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BoB not rocking monetary policy boat

BoB

Bank of Botswana (BoB) Governor Moses Pelaelo said there is still a scope for shedding of the Bank Rate or tightening of it. He said this on Thursday after the central bank decided to maintain the Bank Rate from last month’s 4.25 percent, elaborating a continuance with “an accommodative monetary policy stance.”

This is against the expectations of many monetary economists and commercial banks who are of the view that the previous Monetary Policy Committee (MPC) cut was marginal. According to its Botswana MPC review, First National Bank or Rand Merchant Bank researchers anticipate accumulative 75bp cut in the Bank Rate in 2H20, which would take the rate to a historical low of 3.5 percent.

The recent decision of the MPC made on Thursday kick started 2H20. The remaining MPC meetings for 2020 are scheduled as follows: August 20, 2020, October 8, 2020 and December 3, 2020, meaning for the last half of this year there are only three decisions left for the BoB Committee.

Before BoB cut the Bank Rate by 50 basis points (bps), from 4.75 percent to 4.25 percent in April, First National Bank chief economist Moatlhodi Sebabole, who is part of the Rand Merchant Bank team that had made an accurate prediction in an interview with BusinessPost that for April, and the cut would be 50 bps. He further told this publication that he expects the next cut after April to be by at least 25 bps.

As indicated in a previous interview with this publication, Sebabole expected the Bank Rate to be at 4.00 percent in this second half of 2020. But the MPC on Thursday through virtual communication announced that they will maintain the Rate at 4.25 percent.

“While we anticipated rates to go down by between 25bp and 50bp at today’s meeting, the Bank of Botswana’s (BoB) MPC decided to leave rates unchanged at 4.25 percent today (Thursday). BoB reiterated that with the advent of Covid-19, domestic inflation will be restrained due to slow growth in personal incomes as well as low foreign inflation which provides scope for rates to remain accommodative.

The economy will also undergo significant growth pressures due to the anticipated recession and the impact of the pandemic on economic activity,” said Rand Merchant Bank on Thursday afternoon just after the MPC decision.

When doing research, just after the April MPC 50 bps cut, the commercial bank researchers went deep and even expected a 100 bps. They envisaged that a cut to 3.75 percent was much needed going deeper from their initial projected 4.00 percent before April.

However, the Bank this week held a different view, further saying: “The MPC, however, recognized that the short-term adverse developments in the domestic economy occur against a potentially supportive environment including accommodative monetary conditions; improvements in the provision of utilities; reforms to further improve the business environment; concerted efforts by government to mitigate the impact of COVID-19; and a prospective economic recovery programme. These would generally be positive for economic activity in the medium term.”

But this did not satisfy Rand Merchant Bank experts who explained that unlike in the 2009 economic recession when the economy underwent a current and capital account crisis, the effects of Covid-19 are expected to be broad-based. Covid-19 is expected to impact both the supply-push and demand-pull pressures.

According to the researchers, the limited economic activity posits significant downward pressures to headline inflation, which the commercial bank now estimate at an annual average of 2.20% (2.80% in 2019).

“The significant downward pressures to headline inflation will emanate from lower oil prices expected for the rest of the year as there has already been two reductions to fuel prices in the past three months,” said the researchers.

The commercial bank’s researchers also anticipate limited imported inflation from South Africa (which accounts for over 60 percent of imports) due to moderation of inflation in SA as well as a weaker Rand — which will benefit Pula imports.

“Risks to the upside, though minimal, will be due to increases in administered prices, including the recent tariff hikes on electricity. We reiterate that even with low headline inflation, consumers’ purchasing power remains low due to broad-based unemployment challenges and negative medium term real wage adjustments,” said the researchers.

Pelaelo on the other hand read that inflation eased from 2.5 percent in April to 2.4 percent in May 2020, remaining below the lower bound of the Bank’s objective range of 3 – 6 percent. He further said inflation is forecast to revert within the objective range in the third quarter of 2021, which is a significant downward revision from the April 2020 forecast.

The BoB Governor explained to the media that the downward revision from the April forecast should be credited to the decrease in fuel prices. He said this also saw a decrease in food prices, hence the downward revision.

Rand Merchant Bank experts’ outlook which supported deeper cut of the Bank Rate further said lower inflation and growth support the case for a big shed of the Rate in 2020.

Our GDP growth forecast for Botswana remains at -10.5% y/y in 2020 (4.5% in 2021), with risks to the downside due to the uncertain economic environment, said the researchers.

According to the Rand Merchant Bank researchers, if the current economic situation persists, then growth could dip to -16.1% y/y (bear scenario).

The commercial bank researcher said the Ministry of Finance and Economic Development estimates growth at -13.0% y/y, which is an indication that the economy is anticipated to perform worse than during the global financial crises of 2008/9 where it contracted 7.7% y/y.

“In our view, it will take about two to three years for the economy to regain its 2019 value (in Pula terms), unless an extraordinary stimulus package is put forth, prioritising jobs and productivity. These factors, we believe, provide the BoB with room to cut rates further without altering real interest rate differentials from their historic averages.

We anticipate a cumulative 75bp cut in the Bank Rate in 2H20, which would take the rate to a historical low of 3.5%,” said the Rand Merchant Bank research released end of this week.

The commercial bank researchers said the recessionary growth pattern that they anticipate in 2020, coupled with 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.

“We maintain our view that the Bank Rate will trend lower to 3.50% in 2020 – thus the timing for the cut remains a waiting game,” they said.

Business

A Culture of compliance and financial reporting best practice

27th July 2020

As the complexity and volatility of the business environment has increased, the demand for improvements in the quality of financial information from investors and other decision makers has risen in tandem. Unsurprisingly therefore, the topic of changes to International Financial Reporting Standards (IFRS) has become increasingly prevalent.

However, before delving into what these changes mean for an organization, it is perhaps useful to first provide an overview of the nature and purpose of IFRS. For anyone in the accounting or finance fields, this acronym has become a common phrase critical to any financial reporting undertaken by an organization.

International Financial Reporting Standards are developed and issued by the International Accounting Standards Board (IASB) and provide guidance on how financial statements should be prepared and disclosed. They provide a framework for consistent and comparable information which ultimately helps investors, regulators and other interested parties, make decisions.

In other words, as a global standard, they provide a level playing field amongst companies for reporting financial performance. This is a matter not only of compliance, but also of corporate governance, and thus an integral part of how any financial services sector business ought to be doing business.

As an indication of the pace of change, in the last three years, over twenty new or amended accounting standards have come into effect. The insurance industry is currently in the process of implementing IFRS 17, which speaks specifically to insurance contracts, replacing its predecessor, IFRS 4. The standard will come into effect from 2023 and will significantly change the accounting process for insurance contracts and investments contracts with discretionary participation features.

This new standard has been described as the single largest change in insurance accounting for almost a generation. The standard is intended to provide a more detailed and rigorous framework for the measurement and recognition of key insurance related values and will significantly change the way in which insurer’s measure and recognize insurance liabilities, revenue and profit.

It will also change the presentation of the income statement and statement of accounting position and will require a significant number of new disclosures in the financial statements. The standard requires more detailed measurement of insurance related cash flows, introduces new methodologies for measuring and recognizing insurance contact liabilities and introduces a number of new concepts such as insurance contract margin and risk margin.

All of these changes are meant to create greater visibility of the relationship between the provisions of insurance services and the recognition of revenues and expenses relating to the provision of these services and to align the recognition of revenue and profit with non-insurance businesses.

The overarching intent of the standard is to reduce the variability of results due to differencing accounting treatments employed by various insurance entities and to improve the comparability of financial results between insurance businesses as well as between insurance and non-insurance businesses.

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Business

“We need to shape businesses for a future after COVID-19” – Stanbic Bank Botswana

27th July 2020
Sheperd Aisam

Stanbic Bank Botswana has hosted key clients of the Bank’s Corporate & Investment Banking (CIB) arm for a series of sector-focused webinars, themed “Economic Updates.” The purpose of the series is to provide timely insights for executives within the Bank on the COVID-19 pandemic and its impact on the economy and business operations, with Stanbic Bank committed to supporting clients through this time to enable them to shape their business post COVID-19, across sectors.

There are critical sectors that have been impacted more severely than others like the Tourism & Hospitality sector, Real Estate sector, Mining and the Luxury or non-essential component of consumers, for example Diamonds.  In the same vein, there are sectors that are well positioned for growth for example Healthcare, Innovation & technology, Agri-processing and Infrastructure sectors.

Said Sheperd Aisam, Head of Corporate & Investment Banking (CIB) at Stanbic Bank Botswana, “Focusing on attracting capital to the rapid development of AfCFTA goals in Botswana and onto the continent will create a more resilient marketplace in Africa and make us able to better withstand future pandemics.”

According to the most recent information of an expected 8.5% GDP decline in Botswana where most sectors will be affected and as a consequence jobs may also be at risk. There is no better time for us to focus on the silver linings and come together to address these challenges in a unified way.

This year the government has many positive initiatives in various sectors set up to stimulate the economy and to give us much needed hope such as the BECI initiative; the recently launched CEDA initiative; the incremental component of local currency bond and T-Bills to fund the budget deficits of which we are excited about.

As a Bank we have initiatives for alignment with strategic country goals and supporting our personal, Commercial and Corporate Banking clients which are available to our client base.   Amongst the key aspects businesses need to ensure for continued survival are a focus on strengthening our supply chains, leading on digital client interactions and regional collaboration particularly on manufacturing, it was shared.

This is very much in line with the notion of ‘survival of the quickest” and will no doubt be about how quickly businesses can adopt and adapt to the times so that they can take benefit of some of the new opportunities now out there.

According to Mulalo Madula, an Economist for Africa Region Fixed Income and Currency Research at Standard Bank Group, the IMF projects the global economy to shrink by 3% and G10 strategists see it shrinking by 2%, with China growing by 6%. Developing economies are likely to contract by roughly between 2% and 4%, she notes.

“We expect that many countries in Europe will struggle with huge debt post COVID-19. We tend to think Botswana is in a better situation as we do not look externally for financial relief. In Botswana or Africa as a whole, because we do not exist in a vacuum, we would have been affected even if we had zero infected cases as we are all connected
economically.”

Concluded Aisam, “For Botswana businesses we are here to support you, we have access to 20 direct African markets through our on the ground presence in these jurisdictions. We have learnt and are still learning and happy to share with you our deepest of insights. There is an African story of growth that beckons us and our time is now.”

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Business

Food movers bullish in markets amid lockdown high eating costs

27th July 2020

A lot of economic dynamics explain that Botswana households during lockdown had less choices and options and found comfort in food despite its costs going up. The cost of food in Botswana increased by 3.60 percent in June of 2020 over the same month in the previous year, mirroring high prices from food import production.

Research shows that Botswana’s economy would bear the cost of being reliant on food imports when demand calls supply out. With the increase of food consumer price index when lockdown started in April to June (1.3) and Food & Non-Alcoholic Beverages group being dominant in contributions of groups to annual inflation rate during the time of stay at homes, investment shifted on consumables goods or foodstuffs.

Investment or risk appetite of owners of food suppliers and retailers remain resilient and confident in the financial markets. This could be because consumers’ sentiment on food prices cannot change the appetite for food amidst the chaotic economic environment of Covid-19.

A higher consumer price index may affect food importing countries like Botswana whose households tend to spend a larger percentage of income on foodstuff. According to Statistics Botswana, food comes third after transport and housing in this country when it comes to weighing inside the Consumer Price Index basket.

Back to investment in consumables or products that are highly in-demand, sold quickly and affordable, the financial markets are currently responding despite the higher cost of food and its marginal increase in inflation rate.

According to a recent market analysis from a fresh stockbroker research activity spanned across a number of sectors in the market and the Fast-Moving Consumer Goods (FMCG) is leading the pack; “Sefalana and CA Sales, stocks claimed over half of the volumes traded and turnovers even higher.”

According to Motswedi Securities, for the week ending 17 July there was, “a welcome improvement from the 1.58mn shares that traded worth P3.83mn in the prior week.”
According to Stockbrokers Botswana, putting the same period and the two FMCG stocks into context, there was a turnover amounting to P27, 4 million as 6, 3 million shares exchanged hands; Sefalana (42 percent) and CA Sales (27 percent) were the biggest contributors to turnover.

Sefalana and CA Sales invest on FMCGs or products that are highly in-demand, sold quickly, and affordable. Value chain for fast-moving consumer goods in Botswana research shows Sefalana takes a bulk of its supplies by trucks or ships as “large supplies from foreign supplies” or imports.

The supplies will then reach a wholesaler and Sefalana acts as a transporter of goods and wholesaler. Before the goods can reach consumers, Sefalana will sell it as a retailer too. CA Sales is a giant independent distribution agent and supplies most grocery chains around the country.

A curious investment appetite movement for a sector whose value chain was almost affected by country to country Covid-19 measures. Truck drivers coming from other countries to Botswana waited at the border for days before they could be tested. If they tested positive for the pandemic, they would be returned home if they are foreigners or quarantined if they are locals. This publication saw trucks which were supposed to deliver FMCGs to the country stuck at boarder gates.

But investors are still in the gamble for the stocks of FMCGs. Some simplistic observation from trade experts is that Botswana is a consumer population and despite the pull of demand to supply being skewed, people will still buy food than any other commodity.

According to the June inflation statistics, food prices went up but there was less action in inflationary consequences in other commodities. Notably, communication recorded low inflation rate, recreation and culture was at a low as well, this was because people stayed at home while transport hit the negatives as cars were packed save for few ones driven for essential services.

When making their investment past decisions, FMCGs investors could be reading the forecast notebook recorded by researchers last year of a strong consumer demand supported by positive economic growth and low inflation which will protect consumer purchasing power over the coming quarters.

That time there was “a recent increase in wages for public servants as well as increases in the minimum wage bodes well for consumer-facing companies.” But that was before Covid-19 when government was forced to withheld public servants salaries and the fiscal and IMF lowered their economic projections.

According to renowned think tank Fitch Solutions, consumer spending growth in Botswana is projected to be weaker in 2020 due to the negative impact of the Covid-19 pandemic. “We have revised our forecast for real household spending growth down to 0.7% y-o-y in 2020 from a pre-Covid-19 forecast growth rate of 4.9% y-o-y,” said the think-tank recently.

Thou shall live by bread and cereal alone

Bread and cereal is the stable food in Botswana and it is shown by Botswana’s continued demand for it at higher volumes and takes the largest weight in the food consumer price index. According to Food and Agriculture Organization (FAO), Botswana is a net importer of cereals, with more than 90 percent of the domestic requirements normally satisfied by imports.

According to the latest Consumer Price Index report from Statistics Botswana, the Food & Non-Alcoholic Beverages group index rose by 0.5 percent, from 105.2 to 105.7 over May and June. According to Statistics Botswana, prices of bread and cereals, which have the largest weight in the food price index, increased steadily throughout 2019 and early 2020, and were estimated to be 4 percent higher year on year in June 2020.

FAO said of March 2020, prices of bread and cereals were slightly higher compared to year‑earlier levels. This increase mainly reflects the high prices of maize in South Africa, the country’s main supplier of grains. A disturbance of bread and cereal import value chains is expected to be worse for June/July statistics given the lockdown border disruptions.

Cereal imports in the 2019/20 marketing year (April/March) increased to an estimated 440 000 tonnes, over 20 percent above the previous five‑year average partly reflecting the low domestic cereal harvest in 2019, according to FAO. Maize which accounts for the largest share of cereal imports, is estimated at 265 000 tonnes.

Without imports Botswana is expected to wait for the harvest which is expected to have concluded in June according to FAO. Harvested cereals are mostly sorghum and maize.
About 38 000 people were estimated to be in need of food assistance in the April 2019‑March 2020 period, compared to an estimated 35 000 people in the previous year, according to the Botswana Vulnerability Assessment Committee (BVAC).

In its Global Information and Early Warning System, FAO said the moderate increase is mainly due to the reduced 2019 cereal harvest and the deterioration of livestock body conditions, which particularly affected the livelihoods of subsistence farmers.

FAO in its Global Information and Early Warning System recently also posted that: “Looking further ahead, although an increase in cereal and livestock production in 2020 would improve food availability and ease access constraints to food for subsistence farmers, the risks posed by the COVID‑19 pandemic could cause an increase in the prevalence of malnutrition at the national level.

The effects of the pandemic are expected to be primarily channelled through a reduction in economic activities and associated income losses. A breakdown in supply chains, particularly in relation to trade disruptions with South Africa, which is the primary source of staple foods, would have sizeable impacts on the availability of food supplies in local markets.”

The cost of a healthy diet amid ‘The Great Pandemic’

Cereal and bread are not considered to be healthy food in terms of their nutritional value, as they contain a lot of carbohydrates which are said to be fuelling obesity and its health repercussions in any economy. Fruits and vegetables which are commonly recommended as a panacea to many diseases like immunisations against Covid-19 and makes healthy meals, are trailing the food consumer price index weights at number 6 and 7 respectively.

This paints a picture that Batswana’s diet is predominantly carbohydrates or cereal and bread as opposed to the healthy fruits and vegetables. According to FAO, Assistant Director-General and Regional Representative for Africa, Abebe Haile-Gabriel in a piece sent to BusinessPost, hunger is on the rise in Sub-Saharan Africa, and a healthy diet has become an out-of-reach luxury item for many Africans.

According to Haile-Gabriel, there is a recently launched ‘The State of Food Security and Nutrition in the World (SOFI)’ report which found that Africa has the highest prevalence of undernourishment – more than twice the global average – and the fastest growth in the number of hungry people compared to other regions.

“COVID-19 is compounding the problem. Disruptions to food supply and livelihoods mean that many households are facing increased difficulties in accessing nutritious foods, particularly for the poorest and most vulnerable. Preliminary projections outlined in the report suggest that COVID-19 could add an additional 83 to 132 million people globally to the ranks of the undernourished,” said Haile-Gabriel.

Haile-Gabriel also added that the cost of a healthy diet is above the international poverty line, meaning that people earning less than US$1.90 per day cannot afford to eat adequate calories and nutrients from diverse food groups. The UN representative also said, compared to other regions, this affordability poses the greatest challenge in Africa, where a healthy diet is beyond the means of nearly a billion people.

“In sub-Saharan Africa, a healthy diet costs 3.2 times more than the poverty line, and the situation is even worse in countries with a protracted crisis such as conflict. The poverty line itself needs to be reviewed to include the cost of nutritious food as a basic cost of living,” the FAO chief said.

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