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The fourth wave of debt made more dangerous by COVID-19

The COVID-19 pandemic has triggered a massive increase in global debt levels, including in emerging market and developing economies (EMDEs). Among these economies, government debt is expected to increase by 9 percentage points of GDP in 2020- its largest increase since the late 1980s when EMDEs saw a series of debt crises.

According to a new World Bank Group Flagship Report, private sector debt is also expected to rise sharply as firms deal with the fallout of the global recession. The rapid increase in debt that started in 2010 before the pandemic, was a major cause of concern, as similar previous waves of debt have ended with widespread financial crises, such as the Latin American debt crises in the 1980s, and the East Asia financial crisis in the late 1990s.

Previous crises had frequently been triggered by exogenous shocks that resulted in a sharp increase in investor risk aversion and sudden stops of capital flows. Global growth slowdowns were often catalysts for crises, this is according to the WB report.

The pandemic, the report says, has made the fourth wave of debt even more dangerous by increasing its risky features. The sheer magnitude and speed of the debt buildup heightens the risk that not all of it will be used for productive purposes.

For now, unprecedented monetary policy accommodation has calmed financial markets, reduced borrowing costs, and supported credit extension. However, the report indicates, amid the economic disruption caused by the pandemic, historically low global interest rates may conceal solvency problems that will surface in the next episode of financial stress or capital outflows.

In addition, recent policy moves may erode some of the improvements that have occurred in EMEs in monetary, financial and fiscal policy frameworks, central bank credibility, and fiscal sustainability.

As a result of sharp output collapses combined with unprecedented policy stimulus, debt-to-GDP ratios are set to rapidly reach new highs. Global government debt is expected to reach 99 percent of GDP for the first time on record in 2020. Among EMDEs, total debt had already risen by about 7 percentage points of GDP each year prior to the crisis, in 2020, government debt alone is expected to rise by 9 percentage points of GDP, while corporate indebtedness is also likely to sharply increase.

At the onset of the pandemic, financial markets came under considerable strain, with sharply rising sovereign bond spreads for highly indebted EMDEs, a historic flight to safety, and record capital outflows from EMDEs. Financial conditions have since eased due to unprecedented central bank easing in major advanced economies. The report further indicates that major advanced economy central banks launched or expanded asset purchase programs, and several EMDE central banks have joined them. Real policy rates are negative in advanced economies, as in the first wave of debt.

With the onset of the COVID-19, several new developments have spurred financial market activity in the midst of a collapse in output: the reach of central banks into new financial market segments has broadened; governments have heavily encouraged credit extension; and regulators and supervisors have eased restrictions.

Quantitative easing by EMDE central banks has eased borrowing conditions in financial market segments that would otherwise only be indirectly affected by monetary policy rate cuts. This has ensured continued access to finance in the midst of the recession but this may crowd out private sector investors if sustained over a prolonged period in illiquid EMDE financial markets.

It was further shared in the report that government support packages have encouraged continued credit extensions to corporates. About 40 percent of the fiscal support from governments in EMDEs constitutes liquidity support measures such as loans, equity injections and guarantees. World Bank says some governments have also encouraged banks to make use of available capital and liquidity buffers to support lending.

While these are necessary to avoid widespread bankruptcies, they may support nonviable zombie firms. These contingent liabilities, the World Bank reports, could eventually migrate onto government balance sheets, either in a financial crisis, or, indirectly, in a period of sustained low growth.

Rising debt is less of a concern if it is used to finance growth-enhancing investments, particularly if they boost exports. During the first three waves of debt, borrowing was often used to finance productive investments. However, there are also many examples where debt was employed for less productive uses, including favoring domestic industries, or financing construction and property booms that did not raise productivity.

World Bank indicated that a surge in debt without an increase in growth-enhancing investments projects is one of the factors that led to debt crises. The pandemic has necessitated large-scale borrowing to finance many critical fiscal support measures. However, the scale and speed at which these measures were introduced creates considerable potential for diversion and misuse of funds.


Grit divests from Letlole La Rona

22nd March 2023

Grit Services Limited, a member of the pan African real estate group, London Stock Exchange listed Grit Real Estate Income Group is divesting from Letlole La Rona Limited (LLR), a local real estate company established by government investment arm Botswana Development Corporation over a decade ago.

The Board of Directors of Letlole La Rona Limited this week announced in a statement to Unitholders that Grit Services Limited (‘Grit’) has informed them of its intention to exit its investment in the company.

Grit has been a material shareholder in LLR since 2019. On 07 March 2023, Grit sold 6 421 000 linked units, representing 2.29% of the Company’s total securities in issue, at a market value of BWP 22 537 710.

This trade follows previous sales of 6.79% in December 2022, as communicated to Unitholders on 10 January 2023, as well as a further sale of 4.78% (representing 13 347 068 linked units) on 24 February 2023 to various shareholders.

In aggregate, Grit has sold 13.9% shareholding in the Letlole La Rona between December 2022 and March 2023, resulting in current shareholding of 11.25% in the Company.

Letlole La Rona said in the statement that the exit process will take place in an orderly manner so as to maintain stability of the Company’s share price.

The statement explained that Grit’s sale of its entire shareholding in LLR is in line with its decision to exit investments where it does not have majority control, or where it has significant exposure to currencies other than US dollar, Euro or hard-currency-pegged revenue streams.

“Grit has announced similar decisions pertaining to certain of its hospitality assets in Mauritius recently. The Company would like to advise Unitholders that it remains focused on long-term value delivery to all stakeholders” LLR said

In July last year as part of their Go-to-Africa strategy Letlole La Rona acquired an initial 30% equity stake in Orbit Africa Logistics, with an option to increase this investment to 50%. OAL is a special purpose vehicle incorporated in Mauritius, owning an industrial asset in a prime industrial node in Nairobi, Kenya.

The co-investment was done alongside a wholly owned subsidiary of London listed Grit. The Orbit facility is situated on a prime industrial site on Mombasa Road, the principal route south of Nairobi center, serving the main industrial node, the port of Mombasa and the industrial town of Athi River and is strategically located 11 kilometers south of the international airport and 9.6 kilometers from the Inland Container Depot.

Grit shareholding in Letlole La Rona was seen as strategic for LLR, for the company to leverage on Grit’s already existing continental presence and expand its wings beyond Botswana borders as already delivered by Kenya transaction.

Media reports have however suggested that LLR and Grit have since late last year had fundamental disagreements on how to go about the Go-to-Africa strategy amongst other things, fuelled by alleged Botswana government interference on the affairs of LLR.

Government through LLR founding shareholder – Botswana Development Corporation has a controlling stake of around 40 percent in the company. Government is the sole shareholder of Botswana Development Corporation.

Letlole La Rona recently released their financial results for the six months ended December 2022, revenue increased by 4% to P50.2 million from P48.4 million in the prior comparative six months, whilst operating profit was up 8% to P36.5 million. Profit before tax of P49.7 million was reported, an increase of 8% on the prior comparative six months.

“We are encouraged by the strong results, notwithstanding a challenging economic environment. Our performance was mainly underpinned by annual lease escalations, our quality tenant base and below average market vacancy levels, especially in our warehouse portfolio,” Kamogelo Mowaneng, Letlole La Rona Chief Executive Officer commented.

LLR reported a weighted average lease expiry period of 3.3 years and escalation rates averaging 6.8% per annum for the period ended 31 December 2022.Its investment portfolio value increased by 14% year-on-year to close the period at P1.4 billion, mainly driven by the acquisition of a 30% stake in OAL in July 2022.

The Company also recorded a significant increase in other income, predominantly due to foreign exchange gains on the OAL shareholder loan. “We continue to explore pipeline opportunities locally, and regionally in line with our Go-to-Africa strategy and our interest remains on value-accretive investments,” Mowaneng said.

An interim distribution of 9.11 thebe per linked unit was declared on the 6th of February 2023 for the half-year period to 31 December 2022, comprising of a dividend of 0.05 thebe and debenture interest of 9.06 thebe per linked unit which will be paid to linked unit holders registered in the books of the Company at the close of business on 24 February 2023.

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Stargems Group establishes Training Center in BW

20th March 2023

Internationally-acclaimed diamond manufacturing company StarGems Group has established the Stargems Diamond Training Center which will be providing specialized training in diamond manufacturing and evaluation.

The Stargems Diamond Training Institute is located at the Stargems Group Botswana Unit in Gaborone.

“In accordance with the National Human Resource Development Strategy (NHRDS) which holds the principle that through education and skills development as well as the strategic alignment between national ambitions and individual capabilities, Botswana will become a prosperous, productive and innovative nation due to the quality and efficacy of its citizenry. The Training Centre will provide a range of modules in theory and in practice; from rough diamond evaluation to diamond grading and polishing for Batswana, at no cost for eight weeks. The internationally- recognized certificate offered in partnership with Harry Oppenheimer Diamond Training School presents invaluable opportunities for Batswana to access in the diamond industry locally and internationally. The initiative is an extension of our Corporate Social Investment to the community in which we operate,” said Vishal Shah, Stargems Group Managing Director, during the launch of the Stargems Diamond Training Center.

In order to participate in this rare opportunity, interested candidates are invited to submit a police clearance certificate and a BGCSE certificate only to the Stargems offices.  Students who excel in these programs will have the chance to be onboarded by the Stargems Group. This serves as motivation for them to go through this training with a high level of seriousness.

“Community empowerment is one of our CSR principles. We believe that businesses can only thrive when their communities are well taken of. We are hoping that our presence will be impactful to various communities and economies. In the six countries that we are operating in, we have contributed through dedicating 10% of our revenues during COVID-19 to facilitate education, donating to hospitals and also to NGOs committed to supporting women and children living with HIV. One key issue that we are targeting in Botswana is the rate of unemployment amongst the youth. We are looking forward to working closely with the government and other relevant authorities to curb unemployment,” said Shah.

Currently, Stargems Group has employed 117 Batswana and they are looking forward to growing the numbers to 500 as the company grows. Majority of the employees will be graduates from the Stargems Diamond Training Center. This initiation has been received with open arms by the general public and stakeholders. During the launch, the Minister of Minerals and Energy,  Honorable Lefoko Moagi, stated that the ministry fully endorses Stargems Diamond Training and will work closely with the Group to support and grow the initiative.

“As a ministry, we see this as an game changer that is aligned with one of the United Nations’ Six Priority Sustainable Development Goals, which is to Advance Opportunity and Impact for Diversity, Equity, and Inclusion (DEI). What Stargems Group is launching today will have a huge impact on the creation of employment in Botswana. An economy’s productivity rises as the number of educated workers increases as its skilled workmanship increases. It is not a secret that low skills perpetuate poverty and widen the inequality gap, therefore the development of skills has the potential to contribute significantly to structural transformation and economic growth by enhancing employability and helping the country become more competitive. We are grateful to see the emergence of industry players such as Stargems Group who have strived to create such opportunities that mitigate the negative effects of COVID-19 on the economy,” said the Minister of Minerals and Energy.

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Food import bill slightly declines

20th March 2023

The latest figures released by Statistics Botswana this week shows that food import bill for Botswana slightly declined from around P1.1 billion in November 2022 to around P981 million in December during the same year.

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