Economic headwinds underline rugged 2015
Brian Benza | Friday December 18, 2015 12:44
The turmoil in the diamond market has hit government revenues hard in the past two years, a frailty that filtered down to the private sector and the general households.
Exacerbating the situation in 2015 was the recurring water and electricity shortages that not only slowed economic activity, but also affected the quality of life for the households.
According to the Business Expectation Survey (BES) carried out by the Bank of Botswana (BoB) in September, water and power shortages were listed as the first and second most significant challenges, respectively, facing businesses; a clear indication of the recent deterioration in the provision of these utilities.
Seemingly, the unreliable supply of water and power will continue to be a recurring burden on businesses.
Government spending and domestic demand were the other factors cited as major challenges by businesses due to perceived slow growth in government spending and household disposable incomes.
Although the concerns over inadequate skilled labour and the associated challenge of securing work permits are currently overshadowed by these other problems, they are still ranked as major constraints for doing business.
On the back of the headwinds faced by the economy, government in September halved 2015 economic growth forecast to 2.6 percent, although other analysts such as Econsult, were even more pessimistic, projecting the economy would grow by a paltry one percent this year.
Latest estimates of GDP released by Statistics Botswana indicated that the economy grew by 4.2 percent in the 12 months to June 2015, down from 6.1 percent in the previous year. This slowdown mainly reflected the weakening of the mining sector, which expanded by 1.3 percent, compared to growth of 15.2 percent in the previous year. Non-mining GDP improved marginally from 4.5 percent in 2014 to 4.8 percent in 2015, but remained weak by historical standards.
With the traditional mainstay of the economy, mining, continuously losing its sparkle in terms of contribution to economic growth, the services sector was once again the driver of economic growth with trade and hotels, finance and business services sector anchoring GDP growth.
Mining
The international commodities market was heavily impacted by the slower than anticipated recovery in the global economy and Botswana, with 80 percent of foreign currency earnings and 30 percent of revenues coming from minerals, was not spared.
Debswana cut its production to 21 million carats this year from an original target of 22 million as demand for rough deteriorated on the back of a glut in the pipeline, particularly at the polished stones stage.
With the sluggish environment expected not to end soon, the company has gone on to even trim 2016 production target further down to 20 million from 21 million carats. On top of that, Debswana will close the smallest of its four mines, Damtshaa, while about 250 people will be redeployed from that mine as well as from Orapa No. 1 Plant.
Reflecting the weak demand for rough diamonds from international buyers, the Okavango Diamond Company (ODC) recorded a 35 percent drop in sales in the first nine months of the year compared to the same period in 2014.
In the period January to September, ODC sold 1.64 million carats of rough valued at $303 million.
According to ODC deputy managing director, Marcus ter Haar this represented a 35 percent drop in the value of rough stones sold in the same period last year, which stood at $463 million.
In carat volumes, ODC sales in the period dropped by 40 percent from last year’s 2.7 million carats.
In the year, base metals were also heavily impacted by the commodities slump, with copper prices touching a six-year low. The first major casualty of the copper prices fall in 2015 was Discovery Metals Limited, which was forced to close its Boseto Mine near Maun, leaving over 800 workers jobless.
African Copper, the only other privately owned base metals producer in Botswana, tried to sail through the year surviving on debts from its parent company, but finally succumbed to the copper slump this month. Last week, the High Court issued the final liquidation order against African Copper, after a creditor applied for the business of the company to be wound up over a P47 million debt. Over 500 fulltime workers and contractors lost their jobs with the demise of African Copper.
State-owned BCL Mine was equally affected by the commodities prices crash but managed to survive the year, although reports of delayed workers’ salaries due to cashflow problems, surfaced towards the end of the year.
While developments in commodities markets are negative – for Botswana’s copper and nickel producers as well as diamonds – the short-term impact should not be overstated. Analysts at Econsult say the mining sector is not closely integrated with the rest of the economy, and the mining slowdown does not immediately cause other economic activities to contract across the country, although there may of course be a direct effect in towns that are dependent upon mining. GDP data to the middle of 2015 indicate that growth in the non-mining private sector has continued at a robust rate of nearly five percent. “Although there may be fiscal and balance of payments problems coming up, there is no immediate crisis. Budgeted government spending continues, even with revenue shortfalls, financed from accumulated savings,” an economic review report from Econsult says.
Banking
2015 will certainly be remembered in the banking history books as the year a new era downed on the industry. Profitability of the banks dropped 32 percent in the first nine months of 2015 from a year earlier as reduced interest margins, rising bad debts and a freeze on fees imposed by the regulator weighed on lenders.
Combined net income fell to P789.7 million, financial statistics from the BoB shows. In the period, banks’ net interest income slipped about eight percent to P2.3 billion as provisions for bad and doubtful debts climbed 3.8 percent.
This followed a similar drop in 2014 when profitability of the country’s 11 operating commercial banks fell by 16.7 percent, marking the beginning of the end to an era of supernormal profits for the industry. According to a 2014 Banking Supervision Annual Report, the banking sector’s after-tax profit decreased by a significant 16.7 percent to P1.5 billion last year due to a low interest rates environment coupled with a high rise in non-performing loans.
From a regulation perspective, the year also saw the central bank, after years of aggressively mopping up excess liquidity from the banking system, become a liquidity provider.
In April, the apex bank released P2.3 billion to ameliorate tight liquidity in the banking system through cutting of the primary reserve requirement. In a bid to bolster economic growth through reduced cost of lending by commercial banks, the central bank cut the benchmark rate by a percentage point in the first half of the year.
Due to the tight liquidity in the banking system pushing up cost of sourcing loanable funds, commercial banks found themselves crafting innovative products to attract cheaper deposits in the year. In a tough year that was characterised by tight margins and liquidity, freeze on fees, and declining creditworthiness of customers, banks will be hoping for a better 2016 as articulated by the CEO of the country’s largest bank in Botswana.
Addressing bank customers in Francistown recently, FNBB CEO Steve Bogatsu was quoted as saying the banking industry anticipates improved business through government’s ESP.
Energy
The Morupule B power station has dominated headlines for the past four years and 2015 was no different. Output from the troubled power plant kept oscillating throughout the year, leading to sporadic power outages throughout the country.
Barring any marked improvement in the performance of the power station next year, the power supply –demand gap is expected to continue in 2016, although recent events point to a brighter future beyond next year.
Considerable ground was covered in 2015 in efforts to boost electricity supply with the awarding of the tender to refurbish Morupule A. A preferred bidder for the construction of the 300MW expansion of Morupule B was also identified.
In the year, government published an Expression of Interest (EOI) inviting bids from companies interested in building and operating a solar power station to supply Jwaneng as well as the northwest region, where copper mines are sprouting. The IPP tender by South Africa’s Eskom also lit up the local coal sector as various coal exploration moved to position themselves for the lucrative tender.
Botswana junior coal explorer, Shumba Energy, partnered with a South African firm, Mulilo Renewable Project Developments for the joint development of the Mabesekwa Export Independent Power Plant (MEIPP), which will export power to the neighbouring country.
The MEIPP is a 300MW energy capacity project with a minimum 260MW net supply to grid after auxiliary and mine consumption.
Another coal firm Jindal, which owns 2.7 billion tonnes of coal resources in the Mmamabula coalfields, also recently announced plans to offload 74 percent of their company to South Africa’s Glendal Trading.
African Energy has announced plans to sell its Mmamantswe project to South African buyers.