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.
There is a fast developing case of a depleting government current account which in the twilight of last year recorded a mammoth deficit of P6.6 billion compared to a revised deficit of P485 million during the corresponding period in 2018.
The economic shock occasioned by COVID-19 on the global diamond market has delivered the heaviest blow to Botswana’s wholly state owned Okavango Diamond Company (ODC), the worst since its establishment in 2012.
While other diamond operations across the value chain gradually reopen, ODC will remain closed until diamond market conditions fully recover. This was revealed by Permanent Secretary in the Ministry of Mineral Resources, Green Technology & Energy Security, Mmetla Masire this week.
Following a slow year for the global diamond industry in 2019 owing to the US-China trade war, the industry realized a slight upswing in the first month of 2020, spilling over from recovery signs in late 2019.
However all that was reversed by COVID-19. The virus, which broke in late 2019 in the Wuhan province of China intensified in February, spreading across the world, curtailing movements and international travels.
With the diamond industry, global lockdowns and travel restrictions resulted in muted rough diamond trade, closure of cutting and polishing firms, jewelry outlets and other segments of trade across the value chain.
Mmetla Masire noted that key markets like India are still relatively closed with little demand for rough import for those in operation, as inventories are still swamped up with stock piles. “ODC will remain closed because demand of rough diamonds globally is still very low, so ODC management took a decision to remain closed until demand fully recovers,” he said.
Masire reiterated that major markets for Botswana diamonds such as United States are still on lockdown. He said, “ODC sells its diamonds through auctions; it is still very difficult to hold auctions as of now, so the company will remain closed, with management working from home.”
Okavango Diamond Corporation (ODC) is a wholly state owned diamond marketing and sales company established in 2012 to sell Botswana diamonds outside De Beers’s channels and price books.
ODC markets and sells 15 % of Debswana diamonds after being sorted and valued by Diamond Trading Company (DTCB), while 85 % is sold by De Beers Global Sightholder Sales (DBGSS). Debswana and DTCB are 50-50 ventures of De Beers Group and Botswana Government. DBGSS is wholly owned by De Beers Group.
Botswana Government has a direct 15 % stake in De Beers Group, the remaining 85 % of De Beers Group is owned by Anglo American. Over 60 % of De Beers global production comes from Botswana (Debswana). Meanwhile Debswana, Diamond Trading Company (DTCB), De Beers Global Sightholder Sales (DBGSS) have opened and resumed operations at 60- 70 % workforce.
Mmetla Masire further revealed that DBGSS has started shipping some diamonds to their sightholders in a bid to cultivate market and trading activity amid COVID-19 imposed new normal.
OKAVANGO BLUE YET TO SELL
Okavango Diamond Company has also deferred the sale of Okavango Blue, the magnificent oval shaped blue diamond weighing over 20 carats, unearthed at Debswana Orapa mine at over 40 carats rough weight in 2018.
The sparkling Type IIb ‘Fancy Deep Blue’ unveiled to the world in Gaborone as 20 carats polished last year is yet to sell as demand and prices are still very low to inspire purchase of such a magnificent gem.
The Gemological Institute of America (GIA), has graded the diamond as an Oval Brilliant Cut, VVS2 clarity making it one of the highest polished colour classifications attainable for any blue diamond and at 20.46 carats it sits in the very top bracket of all-time historical blue diamond finds.
Its unique and vibrant blue colour, is created by the molecular inclusion of the rare mineral boron which between 1-3 billion years ago was present in the rocks of ancient oceans during violent diamond forming volcanic activity. Okavango Blue will be showcased over the coming months to promote Botswana as a leading global producer of natural ethical diamonds with an anticipated sale toward the end of the year.
GLOBAL DIAMOND INDUSTRY CRISIS
A couple of months into serious measures to slow the spread of the virus, it has already squashed diamond miners’ dawning hopes of a recovery. Alrosa the world’s largest diamond producer by output, last week reported 95% decline in sales during April, when gauged against the same months last year. This resulted the Russian state-owned deciding to halt production at two of its mines, citing worsening market conditions.
De Beers, the world’s largest producer by value, cut 2020 production guidance by a fifth last month. It had earlier cancelled its April sales event. Canada’s Dominion Diamond Mines, the controlling owner of Ekati mine and a 40% partner to Rio Tinto in the Diavik mine, filed for insolvency protection in April.
Lucara Diamond another Canadian company, posted last week a net loss of $3.2 million, or $0.01 a share, for the first three months of the year. The figure was in sharp contrast with the $7.4 million in net income, or $0.02 in earning per share the miner reported in the same period last year.
South Africa’s Petra Diamonds has recently delayed interest payments to borrow $21 million in new debt, a crucial move to keep the company afloat. Investment banks are increasingly reluctant to extend credit to diamond producers, as inventory is not being sold and defaults are possible, analysts have warned.
“We are concerned about oversupply of rough diamonds following the reopening of economies, as a lot of inventory could potentially be flooded into the system and the market might not be able to absorb all of it, resulting in increased pricing pressure,” said leading European diamond industry think tank, Learnbonds in a statement early this month.
Botswana Stock Exchange (BSE) listed property group, Turnstar Holdings Limited will in the year 2020 focus on domestic growth plans as opposed to further global expansion aspirations which were initially planned for the year.
In their abridged audited Group financial results for the year ended January 2020, Turnstar Managing Director, G H Abdoola said COVID19 will affect lives and businesses in every form until it is brought under control.
“My mission for 2020 was to make Turnstar the largest and most profitable property company on the Botswana Stock Exchange. We have done a lot of work on our growth strategy in the countries we operate in, and identified new opportunities in other countries.”
Abdoola says Coronavirus has brought with it, lessons that will change the way of thinking permanently. He said, “The crisis must not make us panic and helpless. It must make us strong and focused. Each business needs to do the best it can in these circumstances, and rise to the challenge.”
He explained that Turnstar wil continue to strive to achieve its goal of being the largest listed Property Company, by the end of 2020. “We had plans with regards to growth in Botswana, Tanzania, Dubai & Europe, specifically Portugal. At present, this year, we will focus on Botswana until the Corona Virus pandemic has been brought under control,” he said.
Abdoola added, “Only then can we make informed decisions on our future plans. I will keep updating the public and our partners about our plans.” According to the Turnstar Managing Director, unprecedented times such as these require Companies to plan to stay resilient and strong. He revealed that there are various approaches and instruments available to Turnstar management to cushion revenue drop in the business.
The first being “self-help” – what Companies are doing to “help themselves”. The second being restructuring of finances and loans with Banks to suit the revised cash flows. The third being accessing any Government stimulus relief that is being offered.
Abdoola shared that Turnstar is implementing all the self-help steps that are available to keep the Company liquid and strong. The company has paid interim dividend of 9t per linked unit, for the first half of the financial year 31 January 2020.
Turnstar will not pay a final dividend, as has been traditionally done since the inception of the Company. The Managing Director said, “We have prepared cash flow projections based on best case and worst case scenarios, and we are very comfortable that the Group has the financial strength to survive even the worst case scenario.”
He however added that the situation will require management to be prudent and retain cash within the Company, to tide over these difficult times, when trading conditions are almost impossible to forecast.
Abdoola explained that the Company is looking into all areas to try and save costs wherever possible noting that Management will waive their bonuses in the current financial year.
For the financial year ended January 2020, Turnstar has posted satisfactory results, according to company management. The Botswana rental revenues have increased by P 7.7m (5.5%) whilst operational expenses only increased by 3.3%.
The Group operational expenses have been contained. The vacancies in the Commercial Office space in Dar es Salaam, has affected the Group results. The refurbished conference center performed well during the year.
The retail mall is performing to its optimum capacity. The Dubai property continues to perform well. Turnstar is continuously seeking opportunities to expand its property portfolio. Due to the vacancies in the Commercial Office space, Mlimani Holdings has reported a Fair Value loss for the year.
“It should be noted that Fair Values are calculated on current rentals, projected into the future on a discounted cash flow basis. It does not reflect the actual cost of the buildings, and may change from year to year, depending on occupancy levels” explained Turnstar Boss.
The Botswana properties recorded Fair Value Gains. However, due to the Mlimani fair value loss, the Group recorded an overall fair value loss for the year.