The nation is battling the devastating impact of COVID-19, with a bit of panic and extended lockdown period in May, the economy is bleeding heavily.
But what should inject Botswana with more anxiety is that the economic growth “will be lower than anticipated and might even result in a recession,” according to a report made by Botswana Insurance Holdings Limited (BIHL).
“The operating environment deteriorated substantially since mid-March 2020 as government instituted measures aimed at controlling the spread of the Coronavirus. A global recession is now predicted by most economists and Botswana is not an exception,” said BIHL.
According to BIHL business status report, the gloomy picture of economic projections poses a risk to growth in new business volumes as well as persistency experience. Increased pressure on corporate earnings will also heighten credit risk.
“New business volumes are furthermore restricted by lockdowns in markets where investee companies operate thus limiting advisors’ ability to conduct business,” according to the financial services company.
BIHL says equity, bond and currency markets across the globe are expected to remain volatile in the foreseeable future. Also, the impact of the downgrade by Moody’s of both the South African and Botswana sovereign ratings is yet to be seen but might add to volatility of asset prices especially in the South African market.
“The Average investment market levels, the exchange rates and the level of long-term interest rates are key factors that may have an impact on operational earnings and Group Equity Value to be reported for the six month to 30 June 2020 and the year ended 31 December 2020,” said BIHL.
Counting the cost of COVID-19
According to BIHL business report, the virus (COVID-19) is likely to impact the following key sources of revenue for the nation of Botswana. Like when Botswana’s influential economic partner South Africa is in lockdown and could be heading into the pit of recession with other economies.
SACU will bring less or no revenues to Botswana as one of COVID-19 measures is to lock the borders, said the financial services players. BIHL also said this week that not only this country will lose on customs, the second biggest revenue source, but also on the economic mainstay, diamonds, as its sales will be low and impact this country’s purse.
“The tourism sector is likely to be hard hit by the travel bans/restrictions which are being imposed across the world. Due to limited business activity especially during the lockdown period, we expect job losses and an increase in the unemployment rate, which is already high at 20 percent particularly in the youth,” said BIHL.
In the report the company further says it expects households to be under significant financial pressure leading to reduced spending and increases in debt arrears. SMME’s will be severely impacted, and we expect many to go out of business unless they are supported, said the financial services company.
In March, few weeks before Botswana lockdown, BIHL Group CEO Catherine Lesetedi presented BIHL financial results and took the podium with a huge smile saying, “the numbers speak for themselves,” as the financial giant held high a profit after tax which went up by 19 percent from the previous financial year. BIHL closed the year at over P434 million compared to P366 million registered in the prior year before having to battle with the ripple effects that are expected to come with COVID-19 in this current financial year to the next financial years.
After the success the BIHL board is aware that now the country or the whole world is at uncertain times and assures shareholders in its business update that it will remain resilient in the midst of an economically depressing pandemic. “BIHL is well positioned to weather the current conditions – we have a solid balance sheet; strong operational processes and the skillsets to navigate these tough times,” said the company when presenting its first quarter performance.
The financial services company is grateful of Botswana Life Insurance Limited, according to its report on its financial performance for the first quarter of the 2020 financial year and the possible impact of COVID-19 on BIHL’s operations and financial position.
According to BIHL, Botswana Life Insurance Limited is the largest business in its stable and accounts for 99 percent of the Group’s Capital Requirements (CAR).The BIHL Group’s CAR cover as at 31 December 2019 was 7.1 times and this provides the group with sufficient capital buffer should the volatility in markets and other COVID-19 related impacts on operations result in reduction in the value of assets backing CAR, or in an increase in the required capital.
BIHL’s operations have been classified as essential services and during the lockdown period, the company will operate on a limited staff basis, with only core staff on site.
According to BIHL, to date there has not been any impact on claims and persistency within the company. The BIHL Company and Group have considered and taken a stance to accept COVID-19 related claims when they do eventually occur.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at 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. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”