BoB posts P4 billion loss on currency movements

MBONGENI MGUNI
Staff Writer | Wednesday June 2, 2010 00:00

 

By law, BoB invests part of Botswana's foreign exchange reserves in long-term offshore equities, currencies and other vehicles. Last year, the global recession eroded Botswana's international investments, driving the P4.1 billion loss recorded by the central bank. The crisis led to underperformance of entities within which BoB was invested, lowering the value of its investments. In addition, the recession resulted in the appreciation of the pula against all Special Drawing Rights (SDR) currencies except the rand. Botswana's international investments are denominated in SDR currencies. While the investments are long-term, the appreciation potentially means less pula earnings for dividends and interests on investments, which are denominated in foreign currency.

A P5.2-billion currency loss due to the appreciation of the pula plus a P1.6-billion interest expense on the Bank of Botswana Certificates (BoBCs) were the chief drivers of the central bank's loss. According to BoB's 2009 Annual Report released yesterday, currency losses in international investments were behind the central bank's poor results for last year. BoB's exchange rate competitiveness index depreciated by 1.4 percent in 2009 against an appreciation of 4.5 percent in 2008. The competitiveness index reflects the Real Effective Exchange Rate (REER) or the weighted average of the pula relative to the SDR.

BoB Governor, Linah Mohohlo, described 2009 as 'the worst' in terms of the impact of the global financial crisis and the resultant recession on the central bank's reserve management objectives. 'The financial and capital markets were spooky and with the rise of the pula against the SDR currencies, the result is not pleasing,' Mohohlo said as she presented the Annual Report to journalists.

'The economy also shrank by a large margin, mainly because of the collapse of the mining sector by 38.4 percent. The non-mining sector saved the day.' BoB's Head of Research, Andrew Motsumi, noted that besides its losses, the central bank paid a statutory dividend of P1 billion to the government following a transfer from the Government Investment Account.  The Government Investment Account declined by P8.5 billion, as a result of the government drawing down its cash balances to finance part of last year's P13.5 billion deficit.

'The interest paid out on the BoBCs was actually lower than the P2.1 billion paid out in 2008,' Motsumi said. 'This was because the Bank reduced interest rates by a record five percent, which meant the interest rate payable on BoBC's was therefore lower. The value of BoBCs outstanding also declined by three percent to P17.5 billion when compared to 2008. Among other factors, this was partly due to Government issuing bonds under the P5-billion programme of 2008. Part of the funds that would usually go to BoBCs were absorbed by that bond programme.'

As at December 2009, BoB's foreign assets totalled P57 billion from P68 billion at the same period in 2008. BoB officials said while recovery was forecast for this year, challenges to the national economy would persist. Motsumi pointed out that the reduction in government spending, as efforts move towards a balanced budget by 2012/13, would have an adverse effect on the non-mining sector. 'Going forward, as government spending slows down in line with its commitment for (a) sustainable budget, we expect a slowdown in the growth of the non-mining sector,' he said.

Led by strong performances in construction, social and personal services as well as communications last year, the non-mining sector grew by 12.4 percent.