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Liquidity remains biggest risk facing banking sector

Banks thrive when the market is liquid, Stanbic Bank Botswana romped to a profit after tax of P195 million representing a year-on-year growth of 48 percent, with an improved return on equity of 18 percent from 13 percent in 2015.


This is the second consecutive year of posting strong results. But the biggest risk remains the sustainability of the liquidity over the medium term, Leina Gabaraane, Stanbic Managing Director has observed in his comments in the latest Stanbic annual report.

 

He shares that liquidity was fairly adequate during the year (2016) and resulted in keeping cost of funding at acceptable levels. He says it is the single biggest contribution to the improvement in earnings across the banking industry and also resulted in return-on equity enhancements during the year. He further states that this somewhat mitigated the impact of the 50 basis point (bps) rate cut in August 2016. Notwithstanding, the sustainability of liquidity over the medium term is the biggest risk facing the banking sector.

 

With the Botswana operating environment remaining very tough, with credit extension being at its lowest in a decade, business confidence subdued with varying economic sector performance, Gabaraane clings to the hope that the bank’s refreshed strategy “Road to Excellence” was launched during the year. The core emphasis of this strategy centres on driving efficiencies on all client-impacting processes, building stronger teams with the singular aim of creating superior client experiences and structurally optimising the balance sheet.

 

Interest rates are at historically low levels, reflecting the efforts by the Central Bank to stimulate the weak economic environment. This culminated in four consecutive negative quarterly gross domestic product (GDP) readings up to June 2016. The slight recovery in September was a positive development. Gabaraane continues to observe that the challenge going forward is the generation of liquidity from real economic activity resulting from a diversified economy, stronger private enterprise and growth in employment levels. Without this, credit quality deterioration will be a resultant risk on the banking sector.

 

But he acknowledges that the economy looked promising at some end: “A recovery of diamond sales in 2016 by almost 40 percent translated into some improvement in quarter three 2016 GDP growth albeit marginally. The marginal recovery in the GDP contributed to improvements of other measures of the economy such as the marginal (1 percent) recovery of unemployment, the modest improvement of the business confidence index and the slight improvement in the World Economic Forum global competitive index. Improvements of any nature to the economy are always welcome, however the concern is always on their sustainability. For instance the 1 percent improvement in the formal employment levels is likely to be reversed by the recent closures in the mining sector.”

 

However, a landlocked Botswana, highly dependent on commodities should be wary of the unstable global economic performance and uncertainties remains the biggest risk to the mining-sector dependency in the country. Gabaraane argues that the sector was particularly impacted by low commodity prices during the year.

 

Economic blows that pained banks

 

In his remarks Gabaraane captures the sad moments when State-owned nickel / copper mines suffered a more severe impact on account of management efficiencies / low quality of ore and this resulted in the provisional liquidation of Bamangwato Concessions Limited (BCL) Mines with over 5,000 job losses. Some other private mines also shut down in the process.

 

While he opines that the recent firming-up of copper prices may provide new opportunities for some of these mines. “Global uncertainties also contributed to some of the domestic challenges. Brexit, changes in the American presidency / foreign policy, geopolitical risks and their impact on global trade is difficult to assess, but certainly  Botswana’s dependence on commodities make the country’s fiscals more vulnerable in the face of declining trade balance and reserves,” writes Gabaraane.

 

He observes that in a bid to maintain a level of stability and confidence, the Central Bank’s soft monetary policy stance may have bottomed-out with the bank rate maintained at 5.5 percent in December. The outlook is that of rate stability as inflation returns to the target 3-6 percent range with an up-side risk.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

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.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

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.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

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”

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