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Sub-Saharan Africa debt level Surges – Moody’s

Following a sharp decline in government debt from multilateral debt-relief initiatives in the last decade, primary fiscal deficits, currency depreciation as well as the materialization of contingent liabilities in some countries, has driven an accumulation in SSA sovereign debt since 2012.

This is according to a report by Moody's Investors Service released last week. The Global think tank says while containing debt-servicing costs in the near term, relatively favourable financing conditions in recent years have encouraged spending and debt accumulation especially for infrastructure investment. “Between 2012 and 2018, government debt-to-GDP ratios increased by at least 15 percentage points in almost two thirds of the sovereigns we rate in SSA and by at least 30 percentage points in about one third.” Reads the report released from UK this week.

Moody’s says Government debt now exceeds 50% of GDP in more than half of the region's rated sovereigns. Angola, Mozambique, Zambia and the Republic of the Congo are among the sovereigns that have experienced the most rapid accumulation of government debt since 2012. The report further reveals that drivers behind the debt increase vary, including disclosure of hidden debt in the case of Mozambique, exchange rate depreciation inflating the foreign-currency denominated debt in the case of Angola and Zambia as well as persistent fiscal deficits.

Sub-Saharan African sovereigns' debt has increased and affordability has deteriorated, with government debt now exceeding 50% of GDP in more than half of the sovereigns we rate in the region," said Daniela Re Fraschini, a Moody's AVP-Analyst and the report's co-author.
"At the same time, a shift in creditor bases has increased credit risks in several countries. He said

Moody's Investors Service says although the debt burdens of most Sub-Saharan Africa (SSA) governments will stabilize in 2020-21 after years of increase, several sovereigns are now increasingly vulnerable to a financing shock. Credit risks are highest in countries where unfavourable debt structures coincide with narrow external buffers, financing constraints on domestic banking sectors and weak debt-management capacity. The Republic of Congo, Mozambique and Zambia are most exposed, while Ghana, Angola and Kenya are also vulnerable but to a lesser extent.

With countries having greater access to capital markets, issuance on domestic and international capital markets has increased and the share of borrowing from multilateral lenders has fallen. Although this has diversified funding sources, fostered investor scrutiny on macro-fiscal policy and provided funding for development spending, Moody’s says it has also increased exposure to global financing conditions, amplified foreign-currency exposures and increased refinancing risk. At the same time, in some countries bilateral lending has shifted toward non-traditional creditors that usually offer less transparent and predictable terms.

Daniela Re Fraschini says the domestic banking sector remains the main holder of domestic bonds and a significant portion of total government debt and its absorption capacities may be limited, especially when the sector is small relative to the sovereign's financing needs. Fraschini however says its absorption capacities may be limited, especially when the sector is small relative to the sovereign's financing needs like in Kenya and government securities already account for a large share of assets.

In Ghana and Zambia, relatively high foreign participation in the domestic market intensifies the vulnerability to shifts in investor appetite. “Improvements in debt management have not been commensurate to the risks from higher debt levels and debt structures more exposed to financing shocks” he said

The composition of public debt in terms of maturity, interest rate and currency structure and the existence of explicit or implicit contingent liabilities determine a government's resilience to domestic and external shocks, and is an important consideration in our assessment of fiscal strength, government liquidity risk as well as external vulnerability risk.

Moody’s assessment of fiscal strength typically incorporates the vulnerability to adverse currency movements leading to an increase in the sovereign’s overall debt burden and a decrease in its debt affordability by measuring the share of foreign-currency debt. Debt affordability and contingent liabilities that pose substantial risks to a government’s balance sheet are also captured in the assessment of fiscal strength. Moody’s further assess government liquidity risk focusing on the sovereign's ease of access to funding, taking into account the maturity and cost structure, the currency mix and the creditor base.

Assessment of external vulnerability risk takes into account external imbalances, large reliance on short-term capital inflows to finance the current account deficit that can result in depreciation pressures and the adequacy of foreign reserve buffers to meet foreign currency payments.

Moody’s says amid favourable conditions in global financial markets and increased foreign interest in domestic debt markets, governments in SSA have shifted their borrowing strategies away from international financial institutions and traditional bilateral official creditors to private creditors.  The decline in the share of multilateral debt since 2012 has been most pronounced in Ghana, Kenya, Nigeria, Senegal, Uganda and Zambia. Sovereigns that have reported an increase in multilateral financing include Gabon and Niger

A total of 15 governments in SSA issued international bonds between 2010 and 2019, several on a repeated basis with sizeable issuances. “The eurobond issuance of the SSA sovereigns of countries rated by Moody’s reached a record high $19.2 billion in 2018, more than triple 2016 levels. Sovereigns across the region have tapped international bond markets for different reasons including supporting the development of the corporate bond markets in countries such as South Africa and Nigeria and mostly for financing the increase in public investment

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Debswana-Botswana Oil P8 billion fuel partnership to create 100 jobs

18th May 2022
Head-of-Stakeholder-Relations

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.

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VAT in Africa Guide 2022 – Africa re-emerging

18th May 2022

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.

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Economists project lower economic growth for Botswana

18th May 2022
CBD

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.

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