Renowned credit ratings and analytics institution; Moody’s Investors Service in its 2021 outlook released midweek, maintains the red alert colour it placed on Botswana (A2 negative) five months ago, suggesting that Botswana together with 65 sovereigns in the world have plunged into credit risky status even towards next year.
Moody’s assigns ratings on the basis of assessed risk and the borrower’s ability to make interest payments and its ratings are closely watched by many investors. In simple terms credit agencies asses willingness of debt issuers, like corporations or governments, to meet their financial obligations on time and in full.
In the case of Botswana, this means a lower of negative rating or gloomy outlook puts Botswana at a disadvantage when it comes to securing loans or any credit facility from the international market. This also determines the sentiment of foreign investors. Moody’s is placed with Standard & Poor’s (S&P) and Fitch as ‘The Big Three’ credit rating agencies.
In September this year Botswana got a negative outlook on its credit ratings as S&P revised its outlook on Botswana to negative from stable and affirming its ‘BBB+/A-2’ ratings. S& P said that at the time that it expect Botswana’s GDP to contract by 9 percent in 2020 because of the adverse impact of the COVID-19 pandemic, compounded by weaker diamond exports.
Botswana which maintained the Moody’s A2 grade since 2001, which is regarded as “Upper medium grade,” got into the red in May this year amid Covid-19 wave- barely two months after the pandemic broke in this country-and got a negative outlook up to now. Moody’s 2021 outlook projects Botswana to remain with the A2 negative outlook tag until next year.
“Our outlook for sovereign creditworthiness in 2021 is negative, reflecting our expectations for the fundamental conditions that will drive sovereign credit over the next 12-18 months. The widespread fallout from the pandemic and the measures adopted by sovereigns to contain it have created an economic, fiscal and social shock that will last into 2021 and beyond,” said Moody’s research released on Wednesday.
The only time Botswana’s credit outlook was A2 positive was in 2007, it has always had a “stable” status which is regarded as good for creditworthiness. The last time Botswana got a “negative” outlook was in 2010 following the aftermath of global recession. Botswana has maintained the “stable” status until May this year.
When getting a bearish outlook despite an affirmation of A2 rating in May, Bank of Botswana explained that the affirmation of the rating, at ‘A2’, is “underpinned by the Government’s still strong, albeit deteriorating, fiscal and debt metrics, in particular the relatively low public debt level, high debt affordability and fiscal and external liquidity buffers that help in mitigating the impact of the coronavirus shock.”
In the same communication the central bank said Botswana’s track record of “fiscal prudence, adherence to the rule of law, robust institutions and effective policy making, as well as the current level of the Pula Fund,” which continue to provide key fiscal and external buffers.
However this week, Moody’s warned that in the near term sovereigns like Botswana with low credit ratings will be the most adversely affected given their lower economic and institutional strength as well as their more limited access to funding compared to sovereigns with stronger credit profiles.
“However, over the medium term, sovereigns across the rating spectrum will face increasingly challenging policy trade-offs triggered or exacerbated by the crisis. These include developing exit strategies from the current supportive policy framework without jeopardizing the economic recovery, as well as structural economic and social reforms that support long-term growth and social cohesion,” Moody’s continued.
Moody’s projects a negative 2021 outlook as pandemic fallout weighs on economic activity, government finances, complicates policy choices. In July, Moody’s reduced its growth forecasts for Botswana and put it on -10.9, saying the rate was in response to the coronavirus crisis.
“Many African governments have limited financial and institutional capacity to absorb the current coronavirus shock,” said Kelvin Dalrymple, a Moody’s Vice President – Senior Credit Officer in July. “The longer-term negative effects on the region’s sovereign credit profiles will leave them with diminished capacity to absorb future shocks.’’
Expected sharpest declines in real GDP growth is said by Moody’s to be because of the impact of domestic restrictions on economic activity and the impact of a fall in global demand in key sectors such as tourism and mining. Botswana’s GDP for the second quarter of 2020, the time when Covid-19 faced off with this country’s population, frowned by 27 percent.
In May, Botswana got its fair share of the shock of Covid-19 effects, when Moody’s affirmed this country’s rating of ‘A2’ for long-term bonds denominated in both domestic and foreign currency, but changed the outlook from stable to negative.
Bank of Botswana said the downgrading by Moody’s is mostly prompted by the risks associated with coronavirus shocks, given Botswana’s strong dependency on the diamond industry for growth, exports and budget revenues.
“The revision of the outlook from stable to negative reflects the increasing risks of lower growth, higher budget deficits and likely resultant increase in government borrowing. In their assessment, Moody’s observed that these adverse effects of COVID-19 pandemic, combined with the current challenges the government faces on fiscal consolidation, could mean further deterioration of fiscal metrics to a level not consistent with the ‘A2’ sovereign credit rating,” explained the central bank then.
Last month when assessing sovereign ability to recovering revenue post coronavirus crisis, Moody’s said that move will be crucial but challenging. Moody’s last month also said resource-rich, like Botswana which is dependent on diamond exports, will also face a large drop in fiscal revenue. In May when Botswana’s outlook became negative, the central bank explained its “strong dependency on the diamonds industry for growth, exports and budget revenues,” said Bank of Botswana.
In the midweek report, Moody’s said there will be far more negative rating actions in 2020 than in 2019. The rating agency highlighted that as of 9 November 2020, 65 (60 %) of our 108 sovereign rating actions have been negative – a higher proportion than in 2019 (20%) and 2018 (30%).
Moody’s further said almost a third (33) of all rating actions in 2020 were downgrades, the highest tally since the actions taken in 2016 in response to the previous oil price shock. According to Moody’s the pandemic drove almost half of all sovereign rating actions in 2020. Out of the 65 negative rating actions, 43 taken on 33 sovereigns (or 23% of all Moody’s-rated sovereigns) were principally driven by the pandemic.
Constrained access to financing drove most of these actions, said Moody’s. The rating agency further said the other drivers were lower growth, particularly in tourism-reliant or otherwise concentrated economies, invariably accompanied by a sharp rise in debt; and the associated steep fall in oil and other commodities’ prices.
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).
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.
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.
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.”
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.