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Friday, 19 April 2024

The first rate cut should have been the deepest – economists

Business

Bank of Botswana(BoB)’s Monetary Policy Committee(MPC) decision to reduce the Bank Rate by 50 basis points (bps), from 4.75 percent to 4.25 percent was met with mixed reactions.

Former deputy governor Dr Keith Jeffries told BusinessPost this week that there is no big problem with the cut as he sees the bank taking a “cautious approach” towards monetary policy in this current situation. He told this publication that the Bank made a substantial cut and believes a deeper cut, another slash in the future, will be made if there is any dramatic inflationary change. To him the small cut was to leave a room for another, soon.

However some economists were last week not satisfied with the 50 bps cut, saying it is marginal and would not reach its intended purpose. Local economist Othata Batsetswe in an interview with this publication sees the 50 bps cut as “too marginal.”

“The impacts of COVID-19 requires a much better adjustment, maybe 100 bps. South Africa has opened up its economy stimulation much wider with cut by 100 bps, for example. The cut should be big enough to trigger borrowing in the economy especially target to sectors that can stimulate growth,” said Batsetwe.

Just before the rate cut last week, commercial banks were modest in their expectations from the central bank with regards to the cut. When they were both interviewed by BusinessPost Absa Botswana and First National Bank Botswana (FNBB) chief economists, respectively Naledi Madala and Moatlhodi Sebabole envisaged a 50 bps cut. And the central bank shed just in that margin last week.

But the reaction to the rate cut has now changed, spelling unsatifaction from some banks and economists like Batsetswe.  In their recently released MPC review FNBB wanted an even deeper cut rate, doubling its expectation, and hoping for 100 bps.

In a research seen by this publication chief economist, Moatlhodi Sebabole and Gomolemo Basele, a quantitative analyst shared that their “view” was that BoB will shed the rate by 100 basis point, meaning that FNBB wanted the cut to go from 4.75 percent to 3.75 percent. Sebabole and Basele also initially envisaged a 75 bps cut.

According to the duo’s analysis, the anchored inflation prospects and growth pressures within Botswana’s trading partners, which include South Africa, Namibia and the US, throughout 2020 have resulted in broad- based easing in these markets in the first quarter of 2020, and this also gives Botswana a knife to trim down on the rate, making a deeper cut.

“These factors provided the BoB with room to cut rates without altering real interest rate differentials from their historic averages. The local inflation profile and growth forecasts lead us to believe that the BoB can cut rates by an additional cumulative 75 bps in 2020 to take it to new historical averages of 3.5 percent for the rest of 2020,” said Sebabole and Basele.

According to the two experts, these rate cuts provide relief to existing debt cost pressures as well as stimulate some asset purchases, but structural limitations to monetary transmission will have to be addressed for a better signaling effect on economic growth indicators. Sebabole and Basele however acknowledges that the interest rate cuts will not be sufficient to address the economic disruption caused by covid-19 but will complement the fiscal efforts aimed at rescuing and stimulating the economy.

According to Basele and Sebabole, the reduction of the bank rate is in part a coordinated fiscal and monetary policy response to covid-19 as GDP estimates are now significantly lower.

“We have revised our economic growth forecast for Botswana to -10.5 percent y/y (previously 3.6percent) in 2020 – with risks to the downside due to the uncertain economic environment, which should it persist – we anticipate that growth will dip as low as -16.1 percent y/y (bear-scenario),” said their research.

FNBB economic brains explains why interest rates will remain at bottoms

According to Sebabole and Basele it should be noted that headline inflation continues to breach the central bank’s lower inflation objective of 3.00 percent, printing at 2.20 percent in March, and it will be remaining at this level for a fourth consecutive month.

Also, personal income and credit growth remained muted in the first quarter of 2020, resulting in restrained domestic inflation as group indices within the national consumer index reflected changes of less than 1.00 percent, according to the two economists.

“Core inflation was also unchanged between January and March, at 2.70% y/y, reflecting muted demand-pull pressures as household spending remains concentrated on necessities such as food, housing and utilities,” said the two.

Furthermore timid demand prospects for household consumption or dwindling consumer confidence will also keep inflation contained in 2020, FNBB said. This means, according to the bank’s experts, coupled with lower fuel prices which will come as a blessing for the transport index in sustaining low inflationary levels.

“The lower South African inflation outlook and a weaker rand also means limited FX inflation pass-through – while risks to the upside remain negligible. These factors inform our view for inflation to average 2.20 percent this year – with a trough anticipated at 1.68 percent by the first quarter of 2020,” according to Sebabole and Basele.

Sebabole and Basele in their research expect credit growth to remain dwarfed, and to remain below 7 percent in the next two year. Mostly household will bear the brunt of this subdued two year credit growth, they said. According to the two, household demand is expected to be low and below 4 percent and this will not be enough to light up demand-push pressures to inflation.

Sebabole and Basele argued that the postponement of the 2020/21 public workers salary wages by government will further affect household growth to consumption and output. According to the two the increment could have relieved some pressure on disposable income levels.

There will also be the slow growth in personal incomes across the employment workforce as well as minimal employment growth and all these will limit the extent of growth to consumption and output.

“The below-trend GDP growth patterns, stubbornly low inflation dynamics and subdued demand and output prospects all point to our fundamental view that the bank rate will trend lower in the short- to medium-term. It is our view that the bank rate will trend lower to 3.50 percent in 2020 (now at 4.25n percent) – with further cuts anticipated in the next few months,” said the FNBB duo.

BoB on downward crawl adjustment of 2.87 %

Another significant decision that BoB took last week would be the reduction of the primary reserve rate from 5.00 percent to 2.50 percent to inject an additional P1.6 billion excess liquidity in to the market, and an adjustment of the Pula crawl further downwards to 2.87 percent.

But FNBB is not that satisfied by those adjustments. The bank’s researchers said while the fundamentals provide an impetus for further rate cuts, they note that those cuts would have little to no impact on the pula outlook. This is because, according to Sebabole and Basele, as the currency regime is a pegged currency with a crawl and thus does not react in a similar way to freely floating currencies.

“The pula is pegged 45 percent to the rand and 55 percent to the IMF SDR and BoB recently indicated that the crawl has been adjusted further to a downward crawl of 2.78 percent p.a. effective May 2020 from a downward crawl of 1.51 percent p.a. which was announced in January 2020.

In our view, this adjustment to the crawl makes little difference to the pula outlook nor does it affect our view on the bank rate – the pula will be 3.17 percent weaker at the end of 2020 (from 1.81 percent weaker, which we estimated at the crawl adjustment in January) than it would have otherwise been –a difference that can be seen in a single day’s trading for volatile and free-floating currencies in the pula peg like the rand,” said the two experts.

The two however acknowledged that the crawl adjustment pushes up our fair-value estimates on yields by around 1.36 percent across the curve and could result in slight increase to inflation. They said that the pula will remain mostly a function of the rand and the US dollar, therefore the pula outlook will not be a main consideration in the decision to cut rates.

“The rand’s weight in the basket has been reducing in the past years – however, it remains the dominant determinant of the pula outlook. This is because the rand accounts for around 80 percent of USD/BWP volatility – evident even in the almost perfectly correlated USD/BWP and USD/ZAR, which shows the extent of the influence of the rand on the pula,” FNBB researchers said.

Business

LLR transforms from Company to Group reporting

9th April 2024

Botswana Stock Exchange listed diversified real estate company, Letlole La Rona Limited (“LLR” or “the Company” or “the Group”), posted its first set of group financial statements which comprise the Company and Group consolidated accounts, which show strong financial performance for the six months ended 31 December 2023, with improvements across all key metrics.

The Company commenced the financial year with the appointment of a Deputy Chairperson, Mr Mooketsi Maphane, in order to bolster its governance and enhance leadership continuity through the development of a Board and Executive Management Succession Plan.

At operational level, LLR increased its shareholding in Railpark Mall from 32.79% to 57.79% and proudly took over the management of this prime asset.

The CEO of LLR, Ms Kamogelo Mowaneng commented “During the period under review, our portfolio continued to perform strongly, with improvements across all key metrics as a result of our ongoing focus on portfolio growth and optimisation.

“We are pleased to report a successful first half of the 2024 financial year, where we managed to not only grow the portfolio through strategic acquisitions and value accretive refurbishments but also recycled capital through the disposal of Moedi House as well as the ongoing sale of section titles at Red Square Apartments. The acquisition of an additional 25% stake in JTTM Properties significantly uplifted the value of our investment portfolio to P2.0 billion at a Group level. Our investment portfolio was further differentiated by the quality of our tenant base, as demonstrated by above market occupancy levels of 99.15% and strong collections of above 100% for the period”.

The growth in contractual revenue of 9% from the prior year’s P48.0 million to the current year P52.2 million, increased income from Railpark Mall, coupled with high collection rates, has enabled the company to declare a distribution of 9.11 thebe per linked unit, which is in line with the prior year.

 

In line with its strategic pillars of ‘Streamlined and Expanded Botswana Portfolio’ as well as ‘Quality African Assets’, the Group continuously monitors the performance of its investments to ensure that they meet the targeted returns.

“The Group continues to explore yield accretive opportunities for balance sheet growth and funding options that can be deployed to finance that growth” further commented the CEO of LLR Ms Kamogelo Mowaneng.

Ms Mowaneng further thanked the Group’s stakeholders for their continued support and stated that they look forward to unlocking further value in the Group.

 

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Business

Botswana’s Electricity Generation Dips 26.4%

9th April 2024

The Botswana Power Corporation (BPC) has reported a significant decrease in electricity generation for the fourth quarter of 2023, with output plummeting by 26.4%. This decline is primarily attributed to operational difficulties at the Morupule B power plant, as per the latest Botswana Index of Electricity Generation (IEG) released recently.

Local electricity production saw a drastic reduction, falling from 889,535 MWH in the third quarter of 2023 to 654,312 MWH in the period under review. This substantial decrease is largely due to the operational challenges at the Morupule B power plant. Consequently, the need for imported electricity surged by 35.6% (136,243 MWH) from 382,426 MWH in the third quarter to 518,669 MWH in the fourth quarter. This increase was necessitated by the need to compensate for the shortfall in locally generated electricity.

Zambia Electricity Supply Corporation Limited (ZESCO) was the principal supplier of imported electricity, accounting for 43.1% of total electricity imports during the fourth quarter of 2023. Eskom followed with 21.8%, while the remaining 12.1, 10.3, 8.6, and 4.2% were sourced from Electricidade de Mozambique (EDM), Southern African Power Pool (SAPP), Nampower, and Cross-border electricity markets, respectively. Cross-border electricity markets involve the supply of electricity to towns and villages along the border from neighboring countries such as Namibia and Zambia.

Distributed electricity exhibited a decrease of 7.8% (98,980 MWH), dropping from 1,271,961 MWH in the third quarter of 2023 to 1,172,981 MWH in the review quarter.

Electricity generated locally contributed 55.8% to the electricity distributed during the fourth quarter of 2023, a decrease from the 74.5% contribution in the same quarter of the previous year. This signifies a decrease of 18.7 percentage points. The quarter-on-quarter comparison shows that the contribution of locally generated electricity to the distributed electricity fell by 14.2 percentage points, from 69.9% in the third quarter of 2023 to 55.8% in the fourth quarter. The Morupule A and B power stations accounted for 90.4% of the electricity generated during the fourth quarter of 2023, while Matshelagabedi and Orapa emergency power plants contributed the remaining 5.9 and 3.7% respectively.

The year-on-year analysis reveals some improvement in local electricity generation. The year-on-year perspective shows that the amount of distributed electricity increased by 8.2% (88,781 MWH), from 1,084,200 MWH in the fourth quarter of 2022 to 1,172,981 MWH in the current quarter. The trend of the Index of Electricity Generation from the first quarter of 2013 to the fourth quarter of 2023 indicates an improvement in local electricity generation, despite fluctuations.

The year-on-year analysis also reveals a downward trend in the physical volume of imported electricity. The trend in the physical volume of imported electricity from the first quarter of 2013 to the fourth quarter of 2023 shows a downward trend, indicating the country’s continued effort to generate adequate electricity to meet domestic demand, has led to the decreased reliance on electricity imports.

In response to the need to increase local generation and reduce power imports, the government has initiated a new National Energy Policy. This policy is aimed at guiding the management and development of Botswana’s energy sector and encouraging investment in new and renewable energy. In the policy document, Minister of Mineral Resources, Green Technology and Energy Security Lefoko Moagi stated that the policy aims to transform Botswana from being a net energy importer to a self-sufficient nation with surplus energy for export into the region. Moagi expressed confidence that Botswana has the potential to achieve self-sufficiency in electric power supply, given the country’s readily available energy resources such as coal and renewable sources.

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Business

MMG acquires Khoemacau in a transaction valued at P23Bn

9th April 2024

MMG Limited, the Hong Kong-based mining company specializing in base metals, has successfully concluded the acquisition of Khoemacau Copper Mine, a state-of-the-art, world-class copper asset nestled in the northwest of Botswana.

On Monday, MMG announced that the acquisition of Khoemacau Mine in Botswana was finalized on 22nd March 2024. “This acquisition enriches the company’s portfolio with a top-tier, transformative growth project and signifies a monumental milestone in the Company’s journey,” MMG communicated in an official statement published on the Hong Kong Stock Exchange.

Upon completion of the acquisition, MMG remitted to the Sellers an Aggregate Consideration of approximately US$1,734,657,000 (over P23 billion), a sum subject to potential adjustments post-Completion.

In addition to the Aggregate Consideration, MMG, in accordance with the Agreement, advanced an aggregate amount of approximately US$348,580,000 (over P4.5 billion) as the Aggregate Debt Settlement Amount, to settle certain debt balances of the Target Group (Cuprous Capital/Khoemacau).

On November 21, 2023, Khoemacau announced that the shareholders of its parent company [Cuprous Capital] had agreed to sell 100% of their interests to MMG Limited.

MMG is a global resources company that mines, explores, and develops copper and other base metals projects on four continents. The company is headquartered in Melbourne, Australia, and has a significant shareholder, China Minmetals Corporation, which is China’s largest metals and minerals group owned by the Government of the People’s Republic of China.

On December 22, 2023, Khoemacau Copper Mining (Pty) Ltd received the approval from the Minister of Minerals and Energy of Botswana regarding the transfer of a controlling interest in the Project Licenses and Prospecting Licenses associated with the Khoemacau Copper Mine, a result of the Acquisition.

 

The Botswana Competition & Consumer Authority (CCA) on January 29, 2024, notified the market that it had given its approval for the takeover of Khoemacau Copper Mining by MMG Limited.

On January 29, 2024, the CCA issued a merger decision to the market, stating that after conducting all necessary assessments, it was ready to proceed.

The Competition Authority affirmed that the structure of the relevant market would not significantly change upon implementation of the proposed merger as the proposed transaction is not likely to result in a substantial lessening of competition, nor endanger the continuity of service in the market of mining of copper and silver ores and the production, and sale or supply of copper concentrate in Botswana.

Furthermore, the CCA stated that the proposed merger would not have any negative impact on public interest matters in Botswana as per the provisions of section 52(2) of the Competition Act 2018.

Earlier this month, Minister of Minerals & Energy, Lefoko Maxwell Moagi, informed parliament that his Ministry was endorsing the Khoemacau acquisition by MMG Limited. He noted that not only was the company acquiring the existing operation but also committing to an expansion program that would cost over $700 million to double production, create more jobs for Batswana, and increase taxes and royalties paid to the Government.

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