Bank of Botswana executives are optimistic the economy will expand at a much higher rate in 2018 after taking a knock last year, as a result of positive sentiments both locally and globally, Botswana Guardian has heard.
This came out clearly at a press conference which was meant to announce Monetary Policy Committee's (MPC) decision on the benchmark rate, which has been maintained at 5 percent for the third time this year. But what is making central bank’s head honchos buoyant on the economic performance while rainfalls have been recorded above normal levels, made even worse by falling disposable income within the working as well as muted consumer confidence in the country and an increasingly protectionist mentality by Donald Trump United States ?
Bank of Botswana Governor Moses Pelaelo and the bank’s director, research and financial stability, Dr Kganetsano Tshokologo are adamant that the economy will pick to levels higher than last year as a result of improved economic conditions here and elsewhere.
Responding to a Botswana Guardian question on why they are buoyant, Tshokologo stated that economic conditions suggest that the global economy will grow even better than predictions made by International Monetary Fund (IMF) early in the year. In January, the Washington based Fund uplifted its global economic projection by 0, 2 percent to 3, 9 percent, arguing that ‘momentum is building in global economic activity and Donald Trump’s tax cuts in the US are likely to stimulate activity further’.
Global growth is important for Botswana’s economy as the mineral rich country depends on consumer confidence in developed countries which have the ability to purchase luxury goods such as diamonds. De Beers, a joint venture between Botswana and Anglo American sells most of its diamonds mined in Botswana to United States of America, China and India. De Beers is also pinning its hope on synthetic diamonds for its revenue going forward. For the first time the company will start making synthetic diamonds for the retail business this September. Botswana supports the latest move by the world Number 1 rough diamonds producer.
The other reason why the country's Gross Domestic Product (GDP) is expected to expand further this year because as the economy improves in developed countries, the tourism industry in Botswana also benefits, said Kganetsano. Tourism is one of the biggest contributors to national GDP. There are other sectors which will pick Botswana’s economy this year, stated Pelaelo in a prepared speech this Tuesday. “GDP is projected to expand at a faster rate in the short-to-medium term, driven largely by growth in the services sectors and recovery in mining activity, in line with the positive global economic prospects,” said the Governor.
Furthermore, the projected accommodative monetary conditions in the domestic economy and expansion in government expenditure, as well as relative stability in water and electricity supply, are expected to support economic activity in the non-mining sectors. Overall, the economy is expected to operate close to but below full capacity in the medium term. Water and electricity sectors which have in the past dragged down the economy, have now stabilised and this will be critical to support other sectors of the economy such as manufacturing and construction. Finance and Economic Development minister, Kenneth Matambo has stated the economy will grow by 5, 3 percent this year on the backdrop of improved diamond industry.
Two weeks ago, IMF economists visited Botswana and also came to the conclusion that, the economy will bounce back. “In 2018, economic growth is expected to rebound supported by higher diamond sales, a stable macroeconomic environment, and higher government spending,” said the team. Meanwhile, IMF has advised the MokgweetsI Masisi-led government to remove many tax exemptions, increase property taxation and consider making the personal income tax more progressive.
“On the expenditure side, it will be important to contain the growth of recurrent spending, improve the efficiency of social programs, and protect public investment while prioritising projects with the highest payoffs. In addition, the financial sector can be further developed to intermediate additional savings and lend to productive sectors by strengthening creditors’ rights, improving information on borrowers’ creditworthiness, increasing the issuance of government bonds to develop a reliable yield curve, and promoting mobile payments,” said IMF economists.
The diversification and job creation efforts requires focus on prompt and bold market friendly reforms that can reduce the costs of doing business, improve skills in the labor force, make the public sector more efficient, privatise key enterprises, and enable competition and entry of firms in sectors with latent comparative advantage.
Bank of Botswana has kept benchmark interest rate stable, arguing that the economic fundamentals are well in order to tame inflation within the medium term range. The Monetary Policy Committee (MPC) meeting, which was the last for Governor Linah Mohohlo, decided to keep rates at 5, 5 percent. “The current state of the economy and both the domestic and external outlook, including inflation forecast, suggest that the prevailing monetary policy stance is consistent with maintaining inflation within the bank’s medium term objective range,” said the bank earlier in the week.
BoB has set inflation target at 3-6 percent in the medium term. Botswana’s western neighbour, Namibia also joined the local central bank in keeping rates stable at 7 percent for the fourth time in a row on Wednesday. Meanwhile, the MPC said the monetary policy is also aligned to safeguard financial stability. “In this respect, credit growth is considered to be at sustainable levels; posing no threat to financial stability,” said the MPC. The total credit extended to consumers within the banking industry increased sharply during the month of July, the bank said previously.
During that month credit ballooned by 8, 8 percent year on year. Credit extended to households and businesses jumped by 10, 9 percent and 6, 1 percent respectively. In August, the bank reduced interest rate from 6 percent to 5 percent, in a bid jack up the mining-led economy.
The domestic economy has been struggling in the past few years on the backdrop of poor mining performance. In the same period, mining, which is led by diamonds declined by 23 percent. Real Gross Domestic Product is estimated to have contracted by 0, 3 percent in the 12 months to June 2016. In the same period last year, the landlocked economy leapfrogged by 3, 1 percent. Non-mining output for the period under review grew by 4 percent, said the bank. Tourism and communications services are some of the sectors which boosted non-mining.
Barclays Bank Botswana is expecting interim consolidated profits to June 2016 to be higher than the previous period. The latest notice on improved results comes amid tough trading environment that domestic banks have been subjected to such as lower rates and sluggish economic growth.
The company which is publicly listed has however not disclosed to its shareholders how much profit to expect, save to tell shareholders and the regulator, that the results ‘will be higher than that reported for the period ended June 2015’.
The lender which is under the care of South African-born Reinette van der Merwe hinted on the profits a day after the Monetary Policy Committee (MPC) cut key lending rate from 6 percent to 5,5 percent. Bank of Botswana said a rate slash is necessary to inspire growth in the domestic market.
It is not clear what could have contributed to the rise in Barclays bank’s profits for the period under review. However, writing in the bank’s annual report for 2015, Merwe acknowledged that the sector has been under pressure in the past two years, and they are not immune to challenges which include tight regulatory changes. However, Merwe was upbeat about the year ahead(2016), saying they expect strong revenue from the retail sector. The bank’s digital platforms will also come in handy for the bank. In the last couple of months, the bank launched various digital platforms which allow customers to do banking outside banking halls using their mobile gadgets.
Barclays has also been rigorously advertising their business banking services while some of its peers developed cold feet regarding lending to capital intensive projects in the face of market turbulences. Speaking to BG Business on Wednesday, Head of Research at Motswedi Securities, Garry Juma said the bank’s restricting exercise is starting to pay off. Since Merwe was appointed to head the bank three years ago, the lender undertook a restructuring exercise both in terms of human capital and delivery channel platforms.“The bank is also coming from a lower base,” said the analyst referring to the bank’s half year results to June 2015.
During the period, the bank’s profit was P86, 9 million, compared to P123, 6million. The company has also managed to shrug off negative perception which has made the round ever since Barclays plc announced it was pulling out of Africa operations. In the just-ended period, the bank clinched a $100 million deal to fund BCL copper mine. The loan to the struggling miner has been backed by government in case the mine fails to pay up.
It is some of these corporate deals that will also keep Barclays at the top in the coming months, said Juma. Last month, the bank signed a $125 million credit guarantee scheme with Overseas Private Investment Corporation (OPIC). Under the historic arrangement, the United States government will use 75 percent of the credit risk to fund the country’s diamond beneficiation initiatives. The funding could not have come at a better time for the country’s downstream diamond cutting business, which is struggling to receive rough diamonds to process on the backdrop of reduced diamond demand globally.
Last month, minister responsible for minerals, Kitso Mokaila told lawmakers that the industry dropped by nearly half from the US$936.36 million recorded in 2014 to US$502.16 million in 2015.Two out of 21 companies that were operating in Gaborone at the beginning of 2015 had closed shop by year-end due to viability problems, stated Mokaila. “Therefore, there are only 19 operational diamonds cutting and polishing companies operating in Botswana at the moment and they employ around 2,000 people,” said Mokaila.
Barclays Bank which has upped the ante on marketing and promotional activities for its products and services has cautioned its shareholders when dealing with its securities until the results are formally released.
A decision by the Monetary Policy Committee (MPC) to slash key lending rate is a blessing for customers while commercial banks are already experiencing profitability challenges - will take a further knock. This is the general view from analysts who spoke to Botswana Guardian on Wednesday, days after a closed-door meeting of the MPC voted in favour of a rate cut from 6,5 percent to 6 percent.
The decision to cut the bank rate ‘is good for consumers because the interest they pay on their loans from commercial banks will be reduced, an investment Analyst Karabo Tladi of Black Thread Capital said on Wednesday afternoon. In theory lower rates are supposed to encourage consumer spending, said the analyst. “In other words consumers will spend more rather than save more because there is little interest to receive from their savings,” he stressed. Spending by nature drives up inflation. On another point, Tladi said that some consumers who previously did not qualify for certain loans might qualify. “Consumers can now get mortgages, buy cars and improve their standard of living,” he added.
However, Tladi warned this might be inflationary in a long term if the rate goes out of the BoB’s objective range of 3-6 percent. Another financial commentator, Tlotlo Ramalepa who is a research analyst at Motswedi Securities said the development is a positive move for consumers. This is because they (customers) will get loans at relatively cheaper rates, as banks are expected to cut rate accordingly. Banks such as Stanbic have already followed suit by adjusting rates downward accordingly. Ramalepa pointed out that the private sector also stands to benefit because they will seek cheaper funding for business expansion and create employment and contribute to the economic growth of the country. The economy is expected to grow by around 5 percent this year. However, some commentators are doubtful of this since the main cog of the economy - mining industry - is blowing hot and cold.
The benefits that consumers will enjoy on the backdrop of the rate reduction, is not going to be enjoyed by the banking industry, which is half the size of the economy. The banks are hoping for more profits, especially coming from a liquidity squeeze, which nearly brought the industry to its knees. The central bank revised the primary reserve requirement in April this year. “Rates are now at the lowest in more than 20 years. Banks like Barclays which interest income makes a big portion of their total income from operations will be affected more than others like FNBB (First National Bank Botswana) which has been very innovative and as a result generate a big portion of their income from non-interest income,” said Tladi.
“This (decision to reduce bank rate) will also discourage savings at the time when the banking sector is facing liquidity challenges. If rates are low, people will rather invest their money to buy shares and other investment vehicles rather than saving the money in the bank because the returns they get are very small”. Ramalepa said that the move might bode ill for the banking sector as they may get low interest income due to low net interest margins. He said that this will also affect bank’s profitability. It remains a matter of speculation if banks will continue to implement tight credit policies, in a bid to limit instances of defaults by some customers. That was the trend before and after a P2, 3billion lifeline that was extended to banks, as a result of liquidity squeeze caused by limited cash. The current challenges in the industry continue to affect banks’ profitability.
A leading lender has already taken a bite. FNBB this week notified share shareholders that the lender overall performance to be reported for the financial year ended 30 June 2015 is likely to be lower than the corresponding year ended 30 June 2014. By reducing the lending rate, the MPC is going the opposite direction to what other central banks in the African continent are doing by raising interest to bolster their respective currencies. Such countries include neighbour South Africa, Kenya and Ghana.