The Botswana Development Corporation (BDC) has announced that Moody's Investors Service (Moody's) has in June 2017, assigned first-time Baa2/Prime-2 Issuer ratings to the Corporation, with a stable outlook on the Baa2 long-term ratings.
The ratings have been assigned in accordance with Moody's government-related issuers (GRI) rating methodology. Moody’s has noted that a successful execution of BDC's new growth strategy will likely lead to a more resilient earnings profile and stronger asset quality.”
Moody's assigned issuer ratings reflect BDC's standalone credit profile of b1, supported by its strong solvency and liquidity position; in addition to Botswana's A2 (stable) issuer rating acting as the "anchor" for potential support; and Moody's assessment of a high probability of government support, in case of need, reflecting BDC's sole government ownership. The ratings have been assigned in accordance with Moody's government-related issuers (GRI) rating methodology, reads a statement from Moody’s.
Established in 1970, BDC is Botswana's leading development finance institution. The government, through the Ministry of Trade and Industry, owns 100% of its shares. According to Moody’s the stable outlook reflects both the stable outlook on Botswana's A2 sovereign rating and Moody's expectations that BDC's financial metrics – specifically its capital and liquidity buffers will remain solid.
The high probability of support from the government of Botswana particularly influenced the rationale for the assigned ratings. “BDC's Baa2 issuer rating is underpinned by Moody's assessment of a high probability of government support given the government's 100% ownership, BDC's public policy mandate, and the government's track record of providing support.” Specifically, Moody’s noted that the government guarantees part of BDC's debt obligations and commits not to allow BDC to enter into liquidation.
“Although BDC is independently managed, the government has two members on the company's board (the permanent secretaries of the Ministry of Trade and Industry and the Ministry of Finance), while BDC's mandate, strategy and focus are aligned with Botswana's development targets and strategic priorities,” reads the Moody’s statement.
According to Moody's, BDC's b1 standalone credit profile balances its currently strong solvency and liquidity position against its high exposure to a small number of large equity investments, and legacy issues that have led to weak asset quality metrics and volatile profitability.
Strong solvency, funding and liquidity position
Moody’s is of the view that the BDC has a very strong funding and liquidity position, with limited leverage on its balance sheet. Moody's expect its capital, funding and liquidity position to remain strong, despite the company targeting higher leverage as part of its growth strategy. Accordingly, Moody's expects BDC's equity-to-assets ratio to drop to a still strong 40%-50% over the next three years, from an unconsolidated 73% as of June 2016.
“BDC also maintains strong liquidity metrics, with the June 2016 24-month coverage ratio standing at 98% (measured as the percentage of cash, cash equivalent and committed, unsecured bank lines available to cover maturing debt over the next 24 months). While liquidity metrics may drop slightly, this will partly be countered by BDC raising long-term funding, from both development finance institutions and through a tenured note programme and locally issued bonds,” says Moody’s.
However, Moody’s observes that the BDC's legacy high-risk investment strategy had a poor track record, particularly between 2007 and 2012, resulting in a number of investments being written-off or significantly impaired, and leading to earnings volatility and weighing on asset quality metrics.
It says the BDC has historically invested primarily in equity stakes, including majority stakes in unlisted greenfield and start-up investments. This has led to significant investment concentrations, with the net value of the top five investments standing at 78% of total net investments (95% of equity) as of June 2016. However, Moody's acknowledges the progress made in addressing these legacy issues, with adequate provisions held against non-performing exposures and the strengthened processes and practices supporting investment decisions going forward.
It notes that since October 2013, BDC has implemented a major transformation (business remodelling) programme, including a management overhaul to strengthen its venture capital, risk management and finance capabilities both domestically and regionally. “As part of its new strategy, BDC also intends to reduce equity exposures and increase debt (loans and preference shares) exposure to around 75% of total investments. . A successful execution of BDC's new growth strategy will likely lead to a more resilient earnings profile and stronger asset quality.”
According to Moody’s a positive rating pressure will be exerted if BDC successfully executes its new business strategy, including a rebalancing of the portfolio and reduction of associated investment concentrations, leading to a more resilient earnings profile and improved asset quality metrics, while maintaining strong capital buffers. A potential upgrade of Botswana's A2 (stable) sovereign rating would also put upward pressure on BDC's issuer ratings.
“Downward pressure on BDC's ratings could develop if the company significantly increases its leverage, reduces its capital metrics beyond Moody's current expectations, and fails to improve its investment performance track record, which will in turn weigh on asset quality and profitability. Ratings will also be under pressure if Moody's considers that there is a lower probability that the government would support BDC, in case of need and/or if the Botswana government bond rating is downgraded signaling a weakened capacity of the authorities to provide support in case of need,” reads the Moody’s statement.
The methodologies used in these ratings were Finance Companies published in December 2016, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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”