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Bank sector profitability improved in 2016

The Bank of Botswana has said banking sector’s profitability improved in 2016, with income after-tax increasing by 29.3 percent from P1.1 billion in 2015 to P1.4 billion in December 2016.

As a result, Return on Average Total Assets (ROAA) and Return on Equity (ROE) also increased from 1.5 percent and 13.3 percent to 1.8 percent and 14.4 percent, respectively. Overall, the banking sector complied with the minimum prudential and statutory thresholds as expected. According to the Banking Supervision Annual Report 2016 released this week, the banking sector’s total assets increased by 5.3 percent from P76.6 billion in December 2015 to P80.6 billion. Loans and advances grew by 6.2 percent to P51.3 billion in December 2016, compared to growth of 7.1 percent in 2015.

“The Liquid Assets to Total Assets Ratio rose from 15.4 percent (2015) to 16.7 percent (2016), following an increase in liquid assets. Similarly, the ratio of NPLs to Total Loans and Advances increased from 3.9 percent in December 2015 to 4.9 percent in December 2016. The household sector accounted for 59 percent of total NPLs. The ratio of aggregate Large Exposures to Unimpaired Capital was much lower than the 800 percent maximum prudential limit set for banks in Botswana, implying satisfactory management of credit concentration risk,” reads the report.
 

In 2016, total customer deposits grew by 4.2 percent to P62.4 billion, the report further states. It recognizes that customer deposits constituted the largest proportion of liabilities at 77.4 percent and, as expected, the primary source of funding for the banking assets. “Interbank balances and credit from institutions increased by 20.4 percent from P3.3 billion in 2015 to P4 billion in 2016, as banks accessed alternative sources of funding for asset growth. As a result, the Financial Intermediation Ratio (the ratio of Loans and Advances to Deposits) increased from 80.6 percent to 82.2 percent.”

The Banking Supervision report notes that the banking sector was adequately capitalised and met the new regulatory capital requirements, with all banks reporting Capital Adequacy and Common Equity Tier 1 Capital Ratios in excess of the minimum prudential requirements of 15 percent and 4.5 percent, respectively. The banking industry’s capital adequacy ratio was 19.6 percent in December 2016 (December 2015: 20.1 percent).

Access to banking services, as measured by the ratio of Bank Accounts to Adult1 Population, improved from 75.9 percent in 2015 to 76.5 percent in 2016. Notwithstanding the fact that an individual can have multiple accounts, the ratio of Bank Accounts to Adult Population provides a rough indicator of access to banking services. The aggregate number of bank accounts grew by 3 percent from 1.13 million in 2015 to 1.17 million in 2016, while the number of accounts held by the adult population grew by 2.7 percent from 1.49 million to 1.53 million.

The Banking Supervision Annual report states that the employment levels in the banking sector for 2015 and 2016 increased by 0.5 percent from 5 030 in 2015 to 5 055 in 2016. The increase in employment levels was due to branch expansion. However, it further records that five banks recorded declines in their employment levels during the year under review due to branch rationalisation and automation.

The report indicates that Banks continued to innovate and introduce new products and services, including Credit Default Swaps (CDS)2 for institutional investors. CDS is an agreement where the buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults. Various savings accounts, such as target savings and offshore accounts, were also introduced.

To further enhance the existing service delivery channels, some banks upgraded the intelligent ATMs, among others, improving functionality with respect to cash and cheque deposits, withdrawal of foreign currency (e.g., South African rand (ZAR)), bill payments, and cardless services. Point of Sale (PoS) functionalities were also upgraded to permit acceptance of Union Pay International cards3, as well as allowing local merchants and customers to pay in any currency of their choice, where feasible.

Furthermore, PoS machines were enhanced to allow payment using earned cash-back points. In addition, the online banking platforms for small and medium enterprises were extended to include services such as payments to other bank accounts held in Botswana, bulk file payments for multiple beneficiaries and segregation of duties in the platform, according to an individual client’s needs.

FINANCIAL POSITION OF BANKS

According to the Banking Supervision Annual report, the banking sector’s total assets increased by 5.3 percent in 2016 (December 2015: 12.7 percent) from P76.6 billion in December 2015 to P80.6 billion; mainly reflecting a 6.2 percent increase in gross loans and advances to P51.3 billion in December 2016. Net loans and advances constituted a larger proportion of total banking sector assets (62 percent), followed by investment and trading securities (14 percent).

It states that the proportions of both assets and liabilities for 2015 and 2016 have largely remained unchanged, with minimal variations between the two periods. The report further buttresses that it is evident that the major source of funding for commercial bank assets continues to be customer deposits. In an effort to enhance and strengthen the resilience of the banking sector to economic and financial shocks, the Bank of Botswana says it implemented the Basel II Capital framework which came into effect on January 1, 2016.

“In order to facilitate an orderly transition to the new capital regime, the Bank adopted a gradual approach to Basel II implementation, commencing with Pillar 1 (Simple Approaches) and Pillar 3 disclosure requirements. The implementation of Pillar 2 and the Advanced Approaches has been deferred to a later stage.” According to the report, the commercial banks’ Large Exposures to Unimpaired Capital Ratio increased to 195 percent (2015: 194 percent). This ratio differed considerably among individual banks, ranging from 65.5 percent to 484.1 percent.

“The large exposures increased from P18.2 billion in 2015 to P20 billion in 2016, while unimpaired capital increased to P10.2 billion in 2016 (2015: P9.4 billion). The Large Exposures to Total Loans and Advances Ratio was 38.9 percent (2015: 37.7 percent). All banks maintained Large Exposures to Unimpaired Capital Ratios within the recommended 800 percent prudential limit.” The Banking Supervision Annual report states that the banking sector’s Liquid Assets to Total Deposit Ratio increased from 19.7 percent in 2015 to 21.6 percent in 2016, which was significantly above the 10 percent minimum prudential requirement.

“Similarly, the Liquid Assets to Total Assets Ratio increased from 15.4 percent in 2015, to 16.7 percent in 2016, following an increase in liquid assets. Overall, the total liquid assets held in the banking sector increased to P13.5 billion as at December 31, 2016 (December 2015: P11.8 billion),” it states. The banks’ aggregate cash and balances with the Bank increased by 38.2 percent from P4.6 billion in 2015 to P6.3 billion in 2016. Commercial banks’ placements with other banks and credit institutions increased by 3.9 percent from P10.5 billion in 2015 to P11 billion in 2016.

Chart 2.14 shows Bank of Botswana Certificates (BoBCs) holdings by banks for the period 2012 – 2016. There was a slight decrease in BoBCs holdings to P7.9 billion during 2016 (December 2015: P8.2 billion).  The Report says overall, the liquidity indicators show an improved liquidity condition in 2016.

“The banking industry’s unimpaired capital increased by 9.2 percent from P9.4 billion in 2015 to P10.2 billion in 2016, due to an increase in retained earnings of 4.1 percent (2015: 11.5 percent) and Tier 2 capital instruments (5.8 percent). Four banks voluntarily injected additional Tier 2 capital amounting to P240 million. In addition, increases in banks’ capital levels can also be attributed to increases in RWA, as banks grew their loan books. All banks, with the exception of two banks, which paid out dividends, recorded increases in their unimpaired capital,” reads the report.

The report further shares that the country’s financial depth and development indicators improved marginally, with the ratios of Private Sector Credit and Banking Credit to GDP increasing from 31.6 percent and 32.4 percent in 2015, to 31.8 percent and 32.6 percent in 2016, respectively. However, the M2 to GDP ratio decreased from 45.7 percent in 2015 to 42.8 percent in 2016.

“As was the case in the prior year, five banks dominated the banking sector, accounting for 90 percent of total banking assets. There was a dilution of competitiveness, as measured by the Herfindahl-Hirschman Index (HHI), during the year. However, the banking sector remained moderately competitive. The pressure on banks to innovate, develop and improve their products and services, in order to maintain high profitability levels, is expected to enhance competitiveness.”

The Banking Supervision report suggests that there is still room for more players in the banking sector. 

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Inflation will bounce back to objective range in 2022- BoB

25th October 2021
Moses Pelaelo

The Monetary Policy Committee (MPC) of the Bank of Botswana decided to maintain the Bank Rate at 3.75 percent at a meeting held on October 21, 2021.  Briefing members of the media moments after the meeting Bank of Botswana Governor Moses Pelaelo explained that Inflation decreased from 8.8 percent in August to 8.4 percent in September 2021, although remaining above the upper bound of the Bank’s medium-term objective range of 3 – 6 percent.

He said Inflation is projected to revert to within the objective range in the second quarter of 2022, mainly on account of the dissipating impact of the recent upward adjustment in value added tax (VAT) and administered prices from the inflation calculation; which altogether contributed 5.2 percentage points to the current level of inflation.  Overall, risks to the inflation outlook are assessed to be skewed to the upside.

These risks include the potential increase in international commodity prices beyond current forecasts; persistence of supply and logistical constraints due to lags in production; possible maintenance of travel restrictions and lockdowns due to the COVID-19 pandemic; domestic risk factors relating to regular annual price adjustments; as well as second-round effects of the recent increases in administered prices and inflation expectations that could lead to generalised higher price adjustments.

Furthermore, aggressive action by governments (for example, the Economic Recovery and Transformation Plan (ERTP)) and major central banks to bolster aggregate demand, as well as the successful rollout of the COVID-19 vaccination programmes, could add pressure to inflation.  These risks are, however, moderated by the possibility of weak domestic and global economic activity, with a likely further dampening effect on productivity due to periodic lockdowns and other forms of restrictions in response to the emergence of new COVID-19 variants.

A slow rollout of vaccines, resulting in the continuance of weak economic activity and the possible decline in international commodity prices could also result in lower inflation, as would capacity constraints in implementing the ERTP initiatives. Real Gross Domestic Product (GDP) for Botswana grew by 4.9 percent in the twelve months to June 2021, compared to a contraction of 5.1 percent in the corresponding period in 2020.

The increase in output is attributable to the expansion in production of both the mining and non-mining sectors, resulting from an improved performance of the economy from a low base in the corresponding period in the previous year. Mining output increased by 3 percent in the year to June 2021, because of a 3.2 percent increase in diamond mining output, compared to a contraction of 19.3 percent in 2020. Similarly, non-mining GDP grew by 5.4 percent in the twelve-month period ending June 2021, compared to a decrease of 0.7 percent in the corresponding period in 2020.

The increase in non-mining GDP was mainly due to expansion in output for construction, diamond traders, transport and storage, wholesale and retail and real estate.  Projections by the Ministry of Finance and Economic Development and the International Monetary Fund (IMF) suggest a rebound in economic growth for Botswana in 2021. The Ministry projects a growth rate of 9.7 percent in 2021, moderating to a growth of 4.3 percent in 2022.  On the other hand, the IMF forecasts the domestic economy to grow by 9.2 percent in 2021; and this is expected to moderate to a growth of 4.7 percent in 2022. The growth outcome will partly depend on success of the vaccine rollout.

According to the October 2021 World Economic Outlook (WEO), global output growth is forecast at 5.9 percent in 2021, 0.1 percentage point lower than in the July 2021 WEO update.  The downward revision reflects downgrades for advanced economies mainly due to supply disruptions, while the growth forecast for low-income countries was lowered as the slow rollout of COVID-19 vaccines weigh down on economic recovery.  Meanwhile, global output growth is anticipated to moderate to 4.9 percent in 2022, as some economies return to their pre-COVID-19 growth levels.

The South African Reserve Bank, for its part, projects that the South African GDP will grow by 5.3 percent in 2021, and slow to 1.7 percent in 2022.  The MPC notes that the short-term adverse developments in the domestic economy occur against a growth-enhancing environment.  These include accommodative monetary conditions, improvements in water and electricity supply, reforms to further improve the business environment and government interventions against COVID-19, including the vaccination rollout programme.

In addition, the successful implementation of ERTP should anchor the growth of exports and preservation of a sufficient buffer of foreign exchange reserves, which have recently fallen to an estimate of P47.9 billion (9.8 months of import cover) in September 2021.  Overall, it is projected that the economy will operate below full capacity in the short to medium term and, therefore, not creating any demand-driven inflationary pressures, going forward.

The projected increase in inflation in the short term is primarily due to transitory supply-side factors that, except for second-round effects and entrenched expectations (for example, through price adjustments by businesses, contractors, property owners and wage negotiations), do not normally attract monetary policy response. In this context, the MPC decided to continue with the accommodative monetary policy stance and maintain the Bank Rate at 3.75 percent.  Governor Moses Pelaelo noted that the Bank stands ready to respond appropriately as conditions warrant.

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SEZA to boost investment through Mayors forum

25th October 2021
SEZA-CEO-Lonely-Mogara

The Special Economic Zones Authority (SEZA) recently launched the Mayor’s forum. The Authority will engage with local governments to improve ease of doing business, boost investment, and fast track the development of Botswana’s Special Economic Zones (SEZs).

The Mayors Forum was established to recognise the vital role that local authorities play in infrastructure development; as they approve applications for planning, building and occupation permits. Local authorities also grant approvals for industrial licenses for manufacturing companies.
SEZA Chief Executive Officer (CEO) Lonely Mogara explained that the Mayor’s Forum was conceptualised after the Authority identified local authorities as critical partners in achieving its mandate and improving the ease of doing business. SEZA intends to develop legal instructions for different Ministries to align relevant laws with the SEZ Act, which will enable the operationalisation of the SEZ incentives.

“Engaging with local government will bring about the much-needed transformation as our SEZs are located in municipalities. For us, a good working relationship with local authorities is the special ingredient required for the efficient facilitation of SEZ investors, which will lead to their competitiveness and ultimate growth,” Mogara stated.

The Mayors Forum will focus on the referral of investors for establishment in different localities, efficient facilitation of investors, infrastructure and property development, and joint monitoring and evaluation of the SEZ programme at the local level. SEZA believes that collaborating with local authorities will bring about much-needed transformation in the areas where SEZs are located and ultimately within the national economy. Against this background, the concept of hosting a Mayors Forum was birthed to identify and provide solutions to possible barriers inhibiting ease of doing business.

One of the key outcomes of the Mayors Forum is the free flow of information between SEZA and local authorities. Further, the two will work together to change the business environment and achieve efficiency and competitiveness within the SEZs. Francistown Mayor Godisang Rasesigo was elected as the founding Chairman of the Mayors Forum. The forum will also include the executive leadership of all city, town and district councils, among them Mayors, City or Council Chairpersons, Town Clerks and District Commissioners.

Mogara explained that initial efforts would engage the local government in areas that host SEZA’s eight SEZs: Gaborone, Lobatse, Selebi Phikwe, Palapye, Francistown, Pandamatenga and Tuli Block. Meanwhile, Mogara told WeekendPost that they are confident that a modest 150 000 jobs could be unleashed in the next two to five years through a partnership with other government entities. He is adamant that the jobs will come from all the nine designated economic zones.

This publication gathers that the Authority is currently sitting on about P30 billion worth of investment. The investment, it is suggested, could be said to be locked up in government bureaucracy, awaiting the proper signatures for projects to take off. Mogara informed this publication that the Authority onboard investors who are bringing P200 million and above. He pointed out that more are injecting P1 billion investments compared to the lower stratum of their drive.

SEZA’s mandate hinges on the nine Special Economic Zones – being Gaborone (SSKIA), whose focus is of Mixed-use (Diamond Beneficiation, Aviation); Gaborone (Fairgrounds) for Financial services, professional services and corporate HQ village; Lobatse for Beef, leather & biogas park; Pandamatenga designated for Agriculture (cereal production); Selibe Phikwe area which is also of a Mixed-Use (Base metal beneficiation & value addition), Tuli Block Integrated coal value addition, dry port logistics centre, coal power generation and export; Francistown is set aside for International Multimodal logistics hub/ Mixed Use (Mining, logistics and downstream value-adding hub); whilst Palapye is for Horticulture.

The knowledge economy buzz speaks to SEZA’s agenda, according to Mogara. The CEO is determined to ensure that SEZA gets the buy-in from the government, parastatals and the private sector to deliver Botswana to a high economic status. “This will ensure more jobs, less poverty, more investment, and indeed wealth for Batswana,” quipped the enthusiastic Mogara. SEZA was established through the SEZ Act of 2015 and mandated with establishing, developing and managing the country’s SEZs. The Authority was tasked with creating a conducive domestic and foreign direct investment, diversifying the economy and increasing exports to facilitate employment creation.

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De Beers Q3 production up 28 %

25th October 2021
De-Beers

De Beers rough diamond production for the third quarter of 2021 increased by 28% to 9.2 million carats, reflecting planned higher Production to meet more robust demand for rough diamonds. In Botswana, Production increased by 33% to 6.4 million carats, primarily driven by the planned treatment of higher-grade ore at Jwaneng, partly offset by lower Production at Orapa due to the scheduled closure of Plant 1.

Namibia’s Production increased by 65% to 0.4 million carats, reflecting the marine fleet’s suspension during Q3 2020 as part of the response to lower demand at that time. South Africa production increased by 34% to 1.6 million carats due to the planned treatment of higher grade ore from the final cut of the Venetia open pit and an improvement in plant performance. Production in Canada decreased by 13% to 0.8 million carats due to lower grade ore being processed.

Demand for rough diamonds continued to be robust, with positive midstream sentiment reflecting strong demand for polished diamond jewellery, particularly in the key markets of the US and China. Rough diamond sales totalled 7.8 million carats (7.0 million carats on a consolidated basis) from two Sights, compared with 6.6 million carats (6.5 million carats on a consolidated basis) from three Sights in Q3 2020 and 7.3 million carats (6.5 million carats on consolidated basis) from two Sights in Q2 2021.

De Beers tightened Production guidance to 32 million carats (previously 32-33 million carats) due to continuing operational challenges, subject to the extent of any further Covid-19 related disruptions. Commenting on the production figures, Mark Cutifani, Chief Executive of De Beers parent company Anglo American, said: “Production is up 2%(1) compared to Q3 of last year, with our operating levels generally maintained at approximately 95%(2) of normal capacity.

The increase in Production is led by planned higher rough diamond production at De Beers, increased output from our Minas-Rio iron ore operation in Brazil, reflecting the planned pipeline maintenance in Q3 2020, and improved plant performance at our Kumba iron ore operations in South Africa. “We are broadly on track to deliver our full-year production guidance across all products while taking the opportunity to tighten up the guidance for diamonds, copper, and iron ore within our current range as we approach the end of the year.

“Our copper operations in Chile continue to work hard on mitigating the risk of water availability due to the challenges presented by the longest drought on record for the region, including sourcing water that is not suitable for use elsewhere and further increasing water recycling.”
On Wednesday, De Beers announced the value of rough diamond sales (Global Sightholder Sales and Auctions) for the eighth sales cycle of 2021. The company raked in US$ 490 million for the cycle, a slight improvement when compared to US$467 million recorded in 2020 cycle 8.

Owing to the restrictions on the movement of people and products in various jurisdictions around the globe, De Beers Group has continued to implement a more flexible approach to rough diamond sales during the eighth sales cycle of 2021, with the Sight event extended beyond its normal week-long duration.   As a result, the provisional rough diamond sales figure quoted for Cycle 8 represents the expected sales value from 4 October to 19 October. It remains subject to adjustment based on final completed sales.

Commenting on the cycle 8 sales De Beers Group Chief Executive Officer Bruce Cleaver said that: “As the diamond sector prepares for the key holiday season and US consumer demand for diamond jewellery continues to perform strongly, we saw further robust demand for rough diamonds in the eighth sales cycle of the year ahead of the Diwali holiday when demand for rough diamonds is likely to be affected by the closure of polishing factories in India.”

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