The challenging operating environment experienced by companies in 2016 is set to take shape in the form of figures as companies prepare for the financial reporting period.
While there has not been comprehensive information on the extent of the damage caused by economic downturns in 2016, leading companies listed on the Botswana Stock Exchange have offered insights (BSE) in what was perhaps the worst year for local businesses, particularly big companies in the financial services industry.
The 2016 operating environment, although considerably better than 2015, was marked by several retrenchments from different sectors of the economy, with the liquidation of BCL group likely to have the most impact. The retrenchments were in addition to the rising unemployment rate, stagnated wages, and accommodative monetary policy.
As the reporting period approaches, listed companies have sent out less optimistic cautionary notes warning shareholders to exercise caution when dealing with the affected company’s stock. While some cautionary statements were scant in details, other companies were outright blunt that they were expecting lower than projected profits.
Letshego, the largest indigenous BSE-quoted company with a market capitalisation of just under P4.7 billion, has announced that that the Company’s profit after tax for year ended 31 December 2016 will be lower than those reported for the period ended on 31 December 2015. In the previous full year end results for 2015, the Pan-African financial services group achieved profit before tax of P1.1 billion, a 5% increase on the prior period.
The drop in profit is likely the result of foreign currency fluctuations, retrenchments in the local economy, reduced borrowings, and historically lower interest rates that have driven customers to seek cheap credit from banks. Over the last five years, Letshego has experienced a period of rapid transformation from its roots in Botswana as a consumer finance company established in 1998, with a single product, into a pan-African broader based financial institution.
It has achieved geographic and product diversification with subsidiaries across ten countries in Southern, East and West Africa – Botswana, Kenya, Lesotho, Mozambique, Namibia, Nigeria, Rwanda, Swaziland, Tanzania and Uganda. In its 2015 annual report, the group said whilst the business environment has remained competitive, it has continued to grow its market share via geographic expansion and acquisitions into new markets and diversification with a broader product and services offering.
Letshego is currently trading at P2.20 after losing 4.34% of its stock value in year to date returns. This will not look good for shareholders who had to stomach a loss of 20% in 2016. The stock however remains the most traded on the BSE. The Botswana Insurance Holdings Limited (BIHL) has also announced that the Group’s results for the year ending 31 December 2016 will likely be lower than those reported for the year ended 31 December 2015. In 2015, the group achieved profit after tax of P597.7 million, 18% higher than in 2014. The group says the expected lower profit for 2016 is mainly due to current relatively unstable trading conditions.
BIHL Group has the most extensive exposure to the economy through its dominant subsidiaries which include Botswana Life Insurance Limited, Botswana Insurance Fund Management Limited, BIHL Insurance Company Limited as well as non-controlling stakes in Letshego Holdings (23%), Funeral Service Group (35%) and 21.5% stake in Nico holdings.
The group’s profits will be dragged down by fall in insurance premiums, high claims payouts, and reduced returns from the local and global equities markets. It will also be a double whammy for BIHL which will receive a lower share of profits from Letshego. A fall in profit for the group will mask what has been an impressive performance at the stock market after the group’s share price gained 15.46% in 2016 at a time when most stock prices were falling. For this year, the stock is up by 0.22% to trade at P17.59.
The country’s largest bank, First National Bank Botswana (FNBB), is also expected to post lower profit. Although the bank has yet to confirm it, it has hinted that its exposure to the BCL group has left them in a vulnerable position. The bank says the full details of which will be shared at the announcement of the Half Year Interim Results later this month.
In its previous financial performance for the year ending June 2016, FNBB’s profit for the year fell by 15%, marking two years of declining profits on the back of a challenging trading environment characterised by low interests, limited lending and investment opportunities. The bank saw its profit before tax fall by 13% to P659 million while the profit after tax was at a 2 year low of P504 million. With its exposure to BCL coupled with reduced consumer spending power, the interim results are expected to reflect the upheaval that happened in the last half of 2016.
FNBB’s half interim results will be closely watched by investors who have started to lose faith on the company stock. The bank, which has the biggest market capitalization under the local counter on the BSE, has lost as much as 22.51% of its share value in 2016 and the rout has extended to this year as the stock continues to lose, shedding off 7.43% to trade at P2.75.
The embattled Standard Chartered Bank Botswana which was the first to confirm its large exposure to BCL group has also warned that its financial performance might not be stellar. The bank has consecutively reported declining profits since 2014. In its last reporting period, the oldest bank in the country reported lower profit for the half year ended June 2016. For that period, the bank slightly improved on its revenues and contained costs following a dismal 2015 financial performance. However, a 42% surge on net impairments losses resulted in the bank posting profit before tax of P80.1 million, while the profit after tax fell by 5% to P63 million.
Standard Chartered Bank Botswana shocked many in its financial performance for the year ending 2015 after recording profit after tax of P47.4 million, a steep drop from a high profit of P319.2 million recorded in 2014. The steep drop was attributed to high net impairment losses as a result of exposure to the mining sector. While the bank seemed to have been recovering from that, the liquidation of BCL will surely have a negative material impact on the upcoming full financial results to be released next month.
The bank’s share price has been under pressure since 2015 after losing 11% of its share value, followed by another decline of 30.80% in 2016. The bank’s stock is currently trading at P7.60 having lost about 1.9% since the beginning of the year.
Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status. The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.
This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago. In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.
However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced. Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.
The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.
The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.
On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.
The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.
Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.
Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).
“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.
Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.
This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.
For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.
Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers. “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.
‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’
According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.
Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.
“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.