: 4.9%). However, NPLs/Total Loans for households reduced to 4.5% (2016: 4.9%). “This is a comforting development considering the concerns over high indebtedness of households.
Faster growth in expenses vis-à-vis income translated to a higher cost to income ratio of 63.9% (2016: 57.0%). Ultimately, sector net income declined 9.6% and ROE more than halved to 7% (2016: 14.4%). We believe Stanchart’s losses for 2017 played a significant part in the sector’s profitability decline given the bank’s large market share,” observes Motsomi.
There are 10 licensed commercial banks in Botswana, with the 5 largest banks accounting for 90% of total assets according to the latest Banking Supervision Annual Report. The listed banks, First National Bank Botswana, Barclays Bank of Botswana, and Standard Chartered Bank Botswana are amongst these dominant players.
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.
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.
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.