It has been a year of mixed results. Staff writers BOITSHEPO MAJUBE, KEABETSWE NEWEL, KIBO NGOWI and GAOKGAKALA MAENGE give a sectoral view of the economic and business landscapes for the year 2015.
Khama targets ESP benefit
President Ian Khama and his cabinet have pegged their success or failure on the much acclaimed Economic Stimulus Package (ESP). Announced the last quarter of this year, the ESP has been introduced to kick-start a stuttering economy resulting from the collapsing mining activity, especially on the diamond front. Critics of the ESP say the program is a product of political strategy from the ruling party to save it from bleeding goodwill. In economic circles some say the ESP will give, if anything, a short-term benefit with limited multiplier effect, adding that structural defects within the business and economic landscape remain.
The major weakness, which voices in business have put across, remains the Government’s capacity limits. The ESP, requiring an even more focused capacity to deliver on time and on budget, remains a challenge. The ESP was initially expected to come online before the next financial year, as a separate initiative, however spirits were dampened when it emerged that it will only be revealed next year. However, there is still confusion, given that the private sector has been informed that the roll-out will be done before then. In fact in some circles it is said to have been released as early as last week.
The economy
Fresh data from the Bank of Botswana (BoB) has estimated domestic output at 4.2 percent for the six months ending June 2015, significantly lower than the 6.1 percent seen during the previous corresponding period. This was primarily because of a contraction in the mining-sector, the backbone of Botswana’s economy. There has been slow demand from Asia and the USA, the largest consumers of diamonds, coal and commodities, pushing prices down as well. Consequently, diamond production locally was cut, weighing down on government revenue thus reducing cash in circulation.
Water and power cuts have also contracted growth of the manufacturing sector. For the past three months, major textile exporting companies like Western Apparels and Premier Workwear had shut down because of such challenges, losing millions in export revenue. In general, companies have seen operating expenses threatening to go through the roof, while margins were squeezed in return, because of self-generating power. In the financial sector, especially banking, the low interest rate environment squeezed margins, yet lending was a challenge for the banking clientele because of a subdued business environment, and liquidity challenges in the sector as well. Low government spending also affected media businesses because of low advertising while tenderpreneurs were also in the red.
A lesson for the banking sector
Despite denials from both the regulatory authorities at Bank of Botswana (BoB) and within the commercial banking sector itself, panic struck this year, when the banks almost ran out of cash to lend to the market. From the year 2014 the commercial banks have been experiencing a rise in the loan to deposit ratio (LDR), which shot up to unprecedented levels, resulting in credit tightening by banks. The rise on the LDR simply meant that the banks were almost fully lent, with the value of loans growing quickly while deposits were stagnant.
While the LDR has been on the rise the liquid asset ratio has been declining because of lower deposits. What happened especially towards the end of 2014 overlapping into 2015 was that commercial banks had little money to loan to their clientele, creating a near-crisis. During that time, while advances grew as much as 132 percent, total bank deposits grew at a snail pace of 30 percent. Commercial banks were then close to being fully lent with an LDR of about 80 percent, while the liquid asset ratio had shrunk to about 10 percent, just close to the statutory minimum
All this was however self-made. Observations are that Botswana’s commercial banks had for a long time been ‘spoon-fed’ given their historic reliance on Bank of Botswana (BoB) bonds, which were easy cash. When the central bank reduced the bonds issued to banks, it cut the commercial banks’ revenue streams. Banks now struggled to get deposits from Batswana, mainly because the banks themselves were less innovative from the ‘intoxication’ of BoB bonds.
It was however a wake up call for the lazy banking sector which now took to the streets, working hard not to only sell their loans but also to convince people to start saving money. BoB’s P2.6 billion bailout implemented by reducing the primary reserve requirement (PRR) gave the banks a breather. However, we started seeing commercial banks running after clients asking for deposits, a rare activity in Botswana. Suddenly there was competition; attractive interest rates were now offered for deposits within the banking sector, which motivated people to even consider opening savings accounts. Attractive and innovative savings products were introduced especially by banks like Standard Chartered, which incentivized savings.
It was this year that Botswana’s commercial banking sector got to realize that retail clients, other than government bonds are also important as clients. However, performance of the sector in general this year was below par. For the first time in history, First National Bank Botswana (FNBB), the largest company on Botswana Stock Exchange (BSE) by value, saw its profitability drop by 18 percent to P591 million. Standard Chartered suffered the same fate with profits falling by over half to just P85 million. Barclays bank also saw profitability falling by over half to P85 million.
Kudos to Choppies and Sefalana
Despite slow economic growth, coupled with water and electricity challenges the retail sector has experienced tremendous activity and growth. What has been impressive is that while the industry has many players, especially foreign ones, the indigenous supermarkets have been leading in growth and innovation.
Sefalana Holdings Limited and the Choppies Enterprises Group have been business rivals for some time now. The business rivalry between Ramachandran Ottapathu and Chandra Chauhan has been good not only for the two companies but as well as for the consumers. With the vigorous growth of Choppies and expansion to all areas of Botswana, Sefalana did not want to be left behind. The Ponatshego Kedikilwe chaired company started a vigorous expansion. Shoppers, Sefalana’s brand, are today visible in almost all corners of Botswana, just as much as Choppies.
Given that these are retail supermarkets formed and grown in Botswana by Batswana, they became the preferred duo, although competitive amongst each other. This increased both companies’ market share and visibility in Botswana and cemented the two’s market dominance especially against South African owned retailers, Spar, Pick and Pay, Shoprite and others.
Interestingly, the two retail giants proved to also be competitive within the sub-Saharan region. Because they are also competing amongst themselves, this has led to Sefalana crossing borders to as far as Namibia and is busy expanding further to other countries, something which Choppies has done and is still doing. These two deserves to be praised as they have grown in leaps and bounds, with Choppies now being worth over P5 billion in market capitalization, while Sefalana is worth over P3 billion. This has placed the two companies amongst the best by value trading on Botswana Stock Exchange (BSE).
There have been a number of innovations in the sector including the introduction of online shopping by Sefalana. Choppies has made headlines this year with one of the major activities in the retail sector, the secondary listing of Choppies in the Johannesburg Stock Exchange (JSE) exposing the company to much needed capital.
The sector has seen a number of retailers selling and promoting their own branded goods. The largest retailer, Choppies, has about 50 Choppies branded products. Sefalana also has a number of its own branded products under the name Astar. Spar, Pick n Pay, Shoprite and Woolworths also have their own brands. This could see a rise in locally produced goods if the branding is done locally and if locally produced goods are used. This will lead to more employment creation, citizen empowerment and increase in quality of goods produced.
Local retail companies have been expanding their footprints beyond the borders, expanding into the region. This is a welcome development given the small local market, as it will give them scale benefits. Choppies recently opened a store in Zambia adding to their other stores across Africa in South Africa, Zimbabwe and Kenya. Sefalana on other hand also has stores across the border in Namibia and Zambia.
There is no doubt that the sector is contributing positively to the growth of the country’s GDP. The economic contribution of the sector is significant and mainly visible through the employment opportunities that it provides. Choppies alone is currently among the largest private sector employers, employing about 7000 people in Botswana alone in over 70 stores and Sefalana is currently employing about 2000 people in more than 40 stores countrywide.
This year there has seen vigorous marketing aimed at strengthening the brands and images of the retail stores. This could in a way increase competition which could be beneficial to the consumer in terms of prices and quality of goods and services offered and hence benefiting the economy at large.
Thumbs up Barclays Bank
Meanwhile, Barclays bank, which has been making losses over the years, deserves a pat on the bank. Despite a dip in profitability, the bank is now stable, possibly because of good management. The stability has been brought to all its leadership structures and it has been free of scandals at least for some time now.
Reinette van Der Merwe deserves to be credited for also re-structuring the bank to position it yet again in a place of competitiveness. Under her reign, we see new competitive products now being rolled out, a sign that a results-driven management has been put in place. Despite the turbulent times in which van der Merwe took over the stewardship of the bank, one could see stability, focus and hope for the old, powerful and respected Barclays bank. In just a few months at the bank she rolled out a strategy which seemed convincing enough at least for Barclays to become a behemoth in corporate banking while also maximizing the use of technology for the convenience of all its clientele.
A close watch on FNBB
Its growth under Lorato Boakgomo-Ntakhwana was impressive. The bank’s margins were double those of other banks. It has been a bank known for mass clientele, ranging from a student to the highest paid corporate CEO. FNBB was driven by lending especially to its massive number of clients. Further, FNBB is a very convenient bank in terms of technology usage and innovative products. With Batswana being highly indebted, perhaps the race in dominance is now on innovation, an area where FNBB used to lead. This time around other banks have joined the ship and are innovating products just as much. However, we just have to wait and see, especially under the new-broom Steven Lefentse Bogatsu, what FNBB brings to the market. His strategy is not yet clear but we trust that with time he shall crack his shell.
Standard Chartered needs more vigor
The bank has done well, despite a sharp dip in profitability due to the economic and market headwinds. However, one could openly say that this is a highly competitive market which needs no comfort zone especially if one is gunning for the top. Stanchart has fought well to now be at par with Barclays bank by market value. However, take note of the fact that Stanchart grew to be at par with Barclays at a time when Barclays bank was decelerating in all areas because of poor leadership and scandals. Perhaps we need to see a fair competition under a healthy market, where liquidity is ok, where there is reasonable economic activity and fair money circulation.
Stanchart has been doing well at financing especially parastatals, but they turned to make losses which compromised the bank’s growth. Chances are that under increased government spending, the bank could be stronger.
Torrid times for mining
Things have never been as bad for this country’s mining sector as they are now. Retrenchments in 2015 alone were well above thousands, and two copper mines collapsed owing it to the soft prices of base metals. Debswana, the biggest producer of diamonds has been forced to cut production as demand for the precious gems has hit all time lows. The only shining star within the mining sector that illuminated the world was the discovery of the 1, 111 carat diamond discovered at Karowe mine in the outskirts of Letlhakane.
Despite sacrificing royalties in an attempt to save copper mines, the government of Botswana could only watch as the metal prices slipped further, eventually forcing the mines to fold their operations. Copper’s price slide was attributed to the worsening outlook of the global economy. Demand for the metal was at its lowest owing to slow business activity as copper‘s demand is fuelled by manufacturing and construction which currently have slowed down. Thousands of Batswana who were directly and indirectly earning an income from Boseto mine, owned by Discovery Metals, and Mowana Mine, owned by African Copper, were left stranded as the two mines closed shop. Collectively the two mines directly employed around 750 employees and the majority were employed under sub-contractors.
As if things were not bad enough for copper mining, diamond prices also hit historic lows. Debswana, the world’s biggest diamond producer by sales value, cut its 2015 production target to 20 million carats from 23 million carats, leaving employees in its four mines in the country in a panic mode. The diamond giant revised its 2015 growth forecast from 4.9 percent to 2.6 percent due to the downturn in the global diamond market. Okavango Diamond Company (ODC) market sales also fell by 20 percent forcing the company to halt its sales until the market normalizes.
It was not all doom and gloom for the diamond sector as Karowe continued recovering large gem diamonds. The discovery of the second largest diamond injected life into the sector and boosted Botswana’s profile in the world. The diamond also guaranteed that Lucara Diamond Corporation, the owners of Karowe mine, invest further in anticipation of more large diamonds to come. Last week the company revealed it plans to spend between P150m and P180m on additional large diamond recovery processes at its Karowe mine. However, prices for diamonds are still far from the market prices.
Property sector sees red
Surveying the performance of BSE-listed investment property companies in 2015 it becomes clear that there is considerable pressure for these companies to maximise their investments on existing assets while also exploring opportunities for new investments. This should come as no surprise when one considers the results of the fourth “IPD Botswana Annual Property Consultative Index” released in June. The report revealed that the Botswana investment property sector is experiencing a slowdown, with ungeared total returns falling from 21.5 percent in 2013 to 11.5 percent in 2014.
Primetime Property Holdings Limited brought the point home in its financial results for the year ended August 2015 stating, “The property investment landscape has changed significantly in the last 12 months. Economic growth in Botswana has been meagre in comparison to its historic long-term average, which has been evidenced by weaker demand from tenants. Furthermore, the well documented liquidity constraints that hit the market in late 2014, coupled with the depressed economic conditions have checked the pace of growth of our portfolio’s capital value.”
Recording only a minor growth in profit from 61mn to 65mn year-on-year, Primetime made a major change by selling off two properties in Francistown and initiating the development of a shopping centre in Pilane. The company also acquired a property in Zambia and completed two major refurbishments in order to retain major tenants.
Meanwhile, New African Properties painted a similarly gloomy picture of the Botswana property market. “New retail development opportunities in Gaborone are considered limited at this time in view of the significant development that has taken place in recent years, while the Gaborone office market is considered to be oversupplied,” the company stated in its financial results for the year ended 31 July 2015. Reflecting the challenging times, the company’s profit after tax actually dropped from 211mn the previous year to 199mn during the recent period.
Meanwhile RDC Properties enjoyed a 19 percent rise in profit before tax and further focused its operations in Gaborone. The company’s lucrative Masa Centre development saw a 12 percent revenue increase and the company announced plans to convert vacant office space in the building to apartments that will be managed by Lansmore hotel.
The company also completed construction of a set of warehouses in Gaborone West and acquired the ICC Flats, also in Gaborone. Designs for construction of 45 apartments had been completed and council approvals obtained with funding yet to be secured by the time the company released its results for the half year ended 30 June 2015. Not content with its investments within Botswana, the report also noted that RDCP had reached an agreement with the owners of prime land in Cape Town to build 3 or 4 star hotel with 180 rooms and conference facilities.
Turnstar Holdings Limited recorded the highest rise in profit of all five listed property companies at 35 percent, rising from 56mn to 78mn in profit before tax, while Letlole La Rona recorded the second highest rise in profit of all five listed property companies at 27 percent in its profit before fair value adjustment.