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.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.