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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

Botswana records first trade surplus since January

7th October 2021
Botswana-records-first-trade-surplus-

Botswana has recorded its first trade surplus for 2021 since the only one for the year in January.

The country’s exports for the month of July surpassed the value of imports, Statistics Botswana’s July International Merchandise Trade data reveals.

Released last Friday, the monthly trade digest reports a positive jump in the trade balance graph against the backdrop of a series of trade deficits in the preceding months since January this year.

According to the country’s significant data body, imports for the month were valued at P7.232 billion, reflecting a decline of 6.6 percent from the revised June 2021 value of P7.739 billion.

Total exports during the same month amounted to P7.605 billion, showing an increase of 6.1 percent over the revised June 2021 value of P7.170 billion.

A trade surplus of P373.2 million was recorded in July 2021. This follows a revised trade deficit of P568.7 million for June 2021.

For the total exports value of P7.605 billion, the Diamonds group accounted for 91.2 percent (P6.936 billion), followed by Machinery & Electrical Equipment and Salt & Soda Ash with 2.2 percent (P169.7 million) and 1.3 percent (P100.9 million) respectively.

Asia was the leading destination for Botswana exports, receiving 65.2 percent (P4.96 billion) of total exports during July 2021.

These exports mostly went to the UAE and India, having received 26.3 percent (P1. 99 billion) and 18.7 percent (P1.422 billion) of total exports, respectively. The top most exported commodity to the regional block was Diamonds.

Exports destined to the European Union amounted to P1.64 billion, accounting for 21.6 percent of total exports.

Belgium received almost all exports destined to the regional union, acquiring 21.5 percent (P1.6337 billion) of total exports during the reporting period.

The Diamonds group was the leading commodity group exported to the EU. The SACU region received exports valued at P790.7 million, representing 10.4 percent of total exports.

Diamonds and Salt & Soda Ash commodity groups accounted for 37.8 percent (P298.6 million) and 6.2 percent (P48.7 million) of total exports to the customs union.

South Africa received 9.8 percent (P745.0 million) of total exports during the month under review. The Diamonds group contributed 39.9 percent (P297.4 million) to all goods destined for the country.

 

In terms of imports, the SACU region contributed 62.7 percent (P4.534 billion) to total imports during July.

The topmost imported commodity groups from the SACU region were Fuel; Food, Beverages & Tobacco, and Machinery & Electrical Equipment with contributions of 33.3 percent (P1.510 billion), 17.4 percent (P789.4 million) and 12.7 percent (P576.7 million) to total imports from the region, respectively.

South Africa contributed 60.1 percent (P4.3497 billion) to total imports during July 2021.

Fuel accounted for 32.1 percent (P1.394 billion) of imports from that country. Food, Beverages & Tobacco contributed 17.7 percent (P772.0 million) to imports from South Africa.

Namibia contributed 2.0 percent (P141.1 million) to the overall imports during the period under review. Fuel was the main commodity imported from that country at 82.1 percent (P115.8 million).

During the months, imports representing 63.5 percent (P4.5904 billion) were transported into the country by Road.

Transportation of imports by Rail and Air accounted for 22.7 percent (P1.645 billion) and 13.8 percent (P996.2 million), respectively.

During the month, goods exported by Air amounted to P6, 999.2 million, accounting for 92.0 percent of total exports, while those leaving the country by Road were valued at P594.2 million (7.8 percent).

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Business

The 2021/2022 Stanford Seed Transformation Program Begins

7th October 2021

Founders from twenty companies have been accepted into the program from Botswana, Namibia, and South Africa

The 4th Cohort of the Stanford Seed Transformation Program – Southern Africa (STP), a collaboration between Stanford Graduate School of Business and De Beers Group commenced classes on 20 September 2021. According to Otsile Mabeo, Vice President Corporate Affairs, De Beers Global Sightholder Sales: “We are excited to confirm that 20 companies have been accepted into the 4th Seed Transformation Programme from Botswana, Namibia, and South Africa. The STP is an important part of the De Beers Group Building Forever sustainability strategy and demonstrates our commitment to the ‘Partnering for Thriving Communities’ pillar that aims at enhancing enterprise development in countries where we operate in the Southern African region”. Jeffrey Prickett, Global Director of Stanford Seed: “Business owners and their key management team members undertake a 12-month intensive leadership program that includes sessions on strategy and finance, business ethics, and design thinking, all taught by world-renowned Stanford faculty and local business practitioners. The program is exclusively for business owners and teams of for-profit companies or for-profit social enterprises with annual company revenues of US$300,000 – US$15million.” The programme will be delivered fully virtually to comply with COVID 19 protocols. Out of the 20 companies, 6 are from Botswana, 1 Namibia, and 13 South Africa. Since the partnership’s inception, De Beers Group and Stanford Seed have supported 74 companies, 89 founders/CEOs, and approximately 750 senior-level managers to undertake the program in Southern Africa.

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Business

Minergy overcomes challenges – improves revenue and produces record breaking coal sales to date

7th October 2021
Minergy

Minergy, the coal mining and trading company with the Masama coal mine, this week released results for the year ended 30 June 2021. The company achieved revenue of P193 million (2020: P81 million) with significant improvement in sales volumes surpassing 415 000 tonnes sold for the year.

The performance was divided into two distinct periods with very different operating environments. The first eight-month period (July 2020 – February 2021), was negatively impacted by delayed funding, COVID-19 impacts and excessive rain; and the last four-month period (March – June 2021), was a more stable production environment moving toward nameplate capacity.

According to Minergy CEO, Morné du Plessis, production and sales initially recovered in July and August 2020 with the easing of COVID-19 restrictions and recoveries were further bolstered by the successful launch of the rail siding. Delays experienced in concluding the funding contributed to contractors limiting operations to manage arrears.

“However, the heavy rains we experienced from December 2020 through February 2021 flooded the mine pit making access difficult and impacting both production and sales. Fortunately, the rain subsided in March 2021, and we entered a more stable environment, with a positive impact on operations. Good recoveries in production and sales were experienced during the last four-month period of the year, with the mine moving closer toward a breakeven position.”

“Despite these operational constraints, including the effects of COVID-19 on logistics and manning of shifts, we expect to reach consistent nameplate capacity in the 2022 financial year,” du Plessis added.

FINANACIAL REVIEW

In addition to the revenue reported above, the company incurred costs of sales of P256 million (2020: P150 million) with operating costs of P23 million (2020: P31 million). This effectively resulted in an operating loss of P86 million (2020: P100 million). Finance costs of P51 million (2020: P17 million) were incurred, bringing the net loss before taxation to P136 million (2020: P117 million).

Du Plessis explains that the adverse conditions in the first eight-month period contributed to 86% of the gross loss, while the more stable four-month period alone contributed to 50% of total sales value, helping to decrease monthly gross losses, albeit below breakeven levels.

The company benefited from a strengthening in the South African Rand (“ZAR”) supporting higher back-on- mine sales prices.

“As announced, we’re pleased to have secured P125 million of additional convertible debt funding through the Minerals Development Company Botswana (Proprietary) Limited (“MDCB”). Minergy remains grateful for this support.”

He added that the first tranche of additional funding provided by the MDCB had been received in December 2020, which allowed Minergy to settle the majority of the contractor’s arrears and allowed their teams to be remobilised. The second and final tranche was paid post the financial year-end and will allow the business to reach nameplate capacity in the new financial year.”

COAL SALES AND MINE PERFORMANCE

Sales volumes increased by 110%, supported by increased sales in Botswana and internationally in South Africa and Namibia. Sales for June 2021 exceeded 56 000 tonnes, a record since the inception of the mine, with pricing increasing late in the financial year on the back of buoyant international prices and a strengthening ZAR.

Minergy also concluded a further 12-month off-take agreement to the existing off-take agreement, with a further agreement finalised post year end.

Overburden moved during the reporting period increased by 86% and extracted coal by 50%. Coal mined in June 2021 alone exceeded 100 000 tonnes. “This is a good performance considering the challenges faced such as sacrificing pre-stripping activities for a period to manage arrears, excessive rain and COVID-19,” du Plessis indicated.

“The wash plant was initially starved of coal due to the factors noted already. Despite this, overall plant throughput performance was 37% higher than 2020. Consistent output was supported by the completion of the Stage 2 rigid crushing section as well as the water saving dewatering screen with filter press contributing to a reduction in water usage of 60% per tonne of coal. A record throughput of more than 84 000 tonnes was achieved in March 2021 and this consistency has been maintained.”

OUTLOOK

According to du Plessis, the completion of Stage 4 of the Processing Plant, the rigid screening and stock handling section, remains a key optimisation step, which has associated benefits. “The completion was unfortunately delayed by a southern African wide shortage of structural steel but was commissioned post year-end.”

Minergy expects the positive momentum in international coal pricing for southern African coal to remain in place. Higher coal prices have resulted in coal being withdrawn from the inland market in favour of lucrative international markets. Du Plessis added that the regional market is currently under- supplied with sized coal, which supports higher pricing and new customer opportunities for Minergy.

“Our objective for the 2022 financial year is to achieve nameplate capacity by completing final ramp-up of operations. This will enable the company to generate sufficient cash flow to stabilise the business at breakeven or better. The bullish coal market is also providing support. COVID-19 will still be closely managed, and we look forward to the lifting of the State of Emergency, as announced, and trust that vaccination programmes will achieve herd immunity in Botswana during the next 12 months.”

Du Plessis expressed his excitement on prospects stating that, “The Eskom due diligence process is continuing, and we are hopeful of receiving feedback during the current financial year. In addition to this opportunity, Minergy is also investigating participation in the request by the Government of Botswana to provide a 300MW power station for which the company has been shortlisted.”

The approved process to issue shares for cash is showing positive leads and he concluded by saying that a listing in London is still being investigated.

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