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BoB inflation forecast deemed myopic

BoB Governor: Moses Pelaelo

A research paper released on Monday has exposed Bank of Botswana(BoB)’s inflation forecast model as not having far reaching predictions and its accuracy only relevant for a short time.

The research titled “Evaluation of the Performance of the Bank of Botswana’s Inflation Forecasting Model” was conducted by central bank’s Research & Financial Stability Department
It was authored by Deputy Director, Innocent Molalapata and economists Lesego Molefhe, Lizzy Sediakgotla and Daniel Balondi.

According to the quartet, to support its forward-looking monetary policy framework, BoB produces inflation forecasts using a quarterly projection model, known as the “Core-Model.” The inflation forecast provides guidance on the appropriate monetary policy interventions necessary to achieve and maintain the Bank’s primary objective of price stability, they wrote.

The economists further said it is critical to have a model that produces inflation forecasts that do not deviate significantly from the actual data, without justifiable accounting, as it can misinform policymaking.

“According to the results, on average, the Bank’s Model has a good forecasting accuracy in the short term, however the model has a low predictive power of medium-term inflation movements, reflecting higher uncertainty associated with economic events in the distant future. Regarding prediction bias, the Model tends to under-predict inflation, which is a result of changing economic conditions domestically and externally,” said the quartet.

The four brains merged to produce a paper titled “Evaluation of the Performance of the Bank of Botswana’s Inflation Forecasting Model” which sought to evaluate the performance of the central bank’s inflation forecasting model over a 10-year period, from December 2008, a period of the Great Recession, to December 2018.

While they were putting the central bank policy practice under the knife, the objectives of the study are to assess the Model’s forecast bias by employing the Mean Forecast Error and determination of the size of the forecast error using the Mean Absolute Forecast Error (MAFE).

The researchers explained that BoB uses a forward-looking monetary policy framework that is guided by a forecasting and policy analysis system (FPAS). According to them, the FPAS is the Bank’s main policy analysis and forecasting framework while the Core-Model, which forms part of the FPAS, is used to produce medium-term forecasts for macroeconomic variables, such as inflation and the output gap.

“The CoreModel is based on Botswana’s monetary policy transmission mechanism. It captures the essential macroeconomic relationships, primarily the impact of monetary policy on output and inflation. The model provides a comprehensive view on future economic developments and possible policy actions necessary to achieve the Bank’s inflation objective.

It also explores possible alternative scenarios to the baseline forecast. Given the Bank’s forward looking monetary policy framework, forecasts from the Core-Model are used as input into deliberations of monetary policy formulation and direction by the Monetary Policy Committee (MPC),” further explained the economists.

Going sharp in their analysis knife, the economists said the Core-Model is calibrated in accordance with the behaviour of key relationships in the monetary policy transmission process, therefore the model output is expected to be a close match to actual data, assuming an adequately functioning transmission mechanism, ceteris paribus.

However, according to the four experts, it is not easy to have a model that is able to produce forecasts that accurately fit actual or realised data due to, among others, future unanticipated changes in the structure of the economy; model misspecification; historical data measurement errors; inaccurate parameter estimation or calibration; volatility in the analysed variables; inappropriate policy design and decision; as well as domestic and external shocks in the economy.

As the quartet’s thesis was reminiscent of the monetary policy practice dating back to the Great Recession, they said some of the shocks are generated by financial imbalances, as was evident during the 2008/9 global financial crisis, as well as lack of congruence of monetary, financial stability and fiscal policies towards achieving macroeconomic stability.

“Meanwhile, a model that produces an inflation forecast path that deviates significantly from the actual data, without justifiable accounting, is not desirable as it can misinform policy making. In practice, it is essential for forecasts to be approximate to observe values as that provides reliable information that can be useful in guiding policy formulation and implementation.

In this context, it is important to assess the forecasting ability of the Core-Model regularly in order to identify and attend to discrepancies, if any, and where necessary, enhance its forecasting ability,” said the four researchers.

When delving into the ‘Forecast Errors for Headline Inflation’ the four brains said statistically, on average, with the exception of the first two periods, BoB has consistently under predicted both short-term and medium-term headline inflation for the period December 2008 to December 2018.

The economists further elaborated that the bias is more pronounced in the medium-term forecasts, precisely from the 5th quarter to the 8th quarter. Under-prediction of short-term inflation (for four quarters) is, however, relatively small at around 0.05 percentage points on average, while medium term inflation forecasts have on average been 0.69 percentage points lower than actual inflation, they said.

Last week, after maintaining the Bank Rate at 3.75 percent, BoB changed its inflation forecast of October which projected inflation to revert back to the objective range in the third quarter of 2021. The fresh inflation forecast which was done last week during an MPC meeting is that inflation will revert to the objective range of 3-6 percent sooner, in the second quarter of next year.

According to Head of Research & Financial Stability Department, Tshokologo Kganetsano, the quick reversion of inflation is due to the increase in transport fares, adjustment in fuel prices and postal office tariffs. However RMB Botswana researchers who use a model different than that of BoB, said the effect of Kganetsano’s stated price movements is unlikely to see inflation average beyond 3 percent in 2021. They expect price growth to register an average of 1.9 percent in 2020 and 2.5 percent in 2021.

The demand side is expected to act as a drag on inflation in 2021 as the bulk of Botswana’s work force will be faced with unemployment challenges as businesses continue to reel from the effects of the pandemic, said the researchers. The RMB Botswana researchers said they expect the effect of upside pressures on the headline figure to remain limited, coupled with an uncertain economic outlook as a result of the disruption caused by covid-19.

RMB Botswana explained that the model they use is a “bottom-up approach” which is based on the baskets and data from Statistics Botswana. “We track each basket and stress it according to any recent or upcoming developments-so in the case of transport, we observe international prices and the likelihood of BERA will adjust local prices. If the likelihood is high enough, then we factor into the model.

Basically we do this for all the baskets and since they are weighing according to what Stats Bots provides, we are then able to provide an annual forecast. This is then done according to different scenarios-in the case some of our expectations don’t happen or we have surprise announcements. As the year goes along, we keep amending to incorporate any changes. For longer term forecasts, beyond two years, we use a regression and make adjustments to the outcome based on our research houses expectations as well as regional outlooks,” explained a researcher at RMB Botswana after their inflation forecast.

The other side of the coin

The four researchers who studied Botswana’s Performance of BoB’s inflation forecasting model have reached to a conclusion that, according to the results from a rolling four-year sample of forecast errors using MAFE, the forecasting performance of the model used by BoB has improved with time.

According to the research quartet, the innovations in the model structure, constant engagements between the Modelling Team and Monetary Policy Technical Committee members and Sector Specialists, as well as capacity building programmes on modelling and forecasting which the Bank continues to invest heavily in.

In the conclusion paragraph, the four economists said BoB’s forecasting framework has a high level of precision, particularly in the short term. However precision of the inflation forecasts in the medium term is limited by increased uncertainty associated with the longer horizon, they further stated in the report.

The researchers said BoB is not addressing the issue of the forecasts being less far reaching, but this is partly addressed by updates of forecasts for successive MPC meetings and Monetary Policy Reports (MPRs). They said continual efforts are being made to improve the inflation forecast performance in both the short- and medium-term.

“As part of ongoing improvements to the forecasting ability, since the last half of 2017, an assumption on the rate of crawl for the ensuing year is made, compared to the earlier approach in which the rate of crawl was assumed to be constant,” said the researchers.

The four researcher further advised that going forward it is crucial for BoB to continue to invest in capacity improvements to facilitate updating of the model (and its calibration) to reflect the evolving structure of the economy through infusion of relevant methods and skills inputs.

Another advice was in recognition of the influence of administered prices on inflation, the four saying it is important for BoB to broaden relations with all stakeholders in order to be informed of impending changes in administrative prices, to inform both forecasts and policy posture.

“Engagement of the MPC by the forecasting team in the formulation of initial conditions, external assumptions and alternative scenarios must be strengthened further and should include a discussion of the policy rate.

Finally, where possible, BoB should strive to address impediments to monetary policy transmission, particularly the credit channel, to enhance the effectiveness of the transmission of monetary policy. High precision and reliable forecasts are important for the transparency and predictability of monetary policy, which enhances policy credibility,” said the researchers.

Business

MD, Board in BBS battle for supremacy

12th April 2021

Botswana Stock Exchange (BSE) moved swiftly this week to suspend BBS Limited from trading its securities following a brawl between Board of Directors and Managing Director, Pius Molefe, which led to corporate governance crisis at the organisation.

In an interesting series of events that unfolded this week, incumbent board Chairperson, Pelani Siwawa-Ndai moved to expel Molefe together with board Secretary, Sipho Showa, who also doubles up as Head of Marketing and Communications.  It is reported that Siwawa-Ndai in her capacity as the board Chairperson wrote letters of dismissals to Molefe and Showa.

Following receipt of letters, the duo sought and was furnished with legal opinion from Armstrong Attorneys advising them that their dismissals were unlawful hence they were told to continue to report to work and carry out their duties.

Documents seen by BusinessPost articulate that in the meeting which was held on the 1st of April, the five outgoing board members, unlawfully took resolutions to extend their contracts by a further 90 days after April 30 2021 as they face tough competition from five other candidates who had expressed interest to run for the elections.

Moreover, at the said meeting, management explained that neither management nor the board have the authority to decline nominations submitted by shareholders or the interested parties which is in line with Companies Act and also BBS Limited constitution.

Molefe also revealed that as management they cautioned the board that it was conflicted and it would be improper for it to influence the election process as it seems they intended to do so.
“Nonetheless, in a totally unprecedented move in the history of BBSL, the board then collectively passed the unlawful resolutions below. Leading to the illegitimate decisions, the board had brazenly directed that its discussions on the Board elections should not be recorded totally violating sound corporate governance,” reads the statement released by management this week.

When giving their legal advice, Armstrong Attorneys noted that notice for the AGM should state individuals proposed to be elected to the board and directors have no legal authority to prevent the process.

Armstrong Attorneys also noted that, “due process” cited by board members are simply to ensure that the five retiring Directors avoid competition from interested candidates to be appointed to the BBS Limited board.  The law firm further opined that the resolution of the 90 day extension of term of the five directors pending re-election or election was unlawful.

Molefe expressed with regret that BBS has been suspended from trading by BSE until the current matter has been resolved. “I am concerned by this development and other potentially harmful actions on the business. As management, we are engaging with stakeholders to mitigate any negative impact on BBS Limited,” expressed a distressed Molefe.

He assured shareholders and the rest of Management that they are working very hard to ensure that the issues are being dealt with in a mature manner.  BBS which hopes to become the first indigenous commercial bank has seen its shares halted barely four months after BSE lifted the trading suspension of shares for BBS following submission of their published 2019 audited financial statements.

According to Chief Executive Officer (CEO) of the local bourse, Thapelo Tsheole said the halting of shares of BBSL is to maintain fair, efficient and orderly securities trading environment. “The securities have been suspended to allow BBS to provide clarity to the market concerning the recent allegations which have been brought to the attention of the BSE relating to the company’s Board of Directors and senior management,” said Tsheole.

Meanwhile in their audited financial statements for the year ended 31 December 2020, BBS recorded a loss of P14.6 million as at 31 December 2020 compared to the loss of P35.7 million for the comparative year ended 31 December 2019. According to Molefe the year under review was the most challenging for the bank, its shareholders and customers endured the difficult economic environment and the negative impact of the coronavirus.

He revealed that as the bank, they were forced to put in place several measures to ensure that the business withstands the impact of coronavirus and also to cushion mortgage customers from the effects of the pandemic. “Since April 2020 up to the end of December 2020, BBS assisted 555 mortgage customers with a payment holiday,’’ he said.

This is the bank whose total balance sheet declined by 12 percent from P4, 626 billion for the year ended. 31 December 2019 to P4, 088 billion as at 31 December 2020. As if things were not bad enough, total savings and deposits at the bank declined by 14 percent from a balance of P2, 885 billion as at 31 December 2019 to P2, 494 billion as at 31 December 2020.

On a much brighter side, BBSL mortgage loans and advances improved from P3, 401 billion to P3.408 billion with impairment allowance significantly improving to P78, 648 million from P102, 532 million for the year under review, representing a positive variance of 23 percent. BBS maintained a strong capital base with capital adequacy ratios of 26.32% for the year ended 31 December 2020.

Molefe was optimistic and anticipated a positive outcome during the implementation of the new BBS corporate strategy, whose main drive is commercialization of operations, which is in full force.
“It will be spurred on by the positive results we have achieved for the year ended 31 December 2020, and our planned submission of our banking license application to Bank of Botswana which we anticipate to operate as a commercial bank in the third quarter of 2021,” he alluded.

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Mphathi promises people centred, environmentally sensitive new BCL

12th April 2021
CEO of Premium Nickel Resources Botswana: Montwedi Mphathi

Chief Executive Officer (CEO) of Premium Nickel Resources Botswana (PNRB), Montwedi Mphathi, has said his company will resuscitate the formerly owned BCL assets and deliver a new, sustainable and cutting edge mining operation.

The new mine which will leverage on modern and next generation technology, will be environmentally sensitive and cognisant of the needs of its people and that of the communities around the area of influence.

In a statement last week, Premium Nickel Resources Botswana and its parent company, the Canadian headquartered Premium Nickel Resources announced that they have now completed the Exclusivity Memorandum of Understanding (MOU) with the Liquidator.

The MOU will govern a six-month exclusivity period to complete its due diligence and related purchase agreements on the Botswana nickel-copper-cobalt (Ni-Cu-Co) assets formerly operated by BCL Limited (BCL), that are currently in liquidation.

On February 10, 2021, Lefoko Moagi, the Minister of Mineral Resources, Green Technology and Energy Security of Botswana, affirmed in Parliament a press release by the Liquidator for the BCL Group of Companies, stating that PNR was selected as the preferred bidder to acquire assets formerly owned by BCL.

“This is encouraging for the company and for Botswana. Our ambition in this new project dubbed “Tsholofelo” is to redevelop the former BCL assets into a modern, environmentally sensitive, efficient NI-Cu-Co-water producer where sustainability and the people are at the forefront of the decisions we make,” said Mphathi in a statement last Thursday.

“We also understand that no matter how successful we are at building the “New BCL” , our success will only be measured at our ability to create local wealth , skills and support the continued transition of local economy to a longer term sustainable base.”

The next step during the exclusivity period will be the completion of the definitive agreement. Simultaneous to this the PNRB will be conducting additional investigative work on site to further its understanding of the potential of these assets.

Specifically the company will complete an environmental assessment, a metallurgical study, a review of legal and social responsibilities, a review of the mine closure and rehabilitation plans and an on-site inspection of the legacy mining infrastructure and equipment that has been under care and maintenance.

Mphathi said they continue to monitor the global Covid-19 developments noting that they are committed to working with health and safety authorities as a priority and in full respect of all government and local Covid-19 protocol requirements. PNRB has developed Covid-19 travel, living and working protocols in anticipation of moving forward to on site due diligence.

“We will integrate these protocols with the currently applicable protocols of Ministry of Health & Wellness as well as District Health Management Team ( DHMT) and surrounding communities,” reads a statement released by the Gaborone based Premium Nickel Resources team.

PNRB is looking to become a catalyst in participating and building a strong economy for Botswana, with a purpose where respect and trust are core to every single step that will be taken. “Our success will mean following international best-in-class practices for the protection of Botswana’s environment and the focus on its people, building partnerships and earning respect, through cooperation and collaboration,” explains PNRB on its website.

“We are committed to Governance through transparent accountability and open communication within our team and with all our stakeholders.” Mphathi, a former BCL Executive, is widely celebrated for achieving unprecedented profitability at the mine during his tenure as General Manager.

The Serowe-born mining guru obtained a Diploma in Mining Technology from Haileybury School of Mines in Canada. He later obtained a B.Eng. Mining degree from the Technical University of Nova Scotia. Mphathi went on to City University in London, UK and obtained a M.Sc. in Industrial and Administrative Sciences.

Before ascending to the top country managerial role of Premium Nickel Resources. Mphathi was General Manager of Botswana Ash (Botash), Southern Africa’s leading salt and soda ash producer.
He was at some point linked to Debswana top post, which is still to date not substantively filled following the death of Managing Director, Albert Milton, in August 2019.

With Mphathi out of the race and now leading the rebuilding of his former employer, the top post at De Beers- Botswana joint venture is likely to be filled by current acting Managing Director Lynette Armstrong, a seasoned finance executive with unparalleled experience in the extractive industry.

“We are happy to hear that former General Manager of BCL, Mr Montwedi Mphathi, has a relationship with the new Company that intends to resuscitate the mine, he is an experienced Mining Executive who knows BCL better, we want the mine to be brought back to life so that our people can be employed ” said Dithapelo Keorapetse Member of Parliament for Selibe Phikwe West recently in Parliament.

BCL was liquidated in October 2016 following a series of losses and government bailout occasioned by low Copper prices and allegedly poor Investment decisions and maladministration. Recently PNR CEO, Keith Morrison said his team of seasoned experts both from Canada and Botswana are committed to resuscitate the BCL assets and deliver a high performance mining operation.

“The World, Botswana and the mining industry have changed dramatically since mining first started at the former BCL assets in the early 1970s. The nickel-copper-cobalt resources remaining at these mines are now critical metals, required for the continued development of a decarbonized and electrified global economy,” he said.

Morrison added: “As we move forward, it is our goal to demonstrate the potential economics of re-developing a combination of the former BCL assets to produce Ni-Cu-Co and water in a manner that is inclusive of modern environmental, social and corporate governance responsibilities.”

He explained that to attain this, extensive upgrades to infrastructure will be required with an emphasis on safety, sustainability and the application of new technologies to minimize the environmental impact and total carbon footprint for the new operations.

“Our team remains committed to working with the local communities and all of the stakeholders throughout this period and we encourage anyone with questions or feedback to reach out to us directly,” he noted.

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Business

Lucara extends sales deal with Belgian diamond cutter

12th April 2021
Lucara extends HB Antwerp’s contract Signum technologies

Lucara Diamond Corporation, the Canadian 100% owners of iconic Karowe mine, this week announced the extension of its supply deal with Belgian diamond midstream giant HB Antwerp.

The definitive supply agreement is in respect of all diamonds produced in excess. of 10.8 carats in size from its rare gem producing Karowe diamond mine located in the Boteti district of Botswana.
Large, high value diamonds in excess of 10.8 carats in size account for approximately 70% of Lucara’s annual revenue.

Though the Karowe mine has remained fully operational throughout the COVID-19 pandemic, Lucara made a deliberate decision not to tender any of its +10.8 carat inventory after early March 2020 amidst the uncertainty caused by the global crisis.

Under the terms of this novel supply agreement with HB, extended to December 2022, the purchase price paid for each +10.8 carat rough diamond is based on the estimated polished outcome, determined through state of the art scanning and planning technology, with a true up paid on actual achieved polished sales thereafter, less a fee and the cost of manufacturing.

“Lucara is beginning to see the benefits of this strategy in accessing a broader marketplace and delivering regular cash flow based on final polished sales,” said Lucara CEO, Eira Thomas on Wednesday.

“We believe these early results warrant an extension of the arrangement for at least 24 months to determine if superior pricing and market stability for our large, high-value diamonds can be sustained longer term.”

The Canadian junior miner initiated a supply agreement with HB for large stones from its Botswana Karowe mine in July 2020, after pausing its tenders shortly after the Covid-19 pandemic began.
The deal enables Lucara to sell the rough diamonds to HB at a price based on an estimate of the polished outcome, which the companies determine using diamond scanning and planning technology.
Once HB sells the goods, it adjusts the price that Lucara receives based on the actual selling price of the polished, minus a fee and manufacturing costs.

The extended supply deal will follow the same payment terms as the initial agreement, and will be in effect through to December 2022. Lucara said in a statement this week that the agreement also provides increased tax revenue and beneficiation opportunities for the government of Botswana, and creates a streamlined supply chain for Karowe’s rough.

“More than a supply agreement, this collaboration structurally embeds a new transparent and sustainable way of working in the diamond-value chain,” said HB CEO, Oded Mansori.
“For the first time, different partners of the value chain are fully aligned, sharing data and information throughout the process from mine to consumer.”

Mansori added: “We are truly proud with this innovative and straightforward collaboration that has proven itself through the volatile and uncertain reality of 2020. We are confident to achieve even better results during the term of this new contract and demonstrate the power of a true partnership.”

Lucara, which early this year secured extension of Karowe mining license to 2040, announced over P2.4 billion funding for Karowe underground mining expansion project a fortnight ago. The Vancouver headquartered top large diamond producer says this supply agreement deal extension with HB will bring about regular cash flow for Lucara using polished pricing mechanism. Furthermore, the company says the deal has potential revenue upside, particularly suited for Lucara’s large, exceptional diamonds.

In the main, Botswana will benefit increased tax revenue and additional beneficiation opportunities for the Government and communities around Karowe mine. A streamlined supply chain that achieves alignment between Lucara and HB to maximize the value of each +10.8 carat diamond produced at Karowe.

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