The biggest ever financial scam of all times was perpetrated by a financial services firm. Bernard Madoff, shook the American regulation regime from its deep slumber.
The big ponzi scheme, which involved the staggering amount of $50 billion (P500 billion), was perpetrated by a person once a non executive director of the NASDAQ stock exchange, who was widely regarded as the epitome of clean business. Madoff used a scheme, which lures investors in by guaranteeing unusually high returns. The name originated with Charles Ponzi, who promised 50 percent returns on investments in only 90 days.
Ponzi schemes are run by a central operator, who uses the money from new, incoming investors to pay off the promised returns to older ones. This makes the operation seem profitable and legitimate, even though no actual profit is being made. Meanwhile, the person behind the scheme pockets the extra money or uses it to expand the operation. To avoid having too many investors reclaim their "profits," Ponzi schemes encourage them to stay in the game and earn even more money.
Bringing it back home, Botswana has not experienced misconduct in the pension fund sphere, “by the grace of God,” as an observer has put it.
And now the pension fund sector will be required to be more transparent, communicate better and be more explicit in laying out how it operates, because of new legislation.
Parliament last year, approved the Retirement Funds Bill of 2014 which will regulate pension funds in Botswana. The Act will repeal the Pension and Provident Funds Act and re-enact it under a new name, the Retirement Funds Act.
The latest available figures show that management companies and asset managers held total Assets Under Management of P59.7 billion as at March 31, 2014 being a 7 percent growth from P55.9 billion recorded as at March 31, 2013.
In a question and answer session with BusinessPost, the organisers of a workshop aimed at familiarizing industry stakeholders with the new Act, gave some insight on the new Act.
“The big stick here is that those who breach this Act will face punitive action,” said Jeremy Andrew, the facilitator of the workshop, who had an integral role in the drafting of the new law.
“Many will say that NBFIRA is toothless; this new law gives it the power to perform its oversight role,” Andrew said succinctly.
“What has impressed me most is that code of conduct as it has come to make the trustees to look more inwardly and ask themselves if they are doing the right thing,” explained Edna Dambe, CEO of Money Matters, the facilitators of workshop to school local service providers in the pension fund spectrum, on the ramifications of the new legislation.
“It is a service they have promised and they are going to append their signatures to this promise. If you look at how the required communications, investment and risk policy feed into each other, they really offset the possibility of making risky investments with members’ monies,” said Dambe.
Juliana White, an independent consultant said that the new Act would not only bring transparency, it will ensure that there are no perceptions of malpractice.
“Investment strategies should be laid out so that there are no questions about investments that are made; members of the funds will see for themselves that investments made are in line with the investment policy,” said Mrs White.
In the period ended December 31, 2013 there were ninety-three (93) active Standalone Pension Funds licensed in Botswana, including six (6) Umbrella Funds with two hundred and fourteen (214) sub-funds. On the part of asset managers, Afena Capital managing director, Bakang Seretse, said that they “highly embrace new Act as it improves the whole ecosystem of retirement funds.”
Seretse said that with the law requiring service providers to be locally domiciled or having their principal offices in Botswana, it gives the regulator the power to perform its role of oversight.
“Botswana is approaching a period of transition and structural changes. So the challenge for pension funds, regulators, service providers such as ourselves, and Government is to reassess how to best achieve the investment objects of retirement fund long-term savings with a consideration for the long-term development objectives of the country,”
“Yes, pension Funds are already being used in Botswana to finance infrastructure projects, real estate development and other forms of private equity. Yet, the average asset allocation to these alternative asset classes is still relatively low for most pension funds at below 2 percent so there is definitely scope for more “new investments” to be designed to create long term, sustainable opportunities,” Seretse said.
However, a public servant who preferred to remain anonymous, told this publication that the reduction of the number of board members is actually a reduction in the representation of employees as the public service is a very broad constituency that needs represented well.”
“I prefer the Namibian model that sets out two boards for every fund; one that oversees governance and another that oversees investments,” said the source.
“Currently there is some semblance independence as the different committees; with the new Act, there will be no segregation of roles as the same few people will sit in the same committees and oversee themselves.” Seretse said the new legislation goes a long way in addressing some of the risks associated with the industry.
The regulator, NBFIRA (Non Bank Financial Institutions Regulatory Authority), articulated in its 2014 annual report that the pension fund landscape in Botswana are faced with risks such as:
Interest Rate Risk: The possibility that the demand for money market instruments may decline due to an increase in interest rates. Increased interest rates mean less borrowing by consumers;
Concentration Risk: Of the twelve (12) registered asset managers; seven (7) handle pension funds, six (6) of which are mandated to manage the government pension funds.
This exposes the Asset Managers to concentration risk as they are largely dependent on the one client;
Valuation Risk: The local market faces risk in the companies’ valuation processes and abilities, arising from the fact that the processes are carried out by the group companies in South Africa while local staff is not fully equipped with knowledge of the processes and consequently, are unable detect marginal errors as only reasonability tests are performed;
Over Reliance on Group or Foreign Counterparties: Asset Managers and Management Companies that are part of a group or have foreign counterparties tend to adopt groups policies and fail to align them to the specific businesses they are undertaking, resulting in policies that do not capture the essence of their operations.
Regulatory Challenges: The key challenge for the Investment Institutions section is the process that is undertaken in the promulgation of legislation, this process has delayed the section’s efforts to issue licenses to CMIs (asset managers).
Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry started gaining positive momentum towards the end of the year as key markets entered into thanks giving and holiday season.
However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.
The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.
The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.
This halted movement of buyers and shipment of the rough goods , resulting in unprecedented decline of sales, in turn ballooning stockpiles as the upstream operations produced with little uptake by the midstream.
The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.
However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.
De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.
Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.
De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.
“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.
The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.
The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.
Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.
“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.
In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”
All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.
After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.
However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.
Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.
These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.
For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.
Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.
The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering the year 2020 – a 12 months stretch of complete setback.
The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.
National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.
As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.
On the other hand the COVID-19 economic mess is prevailing, the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.
According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.
However reports indicate that the account could be currently holding just about P3 billion. The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.
When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a 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.
Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.
Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.
Meanwhile should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian aids and international donors, because foreign reserves are also on slow down.
During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.
The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020. This was revealed by President Masisi during State of the Nation Address in November last year.
The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.
However latest statistics(October 2020) from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with government’s share of these funds significantly low.
Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.
Furthermore, Value Added Tax has been signaled to go up from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.
Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio. The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.
CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.
CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.
“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.
“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”
Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities. We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.”
CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour. Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.