A modest Gross Domestic Product (GDP), low inflation, below average household demand, levies and many other factors are squeezing the services sector. Motswedi Securities Q2 Economic Bulletin highlights the path for various sectors.
Retail, FMCG and Beverages
Bostwana’s GDP growth forecast is more conservative than the Finance and Economic Development Minister’s 4.1% for 2017, and we believe that this will continue to have a negative effect on the sector. Neighbouring countries are also experiencing hardships of their own, killing off hopes that foreign based subsidiaries of the sector will help smoothen results. Inflation and household demand are also relatively low, putting pressure on retail margins.
Furnmart has really taken a hit, dropping 7.7% loser for the quarter and extending year to date losses to -14.1%, however we expect this to slow down as the company resumed paying dividends, following their interim results. Operating conditions and increased competition will cap immediate benefits as the company realigns itself, following the disposal of its Zambian operations, which were dragging it down.
Sechaba is still battling a growingly hostile alcohol levy system, which was revised last year, and now sees the only local brewer with no natural competitive advantage as, customs duties were included in manufacturing costs for the calculation of the levy. This has had a significant impact on the margins of the company as it had to absorb the cost, versus passing it on to consumers as the price hike would see competitors capture the market share. The termination of the Coca-Cola bottling agreement will is also have a great impact on the company’s bottom line, however the price reaction has been milder than we had anticipated.
Sefalana prices lifted in correction after following the dilutive effect of their rights offer last year, andan overly bearish run, as demand failed to pick up in the 1st quarter. Choppies appears to have finally found equilibrium, however we remain cautious ahead of their full year results.
Property and Real Estate
It’s an interesting time for the sector, with borrowing costs at record lows, however opportunities in the property sector are few and far in between, the retail segment is heavily saturated in the urban centres, pushing developers to the fringes as they seek returns. High populated semi-urban villages with purchasing power or near enough to the citizen for a commute seem to be the ideal target development areas.
Residential properties are struggling on the high end of the market amid a sluggish economy, while there are few barriers to entry on the lower end allowing for multiple entrants and competition. The issue of new retail trading licences for foreign clothing stores without local shareholding has yet to be resolved, further limiting expansion prospects, in a market that is highly tangled upon South African outlets. Commercial/office space has also seen a huge number of developments, and the market has since become rent takers.
Tourism and Hospitality
The $30 tourist levy was effected beginning of June, and would have had very little impact on the expected sector results. Although the levy may been seen as trivial, or even negligible for high-end safari enthusiasts it has the potential to disrupt tourist activity, particularly in the lower segment, were a majority of locals are trying to edge out a niche, with frugal backpackers, opting to avoid the country where possible.
The larger listed entities may not be severely affected in the long run, but the disruptions this may initially cause, may have short term impact. Chobe continues to rally, supported by demand as some sound financials. The stock is up 4.1% for the quarter, and leads yearly gains in the sector having appreciated by 8.6%. The company recently announced that they are in the final stages ofacquiring Dinaka Safaris in the CKGR, in a bit to grow their desert safari experience.
Wilderness Safaris has been flat for the year, up 1.5%, of which 1% was accrued in the quarter under review. Cresta closed unchanged, with the company yet to replace the former CEO, who resigned late last year. The company will begin building a 70 room hotel in Ghanzi, during the year, which should begin feeding into the bottom line hopefully by 2019.
We are all aware of BTCL rise to glory, quickly reversing losses into profit, within a year of listing. But most importantly, it is worth noting that the telecommunications company managed to grow all its three revenue streams, including fixed line telephony, which is on the decline around the globe. We are impressed by the company’s resilience and sustainable revenue, however there is room for some cost cutting and improvement in service delivery. Expectations are high for Engen as oil continues to struggle below $50 a barrel, which should keep inventory prices low for the petroleum product distributor.
The company closed the quarter with yet another special distribution of 40.7 thebe to shareholders, the benefits of which should trickle into some capital gains, as the stock continues to attract dividend seekers. The only listed mining company on the domestic board, Minergy, listed on the BSE late in April, and aspires to be a mid-tier Southern African coal mining and energy company. The company hopes to turn profitable late in 2019, but has already seen share prices lift by 5 thebe on listing.
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”