• Over P50 billion invested by pension funds
• P89 billion in foreign reserves at risk
• The 2008 financial crisis may repeat itself
• Emerging markets to see red
Nerve-wrecking reports have cautioned that the international markets are heading for what was described as a ‘cataclysmic year’, but these are the same markets where billions of Pula belonging to pensioners, some as foreign reserves, are invested. Fund managers and government should make an apt maneouver or risk losing billions. The Business Weekly & Review Staff Writer KEABETSWE NEWEL unpacks the issue.
Recently, the Royal Bank of Scotland issued a caution to all its clients, advising them to off-load everything invested in the capital market. The red flag was raised in response to a momentous nosedive in oil prices, the volatility in Chinese stocks and a widespread tumble in world trade.
There is a general distress among economic and financial pundits that such a development if not well managed could have disastrous repercussions for Botswana, given the value of offshore investments in the global capital market.
“It has already been a tough start for international capital markets with the S&P 500 down 8 percent year-to-date (YTD), and the FTSE 100 down 6 percent” said Emmanuel Letsomane, a financial analyst at Ipro Botswana, a fund management firm.
He said the Shanghai Stock Exchange Composite has retracted by 16 percent, and that for now there are no supporting fundamentals for an upbeat trajectory in international capital markets especially considering China’s disappointing economic performance, declining corporate profits and a general global economic slowdown.
“International investment markets are likely to be under strain, with emerging and frontier markets likely to be most affected, at least in the short term,” Letsomane says. He agrees that Botswana is one of the emerging market economies likely to be affected.
Botswana has invested heavily in the international capital markets, especially the Chinese, American and the United Kingdom stocks. Rich institutions such as the Botswana Public Officers Pension Fund (BPOPF) with assets exceeding P54 billion have invested 65 percent offshore. Chief Executive Officer Boitumelo Molefhe told The Business Weekly & Review that BPOPF has invested in global equities, stocks, especially in China, USA and the United Kingdom, the very equities which are collapsing.
Further, government has over P88 billion offshore. Bank of Botswana (BoB) financial statistics detail that by November 2015, total reserves stood at P88.3 billion, and within that total P59 billion was the Pula Fund.
This week, BoB spokesperson Andrew Sesinyi said the Pula Fund was invested in global bonds and equities.
Molefhe emphasised that market risks are unavoidable; however, she said strategies were needed to be able to sustain BPOPF offshore investments in these risky international markets.
However, she said that in the short term, BPOPF’s offshore investments may be on the negative, but in the long run, an upward trend growth is expected.
At the Linah Mohohlo-led central bank, Sesinyi said that The Pula Fund and other foreign reserves were exposed to exchange rate, interest rate, inflation, market, credit and financial risks. “These are market risks which affect all investors,” he said, adding that to moderate these risks, the investment guidelines limit the bank’s investment exposure to advanced market economies with a minimum sovereign rating of Aa2/AA and bank credit risk of bbb-5.
But Letsomane said the damage would be to the extent of the exposure and the control mechanisms in place to hedge against risk.
“It will be difficult to emerge unscathed,” Letsomane said. Managing Director at Venture Partners Botswana Anthony Siwawa said fund managers who invested in such risky markets understood very well what was at stake when markets collapsed.
“It is not a question of divesting from such markets but rather a strategic plan to cushion the impact of the loss when the markets tumble because losses are unavoidable,” he said.
An Investment Analyst at Afena Capital, Kwabena Antwi, said that international markets performance since the beginning of the year was reminiscent of the financial turmoil last seen during the financial crisis in 2008. The market observer said that there was negative investor sentiment and general risk-off behavior displayed by investors.
Antwi said in times of uncertainty investors sought safe haven assets with the lowest perceived risk. He said these assets could be expected to outperform the rest of the market. “Safe haven assets include, but are not limited to, US treasuries, US Dollars, German Bunds, Japanese Yen and gold,” he adds.
Botswana funds invested in international capital markets may generate flat or positive returns in the current market. This is because when markets are volatile, investors rush to buy US Dollars (which is a safe haven asset), which increases demand for the currency and causes it to strengthen against other currencies. Hence while the return in absolute terms may be negative, when converted back to Pula, it may actually be positive or flat.
If international markets decline, investors’ sentiment towards emerging markets will likely become negative which will lead to capital leaving emerging markets such as Botswana. Head Researcher at Motswedi Securities Garry Juma said that during the 2008 crisis, investors rushed to invest in emerging markets which increased Foreign Direct Investment inflows. However, he worries that with the strengthening of the US Dollar, investors are rushing to invest with it which will this time around cause a decline in FDI inflows into the emerging markets.
On the other hand, Juma says the whole situation will lead to a slowdown in emerging markets, which import a lot from the western economies. “A slowdown will mean that emerging markets, especially in Africa, will reduce their imports and this will negatively affect the developed economies,” he said.
The post Botswana’s offshore reserves headed for the drain appeared first on Business Weekly & Review.