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.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.