Banks and micro-lenders like Letshego will be one of the big beneficiaries when government effects the second leg of the civil servants on April 1st, this was observed by Motswedi Securities experts recently.
Last year after trade unions and government sat down for salary negotiations, it was announced that for the financial year 2019/20 there be an increment of 10 percent for scales A and B , 6 percent for scales C and D, effective 1st April 2019. It was also announced at the same time that there will be the same manner of increment for the financial year of 2020/21, civil servants are still waiting.
When commenting on the recently released Letshego 2019 final financial results on Monday, Motswedi Securities experts said: “We are expecting the second leg of the Botswana civil servants salary increments to be effected on the 1st of April – this will likely play well into growing the retail loan book as is in line with the Group strategy. Otherwise, the group will maintain its core business of deduction at source while also looking to diversify its product offering.”
Letshego is a major lender of government and state owned companies employees who make a larger percentage of the working class in Botswana. Last year the micro-lender’s deduction code ensured that before salaries were credited into accounts of civil servants, instalments due to Letshego were collected by government workers and paid as a lump sum to the micro lender, which decreased or eliminated chances of defaults. Hence why the micro-lender has kept a fair loan book with few defaults as impairments were kept at bay according the 2019 financial results. Botswana’s Household Debt is currently standing at USD 3.6 billion.
However renowned rating agency, Moody’s Investor Service is very sceptical of this system of deduction of loan payments at source from the public sector employees because governments may change terms and regulations or impose restrictions on such platform of loan collection hence leading to a sharp rise in bad debts and impairment costs. Moody’s said this could lead to negative rating pressure being exerted on Letshego's rating if regional authorities in the company's main operating markets change the terms of loan collections from public servant.
According to Moody’s, as of June 2019 Letshego offered payroll loans to around 20 percent of Botswana’s civil servants which was less than the Namibian government workers’ 47 percent. Mozambique government employees who were offered payroll loans last year were around 23 percent. Letshego’s loan book is topped by Botswana being high at 29 percent, followed by Namibia contributing to the micro-lender’s lending by 23 percent. Rwanda does not contribute anything to Letshego’s loan book currently, while Nigeria only adds a percent.
Letshego has just woken up from a human resource fracas with exodus of top management, failing to keep a CEO for more than a year. Motswedi Securities highlighted the bright side was marked by some improvement from the prior year’s numbers, with Profit After Tax up 35 percent at P691 million from P510mn, driven by a 93 percent spike in non-interest income and a 53 percent cut in the expected credit losses. The Letshego EPS climbed to 29.2 thebe, while RoE went up 16 percent and RoA went up to 6 percent.
Letshego has 2,144,045,175 shares in offer and was trading at P0.90 with a market capitalization of 1,929,640,658. Last year just when this country was going for national polls, Letshego saw the biggest decline in its share price, losing 51.2 percent. Letshego’s 12 month low is P0.70 while its high is P1.62. “Letshego achieved growth in both income and profits in 2019, with profits after tax enjoying a strong resurgence on 2018. This is against a backdrop of a challenging year for Letshego following unexpected changes in the Group’s senior leadership team and new regulatory regimes in some of its markets.
The focus for the year was on embedding the strategy to deliver positive performance through maintaining stability, cost control, improving portfolio collection quality and stabilizing the effective tax rate," said Letshego directors. Letshego has declared final dividend of 7.7 thebe per share for the year ended 31 December 2019. The micro-lender shares go ex-dividend from 27 April 2020, while last date to register is 29 April 2020 before dividend payment date on 11 May 2020. Going forward, according to Motswedi Securities, the group maintains its stance on expansion and will not be increasing its footprint across Africa, it will remain present in 11 countries on the continent. One of the key deliverables noted by the incoming CEO Andrew Okai according to Motswedi, include a 10 percent growth in the top line while maintaining the cost to income; cost of credit to sit at around 2.5 percent, push RoE to 20 percent; and reduce the effective tax rate to a target rate of 35 percent (2019: 39%, 2018: 50%).
Respected rating agency Moody’s assigned a Ba2 Corporate Family Rating (CFR) and Ba3/Not Prime issuer ratings to Letshego two weeks ago. According to the rating agency, the outlook on Letshego is stable. “The Ba2 CFR captures the company's solid capitalisation and profitability, supported by its niche, low-cost, franchise. They also capture Letshego's growing diversification across regional countries, which makes the company more resilient to an adverse change in any of its operating markets,” said Moody’s.
According to Moody’s, Letshego’s strengths enabled it to overcome challenges such as narrow business models with high reliance on payroll deductions for loan repayment collections. Letshego also has high exposure to foreign exchange risk. The micro-lender has elevated asset quality risks. According to Moody’s, Letshego's expansion in other sub-Saharan markets, client segments and products, results in a material weakening of asset quality and profitability metrics. Letshego has a major challenge by its dependence on market-sensitive wholesale funding, Moody’s acknowledges that the micro-lender has put on action to address this weakness.
The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.
In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.
“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.
“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”
Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.
“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.
“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.
“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”
Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.
“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.
While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.
“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.
Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.
PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.
In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.
Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.
Maturing VAT system and upskilling SARS
“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”
Broadening the tax base and digital economy
In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.
South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.
ESG and carbon tax
Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.
In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.
Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.
With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”
The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.
Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.
Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.
Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.
According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.
The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.
She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.
The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.
Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.
In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.
According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.