IIMA February 2020 Issue 7 by LCM Capital

IIMA

FEBRUARY 2020 ISSUE 7

BOTSWANA 2020/2021 BUDGET REVIEW Special edition

2 Introduction

3 Job Creation Private Sector Led Economy to Boost Job Creation

7 Budget Allocation

11 Cyber Security No. 1 Global Risk and Why BW should care

Budget Deficit Calls for Austerity Measures

9 Regulation & Policy Deregulation Key to Good Business Environment

14 Climate Change Indigenous People Voice Missing in climate change Dialogue

BW 2020/2021 Budget Speech Special Edition

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ebruary is a crucial month in Botswana's

financial calendar, not because of Valentine's Day or Black History month in the United States of America but the delivery of the ministerial budget speech which will set the tone of the direction of key economic developments and policies for the citizens and residents of Botswana in the 2020/2021 financial year. Unlike father Christmas who delivers presents all over the world on a sleigh, the iconic delivery of the budget speech is a caricature of a well tailored suit donned finance minister carrying a classical black suitcase ready to divide the ministerial budget pie. 2020 has been locally declared 20-plenty thus there is a lot of expectation and pressure for the new face at the helm of the finance ministry to deliver a budget that will ease worry and ignite hope to the masses who are thirsty for solutions for the pressing issues affecting the economy. The budget speech comes at the backdrop of the just ended meeting of the great minds and well funded stakeholders " World Economic Forum's 50th Annual Meeting" in Davos, where Botswana's Presidential delegate was in attendance for the second time in a row.

I n t r o d u c t i o n | Pa g e 2 The 50th Annual Meeting Manifesto defines the purpose of a company as an engagement of all stakeholders in a shared and sustained value creation, that extend beyond the company but all its stakeholders; employees, customers, suppliers, local communities and society at large. As a result, citizens and residents of Botswana are anticipating that the budget speech will cater for all stakeholders taking into consideration number 1 pressing issue, lack of job creation across diverse economic sectors. Statistics of Botswana youth unemployment rate of over 20% will be the grey cloud hovering over the 2020/2021 budget. As the oldest of Generation Z, which refers to the generation that was born between 1996 to 2010 enters the workforce in 2020, there is a dire need to alleviate the employment crisis and find ways to enable business friendly environment that will create sustainable employment for the new entries and those still on the unemployment register. On this special edition, our Research & Analytics Team zoom in on the 2020/2021 budget speech to discover and unlock the direction that this new administration is embarking on. We will provide insights on job creation, why previous year budget deficit calls for austerity measures, why deregulation is key to good business environment and why indigenous people are the missing voice in the climate change dialogue.

Founder & CEO-Lindiwe Mafavuneh LCM Capital

Private Sector Led Economy to Boost Job Creation

As the old adage goes, "the grass is always greener Empty text on the other side", but I cannot help but play the devil's advocate and say the grass is always green where you water it. It has been my wish to attend the World Economic Forum after many years of following the event religiously from the comfort of my computer. This year was not different, still managed to catch a few panel discussions of key global issues whether it was climate change, the President of Botswana interview on CNBC with the backdrop of the Swiss Alps or the keynote opening address of the United States of America President that was full of impressive, biggest iconic economic achievements in the USA 50 year history.Â Key takeaways from the opening address was how the USA managed to achieve 3-4% unemployment rate, the lowest in 50 years, 2 million millennial jobs for the 25-34 demographic group and how 3.5 million people joined the workforce.

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I was astonished by the world's economic powerhouse ability to generate jobs within it's borders. What was the driving force for these remerkable statistics? A further drill down to the statistics suggests that manufacturing, low tax regime, change in trade reforms and independent energy industry were the drivers and fuel to delivering the enviable results. The ripple effect of the low unemployment rateÂ resulted in the stock market appreciation of 50% and US$90 trillion household wealth boosting pension funds. The deregulation market and tax cuts attracted investors from all over the world resulting in the USA taking 1/4 of foreign direct investment market share.Â Evidentely, it is plain to see why unemployment is everyone's problem not just the government. Single digit unemployment rates is a signal of a thriving economy were everyone benefits. But how do developing economies arrive here?

Private Sector Led Economy to Boost Job Creation

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Job Creation Drivers Manufacturing

Independent Energy Market

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Low Tax Regime

Trade Reforms

Private Sector Led Economy to Boost Job Creation

High unemployment mostly affecting the youth is quite an enigma in developing countries that has left everyone overwhelmed to bring tangible solutions forward. With the level of entrepreneurship activity that has engulfed the African continent you would expect direct and indirect creation of jobs emanating from these activities. However, there are a few jobs created every year that can absorb the thousands and thousands of youth in search of decent living and wages. There is also limited room for traditional companies to create more jobs with the current economic climate calling for more nimble and agile companies. Botswana government which is carrying a P5.22 billion expenditure deficit will instill austerity measures in the 2020/2021 financial year to curl the administration bill which is mostly civilian servants salaries. With government and incumbent companies shrinking their wage bill, where will jobs come from? The solution lies with the private sector primarily the Small, Medium and Micro-Sized Enterprises (SMMEs) that already form the bulk of emerging companies in the current low productivity and economic activity business climate to take the lead in creating jobs to stimulate the economy and catalyze economic growth. As the government weans itself from being the front runner in job creation and gives way to the private sector to take the lead, there will be a need for reforms and new policies that should facilitate these new aspirations and goals. SMMEs in Botswana are heavily dependent on government for funding, procurement and services. When the government catches a cold due to micro and macro economic factors, the whole local SMME ecosystem catches a cold.

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Add short body of text Economic Growth Focus 2020/2021 Botswana Agriculture Manufacturing ICT-Innovation According to the Minister Of Finance Dr. Thapelo Matsheka, as part of the transformation agenda, Government will be refocusing attention to the agriculture, manufacturing and ICT sectors, as these sectors have the potential to; boost economic growth, promote exports development, improve efficiency, create job opportunities, and reduce poverty. This over dependence of SMMEs on government has resulted in government competing against itself and not leaving room for SMMEs to grow independently and innovatively. SMMEs cannot compete with a well resourced and funded government but by allowing SMMEs to thrive in a business friendly environment we will see more sustainable growth of SMMEs that will absorb the youthful educated workforce, in turn will boost economic growth especially pension funds, insurance and other service providers. A single digit unemployment rate is not a pipe dream or building castles in the sky. It can be achieved through government concerted efforts to provide and enable a business friendly environment that recognize the importance of allowing their young citizens to participate in economic growth. Lessons can be learnt from the world biggest economies such as the USA who have consistently achieved low unemployment rates by simply allowing the participation of SMMEs in economic growth as a result upliftying a million people out of poverty.

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" High Youth Unemployment epidemic requires a mindset shift of experienced professionals across diverse sectors to forge new paths and industries that will impact knowledge and absorb the youthful workforce. The time has come to have more job creators in the local and regional African market". Lindiwe Mafavuneh Founder & CEO LCM Capital

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B u d g e t D e f i c i t C a l l s f o r Au s t e r i t y M e a su r es

2020/2021 Ministerial Recurrent Budget Pula Billion

Basic Education Defence, Justice & Security Health & Wellness Local Gov't & Lands Tertiary Education, Research, Science & ... Transport &

P51.37 BN Budget

Communication Presidential Affairs, Governance Agricultural and Pub... Development and Food Securi... Investment, Trade and Industry Land Management, Water and FinanceSe... and Sanitation Economic Development Other Ministeries

2020

Source: 2020/2021 Budget Speech

Ministry of Basic Education Ministry of Defence, Justice and Security Ministry of Health and Wellness Ministry of Local Government and Rural Development Ministry of Tertiary Education, Research, Science and Technology Ministry of Transport and Communications Ministry of Presidential Affairs, Governance and Public Administration Ministry of Agricultural Development and Food Security Ministry of Investment, Trade and Industry Ministry of Land Management, Water and Sanitation Services Other Ministries

2019

MINISTERIAL BUDGET ALLOCATION

Ministry of Finance and Economic Development

% 18% 17% 15% 14% 10% 4% 3% 3% 2% 2% 2% 12%

The current administration strategy is to elevate the economy from a middle income economy to a high income economy. The top 5 Ministerial gainers is a reflection of the 5 year strategy to a knowledge based economy, hence the high allocation to the Ministry of Basic Education & Ministry of Tertiary Education, Research , Science & Technology.

B u d g e t D e f i c i t C a l l s f o r Au s t e r i t y M e a su r es

2020 Economic Growth Rates

3.3%

Global

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2020/2021

P BILLION

Revenue & Grants

62.39

Expenditure

4.4%

Domestic

2020/2021 speech is anchored around the creation of an inclusive society with projected average growth rate of 6% per annum that will yield country per capita of US$12,000 ushering the country into high income status by 2036. These aspirations of citizen economic empowerment led economy that leaves no one behind are hindered by an unsustainable fiscal currently sitting on P10 billion deficit due to an economy that is struggling to diversify its’ export base from diamonds. The current administration ambitious transformation agenda is off to a challenging start as global economic growth rate for 2020 is estimated at an all time low of 3.3% and the domestic economic growth rate at 4.4% driven mainly by the services sector. The subdued economic growth rates of less than 6% exert pressure on the government to come up with alternative strategies and innovative ways of bolstering revenue and increasing exports to close the balance of payments deficit. In order to shed light in an already dark and challenging journey to high income status, the government will adopt austerity measures centered around four pillars in order to improve the balance of trade position, improve productivity and cost efficiencies, develop human capital and improve infrastructure.

Deficit

67.62 (5.23)

4 Key Pillars Geared Towards Growth 1. Promotion of Export-Led Growth: to boost economic growth and job creation and replenish the country's foreign exchange reserves. 2. Efficient Government Spending and Financing: prudence in project management, improvement of appraisal design, costing and implementation of public sector investment projects and careful scrutiny of subsidy schemes. 3. Building Human Capital: a commitment to receiving value for money from education through training and development. 4. Provision of Appropriate Infrastructure: heavy investment in infrastructural developments to enhance efficiency and promotion of private sector participation. In addition, promotion of a cluster development approach as approved in the Special Economic Zones Policy. With only 16 years left to achieve 2036 goals, the current administration has a humongous task of cracking the whip through execution of set goals, rigorous implementation of policies and trade reforms that will catapult economic growth beyond business as usual and most importantly investment in human capital and to capitalize on the youth dividend for sustainable economic growth.

D e r e gu l a t i o n K e y t o G o o d B u s i n ess E n v i r o n m e n t

The DNA of economies that have managed to achieve less than 5% unemployment rate is deregulation, in terms of less stringent rules and regulation in order to stimulate economic growth and promotion of business friendly environments that not only contribute to the success of local businesses but also lure foreign direct investment inflows. For three consecutive years, Botswana has not managed to reach top 50 of the World Economic Forum Global Competitiveness ranking despite significant investment in the country's branding strategies through government agencies and the private sector. For a country that is reigning in peace and tranquility, low corruption and attractive tax regime compared to other African countries you would expect it to be at the top of the rankings, but it seems there is still a lot to be done for Botswana to be best in class in the region and internationally.

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What really drives competitiveness on the global stage? According to WEF definition, competitiveness is a set of institutions policies and factors that determine the level of productivity of a country. Botswana ranked 91 out of 141 countries on the latest 2019 Global Competitiveness Report and further drill down to the breakdown of the rankings shows that with regards to enabling environment category, the country is best in class in macroeconomic stability, and ranked above 50 in institutions, infrastructure and below 50 in ICT adoption. The below 50 ICT adoption score is aligned with government economic refocus in the 2020/2021 to improve ICT infrastructure and adoption across the service delivery value chain. However, the big hurdle remains the over regulation which tend to hamper business growth and lower investor confidence when it comes to competing for FDI inflow. This demonstrate that there is a thin line between over regulation and stimulating productivity.

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D e r e gu l a t i o n K e y t o G o o d B u s i n ess E n v i r o n m e n t

NBFIs 747

Capital Markets 84

Retirement Funds 85

Insurance 236

Non-Bank Lenders 342

Source: NBFIRA

According

Non-Banking

Financial

Institution (NBFIRA) 2019 Annual Accounts, the NBFI sector recorded a 3.6% decline in the number of licensed entities from 775 in March 2018 to 747 in March 2019. The reasons given was due to a significant decrease in the insurance industry by 20.88% and a 4.5% reduction in Retirement Funds Industry which more offset the increase in both the Lending and Capital Markets industries by 5.6% and 31% respectively. In a global economic climate characterized by low or flat productivity and growth, regulation is often the stumbling block to stimulating activity especially for SMMEs. The duration time for a SMMEs to be granted a license to practive on average is 6 months, which results in opportunity and sunk costs incurred during the waiting period. The directive from the new administration in the run up to 2019 elections granted SMMEs to start businesses from home while waiting to be granted licenses. Again drawing inspiration from developed countries and those who have managed to build startup ecosystems that reinforces the power of an enabling environment as most of the successful multinationals started from humble beginnings.

This

was a welcome change in the local

startup ecosystem as many businesses closed shop due to high rental income in the first year of operation as they had to submit proof of address before commencing operation. Regulatory frameworks and policies that work in tandem with the SMMEs community will ensure that more jobs are created without any delays. The adoption of ICT by service providers especially regulators will clamp down on duplication, reduce lead time, enable regulators to track the licensed companies thoroughly and increase the rate of compliance. A number of reforms were completed during the 2019/2020 Financial Year which include the Online Business Registration System (OBRS), which was launched in June 2019, with the key objective being to achieve faster, cheaper and more accurate business registration and e-Tax services by Botswana Unified Revenue Service (BURS). In addition, there will be an e-VISA portal which will be developed during the 2020/2021 Financial Year to enable online application and issuance of VISA. The integration of ICT will remove red tape, improve efficiency and productivity which will elevate Botswana to the top 50 ranking.

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AI TO BOOST GLOBAL GROWTH

14% BY 2030

The 4th Industrial Revolution(4IR) brings a plethora of benefits for SMMEs and further introduces the digital way of doing business from manual based processes that have been the DNA of many local enterprises. Any business that wants to compete and keep its head above water in a highly cut throat and competitive landscape will need to develop and adopt a digital strategy and presence. The most significant and far reaching advantage is the cost efficiencies and the ability to scale faster beyond local markets attracting clients from near and far. Many small businesses operating in a landlocked country with less than 3 million people gain additional customers and leverage by taking their businesses online.

There is no denying the endless benefits of having online presence and automation in your business processes. However, there are inherent risks associated with the digital way of doing business that many SMMEs are not prepared to deal with factoring their already limited resources and budget. The bad news is that to have a sustainable business you cannot afford to avoid these risks as they have the potential to destroy your business with a click of a corrupt link. The challenge will always be bridging the gap between affordability to mitigate cyber risk and risk management knowledge in what to do or not to do when it comes to the new ways of operating businesses online. Cyber risk also extends to e-government service providers who will need to stay abreast of the new risks and developments.

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SECURITY BUDGET GROWTH

25% IN 2020 Source: The Global Risk Report 2020

Risk Management function in most businesses is often relegated to the back burner and perceived as a tick of the box exercise that many businesses can do without. The digital economy will change the business as usual approach to risk management and force senior decision makers to move it from the back to the heart of the business strategy. Lack of preparedness and business continuity management policies and plans will cost businesses millions of Pulas to retrieve lost data. Just recently e-government service providers experienced information infrastructure breakdowns for days due to cable network interruptions. The Ministry of Defence, Justice and Security was allocated P8.56 billion in the 2020/2021 budget, representing a 17% allocation of the overall budget and a jump of 24.78% compared to the prior year.Â This material increase in the security budget drew attention and cynics' from some budget reviewers across different platforms.

According to the 2020 Global Risk Report cyber attacks on critical infrastructure were rated the fifth top risk in 2020 by WEF expert network which have become the new normal across sectors such as energy, healthcare and transportation. Such attacks have even affected entire cities with public and private sectors alike being at risk of being held hostage. In 2021, cybercrime damages might reach US$6 trillion what would be equivalent to the GDP of the worldâ&#x20AC;&#x2122;s third largest economy (GRR 2020). The geopolitical tensions also amplify cyber attacks that leave many SMMEs vulnarable to attacks. 4IR technologies run on data, making privacy a major challenge. IoT devices collect and share data that are potentially highly sensitive for individuals, companies and states, from personal identification and medical records to national security information. The data brokering market aggregating, disaggregating, copying, searching and selling data for commercial purposes is worth an estimated US$200 billion a year (GRR 2020).Â

N o . 1 G l o ba l R i s k & W h y B W S h o u l d C a r e

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"Building human capital is one of the 4 critical economic growth pillars that will be implemented by the new administration . Therefore, we expect to see an emergence of Cyber Security Specialists, Data Privacy & Governance Specialists and Business Continuity Management Specialists during the 5-10 year transformation Agenda journey to a knowledge based economy". Lindiwe Mafavuneh Founder & CEO LCM Capital