Bank of Botswana has released the Business Expectation Survey for the last half of the year which shows that there has been an increase in overall business confidence. However businesses still remain wary of the uncertainties surrounding demand for commodities in the global market, which continues to threaten business operations.
The Bank undertakes the Business Expectations Survey (BES) twice a year in order to collect information on perceptions among the local business community about the prevailing state of the economy, as well as future prospects. Businesses are asked to respond to a range of questions relating to, among others, the business climate and prospects for economic growth, inflation and business performance over the survey horizon, which starts from the second half of 2016 until end of 2017.
The survey report shows that overall business confidence in the last half of the year is 43 percent, up by 7 percent from the level that prevailed during the first half of the year reported in the March 2016 survey. The higher confidence level in the second half of 2016 is, however, five percentage points lower than the 48 percent anticipated for the same period at the time of the March 2016 survey. Moreover, there is an improvement in the level of confidence for the rest of the survey period, rising to 51 percent in the first half of 2017 and to 58 percent for the entire 2017.
Domestic oriented businesses were much more optimistic with the level of confidence reaching 43 percent in second half, compared to 31 percent in the first half of the year. Looking ahead, the level of optimism improves to 46 percent in the first half of 2017 and 52% for the whole of 2017.
However, the survey reveals that the confidence level of export-oriented businesses declined significantly, from 71 percent in the first half of the year as reported in the previous survey, to 42 percent in the last half of 2016. Going forward, business confidence recovers markedly to anticipated levels of 75 percent and 92 percent in H1 2017 and the whole of 2017, respectively. Thus, the overall expected upswing in business confidence for 2017 is due to a more positive outlook by both export and domestic oriented businesses.
When it comes to national output growth, businesses are conservative about Gross Domestic Product (GDP) growth. On average, businesses expect real GDP to grow by 2 percent in 2016 and by 2.6 percent in 2017. These are lower than the government forecasts of 3.5 percent for 2016 and 4.1 percent for 2017, indicated in the Budget Strategy Paper for 2017/18. According to the report, the expected economic growth rate for 2016 by the business community, is an improvement over the actual contraction of 0.3 percent realised in 2015, and is consistent with the improving business confidence.
In terms of capacity utilization, investments, input costs and job creation, the majority (85 percent) of businesses expect to utilise at least 50 percent of their productive capacity in the second half of 2016, while at the same time anticipating to raise investment and employment levels in the first half of 2017. This is in spite of strong business sentiments about rising costs of inputs in the period.
The survey indicates that 15 percent of the respondents anticipate operating below 50 percent of their productive capacity in the current period, while 54 percent expect to produce between 50 and 80 percent of their capacity; 31 percent of the businesses expect their productive capacity to exceed 80 percent. Thus, the current levels of capacity utilisation by businesses are broadly comparable with those reported in the March 2016 survey (46 percent anticipated operating between 50 and 80 and 33 percent expected to exceed 80 percent), hence suggesting that the business environment is still challenging, but stable.
Despite the challenging operating environment, the businesses surveyed are optimistic about demand for their products and services, expecting inventory levels to drop as they move more products and services in the first half of 2017.
“In turn, this feeds through to more positive expectations regarding production, employment and profitability in the current period and the remaining period of the survey. Nonetheless, expectations for investment in building, plant and machinery and other items in H2 2016, have been revised downwards in the current survey, compared to expectations for the same period expressed in the March Survey,” the report stated.
Still on that, the report highlighted that there is an improvement in expectations relating to investment in vehicles and equipment between the two surveys. Looking ahead, a majority of businesses anticipate to undertake more investment in the first half of 2017, indicative of the optimistic outlook for 2017.
The Business Expectations Report also reveals that sentiment amongst firms regarding rising cost of inputs is still strong and higher than in the March 2016 Survey. Nonetheless, expectations of higher costs eased for wages and utilities, while remaining broadly strong for materials, rent, and transport and other items in the first half of 2017. The survey from respondents show that expectations of rising costs of inputs decreases in the later period of the survey, consistent with moderating inflation expectations.
The decision by the central bank to slash the bank rate in 2015 and 2016 has struck a chord with the business community as the survey shows that they anticipate an easy access to credit with a bias towards domestic borrowing in the early part of 2017 due to favourable interest rates, before opting to borrow from South Africa later in the year, taking advantage of the currency exchange. The report further reveals that for capital investment, companies would prefer to borrow domestically than abroad (South Africa and international markets) in the first half of 2017, but would opt to borrow from South Africa in the 12-months period to December 2017.
“Regarding borrowing costs, there is some anticipation of lower domestic interest rates in the first half of 2017 before rates start to rise in the later part of the year. Expectations of lower domestic interest rates are aligned to the reduction of the Bank rate from 6 percent to 5.5 percent since August 2016, together with prevailing low inflation, which continues to fluctuate around the lower end of the Bank’s 3 – 6 percent range,” part of the report reads.
While in 2015 there were talks of liquidity crisis, the central bank eased the reserve requirements cap, allowing for more money in the banking sector to enable more lending. The decision appears to have opened doors for businesses. In terms of access to finance, there is a reduction in the proportion of businesses which believe access to credit is tight (44.9 percent compared to 50.8 percent in the previous survey), while the number of those viewing access as easy has fallen from 13.6 percent in the March 2016 Survey to 9 percent. However, there is a significant increase in the proportion of businesses which believe access to credit is normal (46.2 percent from 35.6 percent in the March 2016 Survey). In general, compared to the March 2016 survey, the business sentiment about access to finance has improved.
Despite inflation rate treading below the bank’s medium term range for most part of the year, the respondents projected inflation is above the current inflationary levels but within the Bank’s inflation objective, suggesting confidence in the bank’s monetary policy.
“Businesses have revised their inflation expectations for 2016 slightly downwards to an average of 3.6 percent from 3.7 percent in the March 2016 Survey. Inflation expectations of 3.8 percent for 2017 remained the same as in the March 2016 Survey. Despite the relatively low average inflation expectations, they still remain above actual inflation which averaged 2.8 percent in the 9 months to September 2016,” the report said and also adding that the majority of respondents expect inflation to be within the Bank of Botswana’s medium term inflation objective range of 3-6 percent in 2016 (66 percent) and 2017 (68 percent), possibly reflecting the sustained period during which inflation has been within the objective range, which adds to the Bank’s policy credibility.
In the previous surveys, local based businesses used to cite the water and power crisis as a major challenge to their operations. However in the latest survey respondents now point to weakening domestic demand coupled with reduced government spending as the first and second most significant challenges facing businesses due to perceived slow growth in household disposable income and public expenditure. According to the report, the next ranked impediments to business operations relate to regulatory and supervisory framework and availability of raw materials. Respondents also highlight unavailability of skilled labour and weak international demand among the serious challenges they face.
As COVID-19 and its variants continue to cast a shadow over the world’s health systems and economies, the level of uncertainty and strength of the economic recovery will vary across countries. The real GDP in all G-20 countries is expected to grow compared to the previous year, but some countries will take longer than others to return to full capacity.
According to Mooody’s Global Macro Outlook 2021-22 report released this week, precautionary behavior and official restrictions are still hampering interpersonal interactions. The resulting toll on global economic activity has been staggering, even as the economy has also shown a remarkable degree of resilience.
Overall economic outcomes in 2020 exceeded Moody’s forecasts in most countries because of stronger-than-expected rebounds in the second half of the year. Aided by technology, many people and businesses quickly adapted so that they could carry on with daily activity with reduced in-person interactions.
However, Moody’s says the recovery remains unbalanced, with the pandemic affecting individual businesses, sectors and regions very differently. According to the group, goods demand has almost fully recovered because goods can be produced and consumed with limited in-person interactions, while the recovery in service continue to lag.
Within services, businesses that were able to effectively deliver their products at arms-length have stabilized, if not prospered. Large businesses with access to cheap funding have performed better than small and mid-sized firms. According to the report, the transportation, hospitality and leisure and arts sectors continue to languish, but the information technology, consumer goods, pharmaceuticals and financial sectors have thrived.
According to the report, many individuals around the world (including Botswana), have lost their jobs and continue to face employment uncertainty, but on the flip side, the forced decline in household consumption and the rise in asses prices have buttressed household financial balances at an aggregate level. Moody’s reported that all G-20 countries will post growth rates in 2021 and 2022, but the pace of recovery will vary significantly.
“The COVID-19 shock has exposed differences between countries in terms of political leadership, community health management, fiscal and monetary policy response, economic structures and inherent economic dynamism. Public health considerations drove the economic shock of the pandemic. In that sense, the steep declines in GDP in 2020 across advanced and emerging market countries were less a reflection of underlying weaknesses in the economy, and more a function of the combined effects of the spread of the virus and the stringency of lockdown measures,” says Moody’s.
Economic outcomes will remain closely tied to the pandemic, Moody’s said. “The quicker countries can curb the spread of the virus, the faster their economic activity will recover. Otherwise the costs of keeping parts of the economy shut, in terms of lost income and revenue, will keep adding up. The longer the crisis lasts, the more difficult it will be for governments to compensate the private sector for its continuing losses.”
Without adequate government support, Moody’s predict that large-scale deterioration in asset quality will ensue. Such detrimental effects, it says, could eventually transmit the shock through financial channels to other parts of the economy.
“We have cut or estimate of the 2020 contraction for the G-20 countries. We now expect a collective contraction of 3.3%, compared with our previous estimate of 3.8%, because of a better-than-expected recovery across a wide range of advanced and emerging market economies in the second half of the year. We expect the G-20 countries to grow by 5.3% in 2021 and 4.5% in 2022, up from our prior forecasts of 4.9% and 3.8% respectively.”
US ECONOMY TO LEAD THE GLOBAL SERVICES DEMAND RECOVERY
The US economy advanced at a 4.0% annualized rate in the fourth quarter 2020, but the headline figure masks the fact that the economy has lost momentum since November, when COVID-19 cases began to rise. Moody’s says it expects this current moderation in economic growth to be temporary. Economic momentum will likely puck up pace over the course of 2021 and 2022, supported by: enhanced pandemic control, significant additional fiscal support to the economy and a more predictable policy environment.
With infection rates now starting to fall, economic momentum should naturally pick up in the second quarter and into the summer as individual states progressively ease up social distancing restrictions, Moody’s reports. “We believe that a stronger pandemic management response from the Biden administration, will increase public confidence and allow for a relation of restrictions over this year and next.”
COVID-19 SHOCK EXACERBATES EXISTING STRUCTURAL CHALLENGES IN SOUH AFRICA
South Africa’s economy is expected to growth by 4.5% in 2021 and by 11% in the following year, following an estimated 7.0% contraction last year. According to Moody’s, this will make South Africa’s recovery one of the weakest among emerging market countries. The economy has struggled to build momentum for many years, and as a result suffers from chronically high unemployment. The COVID-19 shock has made the economic situation all the more challenging, says Moody’s.
Reconnaissance Africa, a Canadian exploration company has started piercing the natural resource-rich lands of Kavango basin in Namibia, the company in searching for oil and gas.
The prospective area stretches into North West district of Botswana, the company through its local subsidiary Recon Africa Botswana has been given the nod by Ministry of Mineral Resources, Green Technology & Energy Security to explore petroleum mineral for four (4) years.
Amid all the negative reports around the company’s drilling activities in the Kavango basin, which covers ecosystem components feeding into the mighty Okavango Delta, the bottom line is that there are prospects of billions of dollars beneath the area in form of oil and gas-and Recon Africa is out to unearth the treasures.
Member of Parliament for Selibe Phikwe Dithapelo Keorapetse says Botswana should strive to participate in the exploration and development of these potential oil and gas deposits in the North West district. Contributing to the 2021/22 budget speech on Monday Keorapetse cautioned government against watching from afar while a potential multi-billion pula industry unfolds in the Okavango area.
He implored Botswana Oil Limited(BOL) and Mineral Development Corporation Botswana (MDCB) both state owned enterprises, to take up equity stakes in the exploration activities as early as now to “ rather than being spectators and waking up late when the foreigners are enjoying the billions”.
ReconAfrica through its subsidiary Recon Botswana was issued an exploration license under the Petroleum Act to explore for petroleum minerals in the North West District of Botswana, on 1 June 2020, for a period of four years.
“Botswana Oil as the country ‘s petroleum investment company together with MDC-a state owned mineral interest holding company must come together and acquire a stake in the ongoing exploration activities ,not to wait until Recon is making money and you say you want shares”. Keorapetse made reference to Karowe mine which Botswana’s diamond mining partner De Beers Group sold to Lucara over a decade ago while still at exploration stage.
Lucara bid on the site, and its internal partner Lundin provided a bank guarantee to De Beers for fifty million dollars, capturing some seventy per cent of the stake.Soon afterward, Lucara bought the remaining stake by acquiring De Beers’s London-based junior venture partner, African Diamonds. Lucara now owns AK6 (now Karowe Mine), having spent a little more than seventy million dollars.
The mine has since developed into a prolific rare gem producer celebrated worldwide, having unearthed some the world’s largest diamond ever in history , such as the over 1000 carats Lesedi La Rona, Sewelo and the magnificent 813 carats Constellation.
“We are now mulling acquisition of shares in Lucara but when transactions were happening in 2009 we were just spectators, we could have acquired shares back then when they were affordable now it is expensive to buy into Karowe mine, we must not make the same mistake with this oil and gas projects” said Keorapetse urging Government to be pro-active and move quickly to approach Recon Africa for a stake in Recon Africa Botswana.
ReconAfrica is a junior oil and gas company engaged in the exploration and development of oil and gas in North East of Namibia and North West of Botswana—the Kavango Basin. The company officially launched the oil and gas exploration project in Namibia in early January 2021. The exploration activities are taking place in the Kawe area, Kavango East Region, Namibia.
ReconAfrica holds a 90% interest in a petroleum exploration license in Namibia which covers the entire Kavango sedimentary basin in Namibia, the remaining 10% is owned by Government of Namibia. The exploration licence covers an area of 25,341.33 km2 (6.3 million acres), and based on commercial success, it entitles ReconAfrica to obtain a 25-year production license.
Further, ReconAfrica holds a 100% interest in petroleum exploration rights in Botswana over the entire Kavango sedimentary basin in the country. This covers an area of 8,990 km2 (2.2 million acres) and entitles ReconAfrica to a 25-year production license over any commercial discovery. The company acquired a high-resolution geomagnetic survey of the license area and conducted a detailed analysis of the resulting data and other available data, including reprocessing and reinterpretation of all existing geological and geophysical data.
The survey and analysis confirm that the Kavango Basin reaches depths of up to 9,000 m (30,000 feet) under optimal conditions to preserve a thick interval of organic rich marine source rock, and is anticipated to hold an active petroleum system.
“We believe that the Kavango Basin is another world class Permian basin, analogous to the Permian basin in Texas It is estimated that the oil generated in the basin could be billions of barrels. Recon Africa’s initial goal is to establish the presence of an active petroleum system with its fully funded 3-well drilling program starting early January 2021.
Canadian mining company, Lucara Diamond Corporation, well known globally for producing rare gems of unprecedented quality, has not been spared by the 2020 global market downturn caused by the COVID-19 pandemic.
In their financial results for the year ended 31st December 2020, released from Vancouver Canada late Monday, the junior minor reported a significant net loss of $26.3 million for the year (approximately P287 in Botswana currency).
This according to the financials is a loss of $0.07 loss per share, which is a significant decline when compared to net income of $12.7 million ($0.03 per share) in 2019. The company which wholly owns and runs Botswana’s Karowe mine registered total revenues of $125.3 million (over P1.3 billion), a 34 percent drop compared to $192.5 million (almost P2 billion) recorded in 2019 or $335 per carat from $468 per carat in 2019.
The decrease in revenue resulted in adjusted EBITDA of $18.4 million, a decline when compared to adjusted EBITDA for the same period in 2019 of $73.1 million. Lucara executives explained that total revenue decline was a result of challenging market conditions, a longer ramp-up for production and polished sales in the latter half of 2020 under the HB supply agreement.
“As a result, revenue from certain polished diamonds from Lucara’s highest value stones that would otherwise have been recorded as revenue in 2020, is now expected to be realized in 2021.” reads a commentary alongside the figures.
During the year ended December 31, 2020, Lucara sold 373,748 carats at an average price of $335 carat. Diamond sales for the fourth quarter of 2020 were held through a combination of regular tenders, Clara, for diamonds less than 10.8 carats, and through HB under the supply agreement for those diamonds greater than 10.8 carats.
The Company recognized revenue of $42.4 million or $402 per carat from the sale of 105,648 carats. Price recovery was observed in most size and quality classes. Of note, prices achieved for goods sold on Clara (under 10.8 carats in size) in January 2021 have now recovered to the level of pricing achieved early in 2020.
For the year ended December 31, 2020, Lucara registered revenue totaling $55.2 million from the two agreements with HB, including an accrual for variable consideration of $7.2 million related to “top-up” payments arising from polished diamond sales in excess of the initial purchase price paid to Lucara.
With global restrictions impeding travel for many diamantaires, Lucara says interest in Clara grew significantly in 2020 and the number of buyers on the platform increased from 27 to 75. During 2020, Clara began selling stones on behalf of third party sellers, which was a significant objective for the year.
“As Clara becomes the online marketplace of choice for rough buyers, discussions are underway with several producers to begin trials for the sale of their diamonds on Clara” the company said Amidst challenging circumstances for the diamond industry in 2020 Lucara forged ahead with the Karowe mine underground project.
During the year period under review $18.7 million (over P190 million ) was spent on project execution activities including the following: Site earthworks (consisting of laydown preparation and clearing of shaft and surface infrastructure locations), geotechnical test pitting and drilling, and completion of two pilot holes at the shaft locations, a 746 metre hole for the ventilation shaft and a 768 metre hole for the production shaft.
The Company was able to complete on-site earth works and geotechnical studies by using local contractors while a State of Emergency remained in effect in Botswana. Long lead time item orders were also placed for shaft muckers, and hoist and winder refurbishment was initiated. In addition, power line engineering and detailed shaft design and engineering (consistent with original targets for 2020) progressed.
In Q4 2020, the Government of Botswana approved the proposed powerline route and granted a 25-year extension to the Karowe Mine License to 2046, sufficient to cover the remaining open-pit life (to 2026) and the expected life of the proposed underground expansion, currently planned to 2040.
Lucara says it’s currently actively exploring opportunities to arrange debt financing for the underground expansion for those amounts which are expected to exceed the Company’s cash flow from operations during the construction period. The underground expansion program has an estimated capital cost of $514 million (over P5 billion) and a five year period of development.
President & Chief Executive Officer of Lucara Diamond Corporation, Eira Thomas said the measures that Lucara took early in the pandemic, including the decision not to sell rough diamonds in excess of +10.8 carats after Q1, helped protect and support prices for large, high value diamonds that account for more than 70% of the company’s revenues.
“These efforts in conjunction with our transformational supply agreement with HB Antwerp executed in July, resulted in strong price recoveries by Q4, a trend which has continued into 2021.” Thomas said the recent recovery of two, high value +300 carat stones “continue to highlight the extraordinary nature of the Karowe resource and underpin the rationale for underground expansion, extending our mine life out to at least 2040”.