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Should credit be panacea for ‘The Great Pandemic’?

Dr Thapelo Matsheka

There is currently an image of microeconomics heavily eclipsing macroeconomics as economies around the world including Botswana, are going through lockdowns leading to the closure of borders around the world.

This visual should show a system of economics where decisions are mostly human based or business centred taking a bigger shape and replacing plans made by governments in front of a broken vintage mirror reminiscing The Great Depression.

When he rushed to close the country to a complete halt of lockdown on 31 March, in his most sober speech after this country discovered the first face of the invisible enemy; Covid-19, President Mokgweetsi Masisi in paragraph 17 of his speech talked of “Stabilizing businesses.”

With the decision to close down borders, there was obviously no way Masisi was going to speak macroeconomics in his speech given the situation of a pandemic affecting the global village and threatening to wipe out the human race.

The President only bordered his thought on how government can help businesses participate in the domestic economy whereby the Government is to “give businesses some cash-flow relief. Government will guarantee loans by commercial banks to businesses mostly affected by COVID-19.

Give eligible businesses affected by COVID-19 access to credit to support ongoing operations in conditions where credit becomes more difficult to obtain.”

Masisi was talking of credit to businesses but the discussion was more than what was in the black and white document.

However, dynamics shift when microeconomics takes centre stage as compared to macroeconomics especially when there is something which greatly affects humanity and cuts down all the aspects of humanness, like wars, disasters and diseases or a big global economic collapse.

As the global economy is cornered, there comes a time when things seem like déjà vu as the history of The Great Depression after the First World War repeats itself in this era of the novel Corona virus. There was a global wave that saw the collapse of the stock market while populations across the world failed to deal with microeconomics which were caused by macroeconomics when nations went for war.

After WWI, the US banks got hit hard due to credits offered to countries at war. Domestically, financial systems collapsed due to people or businesses who could not pay back banks.

There were many global economic downfalls including ‘Great Trade War’ between China and the US which affected global economics. Recently, the ‘Great Price War’ amongst oil producing giants subsequently resulted in ‘Great Oil Crunch’ not to forget the Brexit saga all this during and amid Covid-19, things went from bad to worse for economies in 2020. But in microeconomics there is an echo that ploughing credit in the population will be the best medicine in this year of economic ills.

As coronavirus took its toll on Botswana’s economy, one of the most fiscal and monetary interventions was when the central bank cut the benchmark policy rate by 50 basis points to 4.25 percent aimed at cushioning the economy by easing borrowing costs across board.

The prudential capital adequacy ratio for commercial banks was also dropped from 12.5 percent to 15 percent. The central bank said the reduction of primary reserve requirement will free up P1.6 billion to be used by banks to finance economic activity.

A recent business expectations survey by Bank of Botswana (BoB) for the second quarter, which was carried out in the constrained conditions of Covid-19 lockdown, says firms do not believe there will be easy access to credit. Firms anticipate “tight access to credit in the domestic market in the second quarter of 2020.

Businesses also expect lending rates in the rest of the markets to decline according to the business expectations survey and this is not what the President wished for in his first Covid-19 speech of 31 March.

Business expectations could have been informed by the statistics which were recently released by BoB. The statistics which were made before Masisi encouraged borrowing as one of the economic panacea in the wave of ‘The Great Pandemic’ shows that commercial bank credit growth in March 2020 swayed more to households than businesses.

This contradicted Masisi’s State of Emergency speech as instead of businesses taking credit from commercial banks, households lead the connection to tellers with credit growth of 15 percent by March 2020. Credit growth in businesses was only four percent.

According to the central bank, annual growth in commercial bank credit increased by 10.7 percent in March 2020, from 6.7 percent in March 2019. However, things were different last March unlike this year where household credit dwarfed that to businesses. Last March businesses had a credit growth of 7.5 percent while households was at 6.2 percent.

According to BoB Annual Report of 2019, which was released recently, commercial bank credit decelerated from 7.7 percent in 2018 to 7.6 percent in 2019. “The slight decrease in the rate of credit growth was mostly associated with sluggish lending to businesses, which decreased from 10 percent in 2018 to -1.7 percent in 2019.

This was mostly due to loan repayments by some companies in manufacturing (some in the diamond cutting and polishing sectors,” said the Annual Report.

Borrowing but not paying back

During The Great Depression the banking sector suffered the most with companies and households failing to pay back the money they owed. This could be the case with ‘The Great Pandemic’.

As much as credit appetite is growing for households than for businesses, the central bank on Tuesday told reporters that it is a good thing as it stimulates domestic demand. It emerged during a dialogue between the central bank and the media this week that the prevalence of Non-Performing Loans (NPLs) has remained an eyesore for the banking sector for years. Households would line up to take loans but not pay back.

There could be a problem looming. When the lending rate increased for households, from 7 percent in 2018 to 18.7 percent in 2019, it was because of personal loans facilities which were offered after government hiked public service salaries in the past financial year.

But in this current financial year, the salaries which were supposed to be increased in this season were not hiked. Credit growth to households could shrink further amid Covid-19 economic effects because of such decisions.

Maybe government by withholding salary hikes spared many from borrowing and failing their debt obligation as coronavirus hit. But some economic pragmatics hold a different view, saying people will shy away from borrowing because their salaries were not increased hence an expected decrease in credit growth.

Non-Performing Loans

Manufacturing and trade sectors dominated the private business NPLs in 2018, accounting for 29.5 percent of the private business NPLs. The NPL ratio for businesses soared, it reached 7.5 percent in 2019 from 7.3 percent in 2018.

Despite the household in-debt of Botswana even when considered low by international standard, the central bank in its recent report has observed that household credit is concentrated in unsecured lending, being 70.1 percent in December 2019.

BoB said: “The significant share of unsecured loans and advances has the potential to cause financial distress in households, given the inherently expensive nature of such credit.

Nevertheless, concern would arise in the event of high levels of borrowing that are out of line with trends in economic and personal income growth, which would amplify the risk of exposure of households and businesses to economic shocks and could adversely affect their ability to repay debt.”

Tuesday this week during a meeting with journalists, Head of Banking Supervision Department, Dr Lesedi Senatla said that anyone who applies for bank loans goes through a thorough assessment to see their credit worthiness. But a problem can occur when an unforeseen event like loss of jobs happen. Masisi in his State of Emergency bars anyone from firing or retrenching workers.

BoB Governor, Moses Pelaelo talked of financial discipline not forgetting the fact that “banks are traders of risk” and a source of income may be lost or reckless uses of finance would lead to defaulting in loans.

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Business

Gambling Authority tender dangles as a jittery lottery quandary

30th November 2020
SEFALANA MD: CHANDRA CHAUHAN

Lucrative and highly anticipated national lottery tender that saw several Batswana businessmen partnering to form a gambling consortium to pit against their South African counterparts, culminates into a big power gamble.

WeekendPost has had a chance to watch lottery showcase even before the anticipated and impending national lottery set-up launches. A lot has been a big gamble from the bidding process which is now set for the courts next year January following a marathon legal brawl involving the interest of the gambling fraternity in Botswana and South Africa.

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The uncertainty of getting the next meal in Botswana

30th November 2020
uncertainty of getting the next meal

Households representing more than half of Botswana’s population-mostly residing in rural areas- do not know where their next meal will come from, but neither do they take into consideration the quality and/or quantity of the food they consume.

This is according to the latest Prevalence of Food Insecurity in Botswana report which was done for the 2018/19 period and represents the state of food insecurity data even to this time.
The Prevalence of Food Insecurity was released by Statistics Botswana and it released results with findings that the results show that at national level 50.8 percent of the population in Botswana was affected by moderate to severe food insecurity in 2018/19, while 22.2 percent of the population was affected by severe food insecurity only.

According to the report, this translates to 27 percent of the population being food secure that is to say having adequate access to food in both quality and quantity. According to Statistician General, Burton Mguni, when explaining how the food data was compiled, Food and Agriculture Organization of the United Nations (FAO), is custodian of the “Prevalence of Undernourishment (PoU)” and “Prevalence of moderate or severe food insecurity in the population based on the Food Insecurity Experience Scale (FIES)” SDG indicators, for leading FIES data analysis and the resultant capacity building.

“The FIES measures the extent of food insecurity at the household or individual level. The indicator provides internationally comparable estimates of the proportion of the population facing moderate to severe difficulties in accessing food. The FIES consists of eight brief questions regarding access to adequate food, and the questions are answered directly with a yes/no response. It (FIES) complements the existing food and nutrition security indicators such as Prevalence of Undernourishment.

According to the FIES, with increasing severity, the quantity of food consumed decreases as portion sizes are reduced and meals are skipped. At its most severe level, people are forced to go without eating for a day or more. The scale further reveals that the household’s experience of food insecurity may be characterized by uncertainty and anxiety regarding food access and compromising the quality of the diet and having a less balanced and more monotonous diet,” says Mguni.

The 50.8 percent of the population in Botswana which was affected by moderate to severe food insecurity are characterized as people experiencing moderate food insecurity and face uncertainties about their ability to obtain food. These people have been forced to compromise on the quality and/or quantity of the food they consume according to the report on food insecurity.

Those who experience severe food insecurity, the 22.2 percent of the population, are people who have typically run out of food and, at worst, gone a day (or days) without eating. According to the statistics, rural area population experienced moderate to severe food insecurity at 65 percent while urban villages were at 46.60 percent and cities/town were at 31.70 percent. Those experiencing the most extreme and severe insecurity were at rural areas making 33.10 percent while urban villages and towns were at 11.90 percent and 17.50 respectively.

According to a paper compiled by Sirak Bahta, Francis Wanyoike, Hikuepi Katjiuongua and Davis Marumo and published in December 2017, titled ‘Characterization of food security and consumption patterns among smallholder livestock farmers in Botswana,’ over 70 percent of Botswana’s population reside in rural areas, and majority (70%) relies on traditional/subsistence agriculture for their livelihoods.

The study set out to characterize the food security situation and food consumption patterns among livestock keepers in Botswana. “Despite the policy change, challenges still remain in ensuring that all persons and households have access to food at all times. For example, during an analysis of the impacts of rising international food prices for Botswana, BIDPA reported that food prices tended to be highest in the rural areas already disadvantaged by relatively low levels of income and high rates of unemployment,” said the study.

According to the paper, about 9 percent of households were found to be food insecure and this category of households included 6 percent of households that ranked poorly and 3 percent that were on the borderline according to the World Food Programme’s (WFP) definition of food security.

Media reports state that the World Bank has warned that disruption to production and supply chains could ‘spark a food security crisis’ in Africa, forecasting a fall in farm production of up to 7 percent, if there are restrictions to trade, and a 25 percent decline in food imports.

Food security in Botswana or food production was also attacked by the locust pandemic which swept out this country’s vegetation and plants. The locust is said to have contributed to 25 percent loss in production.

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Business

Solid demand for diamonds towards the ‘gift’ season

30th November 2020
Diamonds

Global lockdown have been a thorn in diamonds having shiny sales, but a lot of optimism shows with the easing of Covid-19 restrictions, the precious stones will be bought with high volumes towards festive season. The diamond market is however warned of the resurgence of Covid-19 in key markets presents ongoing risks amid the presence and optimist about the new Covid-29 vaccines.

The latest findings published as De Beers Group’s latest Diamond Insight ‘Flash’ Report, which looks at the impact of the pandemic on relationships and engagements, has revealed that in the US that more couples than ever are buying diamond engagement rings. Bridal sales is mostly the primary source of diamond jewellery demand in recent months, De Beers said.

According to De Beers, interviews with independent jewellers around the US revealed that the rate of couples getting engaged has increased compared with the period when Covid-19 first had an impact in the US in the spring.

“In addition, despite challenging economic times, consumers were spending more than ever on diamond engagement rings – often upgrading in colour, cut and clarity, rather than size. Several jewellers speculated that with consumers spending less on elaborate weddings and/or honeymoons in the current environment, they had more to spend on choosing the perfect ring,” said De Beers.

According to De Beers, a national survey of 360 US women in serious relationships, undertaken in late October in collaboration with engagement and wedding website, The Knot. This survey is said to have found that the majority of respondents (54%) were thinking more about their engagement ring than the wedding itself (32%) or the honeymoon (15%), supporting jewellers’ hypothesis that engagement ring sales were benefiting from reduced wedding and travel budgets in light of Covid-19 restrictions.

When it came to researching engagement rings, online was by far the predominant channel for gaining ideas/inspiration at 86% of consumers surveyed, with 85% saying they had saved examples of styles they liked, according to De Beers. According to the survey, only a uarter of respondents said they had looked in-store at a physical location for design inspiration.

“For many couples, the pandemic has brought them even closer together, in some instances speeding up the path to engagement after forming a deeper connection while experiencing lockdown and its associated ups and downs as a partnership. Engagement rings are taking on even greater symbolism in this environment, with retailers reporting couples are prepared to invest more than usual, particularly due to budget reductions in other areas,” De Beers CEO Cleaver said.

According to De Beers Group, its Diamond Insight Flash Report series is focused on understanding the US consumer perspective in light of Covid-19 and monitoring how it evolves as the crisis evolves. Also, the company said, it is augmenting its existing research programme with additional consumer, retailer and supply chain touch-basis to understand the pain points and the opportunities for stakeholders across the diamond pipeline.

Demand for diamonds is as hard and resilient as the precious stone itself. De Beers pocketed US$ 450 million in its recently held ninth rough diamond sales cycle, and the company says it is more flexible approach to rough diamond sales during the ninth sales cycle of 2020, with the Sight event extended beyond its normal week-long duration.

“Steady demand for De Beers Group’s rough diamonds continued in the ninth sales cycle of the year, reflecting stable consumer demand for diamond jewellery at the retail level in the US and China, and expectations for reasonable demand to continue throughout the holiday season. However, the resurgence of Covid-19 infections in several consumer markets presents ongoing risks,” said De Beers CEO Bruce Cleaver recently.

High expectations are on diamonds being a sentimental gift for holiday season or as the most fetished gift. However the ninth cycle was lower than the eighth which registered US$ 467 million. For the last year period which corresponds with the current one, De Beers managed to raise US$ 400.

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