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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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Matsheka seeks raise bond program ceiling to P30 billion

14th September 2020
Dr Matsheka

This week Minister of Finance & Economic Development, Dr Thapelo Matsheka approached parliament seeking lawmakers approval of Government’s intention to increase bond program ceiling from the current P15 Billion to P30 billion.

“I stand to request this honorable house to authorize increase in bond issuance program from the current P15 billion to P30 billion,” Dr Matsheka said. He explained that due to the halt in economic growth occasioned by COVID-19 pandemic government had to revisit options for funding the national budget, particularly for the second half of the National Development Plan (NDP) 11.

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Lucara sits clutching onto its gigantic stones with bear claws in a dark pit

14th September 2020
Lesedi La Rona

Botswana Stock Exchange (BSE) has this week revealed a gloomy picture of diamond mining newcomer, Lucara, with its stock devaluated and its entire business affected by the COVID-19 pandemic.

A BSE survey for a period between 1st January to 31st August 2020 — recording the second half of the year, the third quarter of the year and five months of coronavirus in Botswana — shows that the Domestic Company Index (DCI) depreciated by 5.9 percent.

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Botswana Diamonds issues 50 000 000 shares to raise capital

14th September 2020
Diamonds

Botswana Diamond PLC, a diamond exploration company trading on both London Stock Exchange Alternative Investment Market (AIM) and Botswana Stock Exchange (BSE) on Monday unlocked value from its shares to raise capital for its ongoing exploration works in Botswana and South Africa.

A statement from the company this week reveals that the placing was with existing and new investors to raise £300,000 via the issue of 50,000,000 new ordinary shares at a placing price of 0.6p per Placing Share.

Each Placing Share, according to Botswana Diamond Executives has one warrant attached with the right to subscribe for one new ordinary share at 0.6p per new ordinary share for a period of two years from, 7th September 2020, being the date of the Placing Warrants issue.

In a statement Chairman of Botswana Diamonds, John Teeling explained that the funds raised will be used to fund ongoing exploration activities during the current year in Botswana and South Africa, and to provide additional working capital for the Company.

The company is currently drilling kimberlite M8 on the Marsfontein licence in South Africa and has generated further kimberlite targets which will be drilled on the adjacent Thorny River concession.

In Botswana, the funds will be focused on commercializing the KX36 project following the recent acquisition of Sekaka Diamonds from Petra Diamonds. This will include finalizing a work programme to upgrade the grades and diamond value of the kimberlite pipe as well as investigating innovative mining options.

Drilling is planned for the adjacent Sunland Minerals property and following further assessment of the comprehensive Sekaka database more drilling targets are likely. “This is a very active and exciting time for Botswana Diamonds. We are drilling the very promising M8 kimberlite at Marsfontein and further drilling is likely on targets identified on the adjacent Thorny River ground,” he said.

The company Board Chair further noted, “We have a number of active projects. The recently acquired KX36 diamond resource in the Kalahari offers great potential. While awaiting final approvals from the Botswana authorities some of the funds raised will be used to detail the works we will do to refine grade, size distribution and value per carat.”

In addition BOD said the Placing Shares will rank pari passu with the Company’s existing ordinary shares. Application will be made for the Placing Shares to be admitted to trading on AIM and it is expected that such admission will become effective on or around 23 September 2020.

Last month Botswana Diamond announced that it has entered into agreement with global miner Petra Diamonds to acquire the latter’s exploration assets in Botswana. Key to these assets, housed under Sekaka Diamonds, 100 % subsidiary of Petra is the KX36 Diamond discovery, a high grade ore Kimberlite pipe located in the CKGR, considered Botswana’s next diamond glory after the magnificent Orapa and prolific Jwaneng Mines.

The acquisition entailed two adjacent Prospecting Licences and a diamond processing plant. Sekaka has been Petra’s exploration vehicle in Botswana for year and holds three Prospecting Licenses in the Central Kalahari Game Reserve (Kalahari) PL169/2019, PL058/2007 and PL224/2007, which includes the high grade KX36 kimberlite pipe.

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