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Heavy reliance on diamonds backfires as Botswana rating drops

The COVID-19 global pandemic which put the world to stand still for 2 months, has delivered some of the worst catastrophic shocks to global economies in history. In sub Saharan Africa, corona virus landed the region into its worst economic recession since 1970, in what the International Monetary Fund – Africa Department calls an “Unprecedented threat to Development”.

What economists and leading minds projected when COVID-19 intensified in March, was that resource based economies would be hard hit by this pandemic compared to non –resource intensive countries. This according to leading minds would be due to restricted international travels, curtailed trade and movement of goods as well as halt in productivity as factories closed worldwide.

Botswana stands out as one of those countries in Africa and by extension the whole world, that depend heavily on resource anchored revenue for government budget and economic activity, worse enough, a finite resource!
The country’s leading economic sectors can somewhat be referred to as industries dependent on consumers luxury spending. At the first sign of COVID19 escalation, these sectors, being mining and tourism started receiving blows, heavy blows far worse than those experienced during the 2008/09 global financial crisis.

The mining sector started receiving a sharp decline in demand of rough diamonds as a result of cautious spending by traders because inventories were getting filled up without downstream uptake. The closing of cutting and polishing firms in China and India exacerbated the situation as wholesale financiers held onto their cash; the crisis was further worsened by closing of jewelry outlets in United States as the country went on lockdown.

Travel restrictions to curb the spread of the virus finished off the industry, sealing the crisis into what will clearly be terrible year for the multibillion dollar luxurious money spinner. For the tourism industry which is Botswana’s second largest contributor to GDP, travel restrictions straight way delivered a heavy blow of completely zero revenue. Safaris, hotels and lodges closed for over 2 months, activities within the sector are unlikely to resume into full peak anytime soon.

According to Moody’s Investor Services, an international rating agency and global think tank, corona virus has only amplified Botswana‘s already risky and vulnerable economic setup. The London based finance and economic minds said the corona virus shock has crystallized Botswana’s vulnerabilities arising from the limited economic diversification given its heavy reliance on a single commodity for growth, exports and budget revenues, slow progress towards economic transformation, and an increasingly rigid expenditure structure in the budget.

Last week on Friday 29th May 2020, the agency released rating action for Botswana, maintaining the A2 long-term local and foreign currency issuer ratings. A2 rating is the sixth highest rating in Moody’s Long-term sovereign ratings. Countries rated A2 are considered to be of upper-medium grade and are subject to low credit risk.

This rating is within the High credit quality bracket, which boasts of strong capacity for timely fulfillment of financial obligations. Possesses many favorable credit characteristics but may be slightly vulnerable to adverse changes in business, economic and financial conditions. Moody’s has however changed the outlook from stable to negative, meaning the rating can go down anytime within a period of six months to two years.

The negative outlook according to the statement reflects increasing risks to Botswana’s fiscal strength due to the severe shock to its growth and the government’s revenue resulting from the corona virus pandemic impact on the economy and the important diamond sector in particular. “Significantly lower growth, much weaker government revenues and higher borrowing requirements will aggravate already deteriorating fiscal trends and risk accelerating the erosion of fiscal buffers,” reads the statement from London.

Furthermore, Moody’s says the disruptions caused by the corona virus will likely slow progress in terms of fiscal consolidation and economic diversification, which are key to preserve the fiscal and external buffers in the longer term. Against a projected GDP growth of about 4 % by local forecasts, COVID 19 has overturned Botswana’s growth prospects to a 13 % decline in economy during the year 2020. Against initial projected revenue of P62.4 billion, Botswana‘s economy is only expected to generate revenue of about P48 billion.

Government has trimmed its budget from P67.6 billion to P59.6 billion. Budget deficit will now shoot up from initial P5.2 billion, 2.4 % GDP to over P10 billion which will now be over 5 % of GDP, well over government threshold of 4%. The decline in government revenue will be attributable to a massive reduction in Mining & Mineral revenue which is anticipated to shrink by over 33 %. The decline in mining and mineral revenue is predominately as a result of halt in rough diamond sales due to travel restriction and stand still in trading across the industry.

The diamond industry is Botswana‘s key foreign income earner and largest contributor to GDP. It was projected that diamond revenue will bring to the table a total of P20 billion, however Government now experts revenue from mineral revenue to only be around P6 billion. Trade & Hotels revenue will go down over 32 %. Manufacturing will go down by 10 %, Transport and communication will decline by over 4 %.Non Mineral tax revenue will shrink by P2 billion from initial projection of P14 billion to P12 billion. Revenue from Value Added Tax (VAT) will go down from P8.6 billion to P7.6 billion.

Moody’s says an upgrade in Botswana’s rating in the foreseeable future is very unlikely given the negative outlook. Botswana ‘s outlook would only change back to stable according to the agency if the current wave of deteriorating fiscal metrics would be countered by credible fiscal measures aimed at rebuilding fiscal buffers in the long term and reduce fiscal vulnerabilities posed by the rigid budget structure.

“The decision to stabilize the outlook may also be supported by evidence of progress in implementing growth-enhancing reforms targeting an improvement in economic diversification and business environment,” says the London based economic think tank. Conversely, indications of challenges in halting the fiscal deterioration after the severe but temporary corona virus shock suggesting a durable deterioration of fiscal strength will likely prompt a downgrade.

Furthermore an increase in financial support to state-owned enterprises that lead to a material weakening of the fiscal metrics would also likely result in a lower rating. Any signs that susceptibility to event risk has increased due to higher liquidity risk resulting from larger gross borrowing requirements or a further deterioration of the external position compared to current expectations will also increase the likelihood of a downgrade.

Moody’s says given Botswana’s strong dependency on the diamond industry for growth, exports and budget revenues, the country is more exposed than peers at the current rating level to the risks associated with the corona virus shock.

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Investors inject capital into Tsodilo Resources Company

25th January 2023

Local diamond and metal exploration company Tsodilo Resources Limited has negotiated a non-brokered private placement of 2,200, 914 units of the company at a price per unit of 0.20 US Dollars, which will provide gross proceeds to the company in the amount of C$440, 188. 20.

According to a statement from the group, proceeds from the private placement will be used for the betterment of the Xaudum iron formation project in Botswana and general corporate purposes.

The statement says every unit of the company will consist of a common share in the capital of the company and one Common Share purchase warrant of the company.

Each warrant will enable a holder to make a single purchase for the period of 24 months at an amount of $0.20. As per regularity requirements, the group indicates that the common shares and warrants will be subject to a four month plus a day hold period from date of closure.

Tsodilo is exempt from the formal valuation and minority shareholder approval requirements. This is for the reason that the fair market value of the private placement, insofar as it involves the director, is not more than 25% of the company’s market capitalization.

Tsodilo Resources Limited is an international diamond and metals exploration company engaged in the search for economic diamond and metal deposits at its Bosoto Limited and Gcwihaba Resources projects in Botswana.  The company has a 100% stake in Bosoto which holds the BK16 kimberlite project in the Orapa Kimberlite Field (OKF) in Botswana.

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Global CEOs Back Plan to Unlock $3.4 Trillion Potential of Africa Free Trade Area

23rd January 2023

African heads of state and global CEOs at the World Economic Forum Annual Meeting backed the launch of the first of its kind report on how public-private partnerships can support the implementation of the African Continental Free Trade Area (AfCFTA).

AfCFTA: A New Era for Global Business and Investment in Africa outlines high-potential sectors, initiatives to support business and investment, operational tools to facilitate the AfCFTA, and illustrative examples from successful businesses in Africa to guide businesses in entering and expanding in this area.

The report aims to provide a pathway for global businesses and investors to understand the biggest trends, opportunities and strategies to successfully invest and achieve high returns in Africa, developing local, sub-regional and continental value chains and accelerating industrialization, all of which go hand in hand with the success of the AfCFTA.

The AfCFTA is the largest free trade area in the world, by area and number of participating countries. Once fully implemented, it will be the fifth-largest economy in the world, with the potential to have a combined GDP of more than $3.4 trillion. Conceived in 2018, it now has 54 national economies in Africa, could attract billions in foreign investment, and boost overseas exports by a third, double intra-continental trade, raise incomes by 8% and lift 50 million people out of poverty.

To ease the pain of transition to its new single market, Africa has learned from trade liberalization in North America and Europe. “Our wide range of partners and experience can help anticipate and mitigate potential disruptions in business and production dynamics,” said Børge Brende, President, and World Economic Forum. “The Forum’s initiatives will help to ease physical, capital and digital flows in Africa through stakeholder collaboration, private-public collaboration and information-sharing.”

Given the continent’s historically low foreign direct investment relative to other regions, the report highlights the sense of excitement as the AfCFTA lowers or removes barriers to trade and competitiveness. “The promising gains from an integrated African market should be a signal to investors around the world that the continent is ripe for business creation, integration and expansion,” said Chido Munyati, Head of Regional Agenda, Africa, World Economic Forum.

The report focuses on four key sectors that have a combined worth of $130 billion and represent high-potential opportunities for companies looking to invest in Africa: automotive; agriculture and agroprocessing; pharmaceuticals; and transport and logistics.

“Macro trends in the four key sectors and across Africa’s growth potential reveal tremendous opportunities for business expansion as population, income and connectivity are on the rise,” said Wamkele Mene, Secretary-General, AfCFTA Secretariat.

“These projections reveal an unprecedented opportunity for local and global businesses to invest in African countries and play a vital role in the development of crucial local and regional value chains on the continent,” said Landry Signé, Executive Director and Professor, Thunderbird School of Global Management and Co-Chair, World Economic Forum Regional Action Group for Africa.

The Forum is actively working towards implementing trade and investment tools through initiatives, such as Friends of the Africa Continental Free Trade Area, to align with the negotiation process of the AfCFTA. It identifies areas where public-private collaboration can help reduce barriers and facilitate investment from international firms.

About the World Economic Forum Annual Meeting 2023

The World Economic Forum Annual Meeting 2023 convenes the world’s foremost leaders under the theme, Cooperation in a Fragmented World. It calls on world leaders to address immediate economic, energy and food crises while laying the groundwork for a more sustainable, resilient world. For further information,

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Electricity generation down 15.8%

9th January 2023

Electricity generation in Botswana during the third quarter of 2022 declined by 15.8%, following operational challenges at Botswana Power Corporation’ Morupule B power plant, according to Statistics Botswana Index of Electricity Generation (IEG) released last week.

The index shows that local electricity generation decreased by 148,243 MWH from 937,597 MWH during the second quarter of 2022 to 789,354 MWH during the third of quarter of 2022.

This decrease, according to the index, was mainly attributed to a decline in power supply realized at Morupule B power station. The index shows that as a result of low power supply from the plant, imported electricity during the third quarter of 2022 increased by 76.3 percent (123,831 MWH), from 162,340 MWH during the second quarter of 2022 to 286,171 MWH during the current quarter and Statistics Botswana added that the increase was necessitated by the need to augment the shortfall in generated electricity.

In the index Statistics Botswana stated that Eskom was the main source of imported electricity at 42.0 percent of total electricity imports. “The Southern African Power Pool (SAPP) accounted for 38.4 percent, while the remaining 10.1, 9.1 and 0.5 percent were sourced from Electricidade de Mozambique (EDM), Cross-border electricity markets and the Zambia Electricity Supply Corporation Limited (ZESCO), respectively. Cross-border electricity markets are arrangements whereby towns and villages along the border are supplied with electricity from neighbouring countries such as Namibia and Zambia.”

The government owned statistics entity stated that distributed electricity decreased by 2.2 percent (24,412 MWH), from 1,099,937 MWH during the second quarter of 2022 to 1,075,525 MWH during the third quarter of 2022. The entity noted that electricity generated locally contributed 73.4 percent to electricity distributed during the third quarter of 2022, compared to a contribution of 85.2 percent during the third quarter in 2022 and added that this gives a decline of 11.8 percentage points. “The quarter-on-quarter comparison shows that the contribution of electricity generated to electricity distributed decreased by 11.8 percentage points compared to the 85.2 percent contribution during the second quarter of 2022.”

Statistics Botswana meanwhile stated that the year-on-year analysis shows some improvement in local electricity generation. Recent figures from entity show that the physical volume of electricity generated increased by 36.3 percent (210,319 MWH), from 579, 036 MWH during the third quarter of 2021 to 789,354 MWH during the current quarter. According to Statistics Botswana electricity generated locally contributed 73.4 percent to electricity distributed during the third quarter of 2022, compared to a contribution of 57.7 percent during the same quarter in 2021. This gives an increase of 15.7 percentage points.

 

The entity noted that trends also show an increase in physical volume of electricity distributed from 2013 to the third quarter of 2022, thereby indicating that there are ongoing efforts to meet the domestic demand for power. “There has been a gradual increase of distributed electricity from the first quarter of 2013 to the third quarter of 2022, even though there are fluctuations. The year-on-year perspective shows that the amount of distributed electricity increased by 7.2 percent (71,787 MHW), from 1,003,738 MWH during the third quarter of 2021 to 1,075,525 MWH during the current quarter.”

The statistics entity noted that year-on-year analysis show that during the third quarter of 2022, the physical volume of imported electricity decreased by 32.6 percent (138,532 MWH), from 424,703 MWH during the third quarter of 2021 to 286,171 MWH during the third quarter of 2022. “There is a downward trend in the physical volume of imported electricity from the first quarter of 2013 to the third quarter of 2022. The downward trend indicates the country’s continued effort to generate adequate electricity to meet domestic demand, hence the decreased reliance on electricity imports.”

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