Financial Stability Report October 2023

FINANCIAL STABILITY
REPORT
OCTOBER 2023
FINANCIAL STABILITY COUNCIL

Financial Stability Council | Financial Stability Report October 2023 i FINANCIAL STABILITY REPORT REPUBLIC OF BOTSWANA MINISTRY OF FINANCE Republic of Botswana Ministry Of Health & Wellness OCTOBER 2023 FINANCIAL STABILITY COUNCIL

ii Financial Stability Council | Financial Stability Report October 2023
TABLE OF CONTENTS
LIST OF TABLES, CHARTS, FIGURES AND BOXES iii ABBREVIATIONS vi ACKNOWLEDGEMENT viii PREFACE ix

EXECUTIVE SUMMARY 1
FINANCIAL STABILITY DEVELOPMENTS AND TRENDS 3
(a) Global Financial Stability Trends3
(b) Regional Financial Stability Trends5
(c) Domestic Financial Stability Trends6
DOMESTIC VULNERABILITY ASSESSMENT8
(a) Sovereign Vulnerabilities8
(b) External Sector Vulnerability Assessment 8 (c) Credit Growth and Leverage 9 (d) Liquidity and Funding Risk20 (e) Macro-Financial Linkages26 (f) Banking Sector Analysis 30
FINANCIAL MARKET INFRASTRUCTURE AND REGULATORY DEVELOPMENTS 37
(a) Payments and Settlement Systems37
(b) Regulatory and Other Developments Relevant to Financial Stability 38
CONCLUSION AND OUTLOOK42
APPENDIX43

Financial Stability Council | Financial Stability Report October 2023 iii LIST OF TABLES, CHARTS, FIGURES AND BOXES
TABLE
Table 3.1: Household Net Worth 11
Table A1: Macroeconomic and Financial Stability Indicators 43
Table A2: Risk Assessment Matrix44
Table A3: Annual Sectoral Indicators of Financial Development 46
Table A4: Size of Selected Asset Markets47
Table A5: Interlinkages Data (August 2023)47
CHARTS
Chart 3.1a: Sectoral Loans-to-GDP 10
Chart 3.1b: Sectoral Loans-to-Total Loans 10
Chart 3.2a: Growth in Household Debt (Percent) 11 Chart 3.2b: Contribution-to-Credit Growth 11 Chart 3.2c: Debt-to-Income vs NPL Ratio 11 Chart 3.2d: Composition of Household Debt (P Million) 11 Chart B3.1a: Aggregate Credit-to-GDP Gap (Percent) 13 Chart B3.1b: Household Credit-to-GDP Gap (Percent) 13 Chart B3.1c: Business Credit-to-GDP Gap (Percent) 13 Chart 3.3a: Profitability (Percent) 17 Chart 3.3b: Cost-to-Income Ratio (Percent) 17 Chart 3.3c: NFC Credit-to-GDP Ratio (Percent 17 Chart 3.3d: NFCs Leverage (Percent) 17 Chart 3.4a: Mortgage Loans 18 Chart 3.4b: Commercial Real Estate Loans 18 Chart 3.5: Distribution of Mortgages by LTV Ratios 18 Chart 3.6a: Banks FX Exposure 21 Chart 3.6b: FX Volatility 21 Chart 3.7a: Market Capitalisation 23 Chart 3.7b: BSE Trading 23 Chart 3.7c: Liquidity Ratio 23 Chart 3.7d: DCI 23 Chart 3.7e: FCI 23 Chart 3.7f: Market Volatility 23 Chart 3.8a: Bond Nominal Values (P Million) 25 Chart 3.8b: Bond Yields 25 Chart 3.8c: Number of Bonds 25 Chart 3.8d: Bonds Indices 25 Chart 3.8e: Corporate Spread 25

iv Financial Stability Council | Financial Stability Report October 2023 Chart 3.8f: Bonds Volatility25 Chart 3.9: Nominal Value of ETFs26 Chart 3.10a: Structure of the Financial System in 201627 Chart 3.10b: Structure of the Financial System in June 2023 27 Chart 3.10c: Financial System Assets27 Chart 3.10d: Financial System Assets to GDP 27 Chart 3.11: Investment Allocation of Pension Funds29 Chart 3.12a: Capital Adequacy31 Chart 3.12b: Asset Quality31 Chart 3.12c: Liquidity31 Chart 3.12d: Profitability 31 Chart 3.13a: Concentration Shock35 Chart 3.13b: Sectoral Shock 35 Chart 3.13c: Overall NPL Shock 35 Chart 3.13d: NPL Ratio 35 Chart 3.13e: Liquidity Test35 Chart 3.13f: Interest Rate Test 35 Chart 3.14a: Capital Adequacy36 Chart 3.14b: Capital Needs36 Chart 4.1a: Electronic Payments (P Billion) 37 Chart 4.1b: BISS Transactions 37 Chart 4.1c: EFTs37 Chart 4.1d: Cheques 37 Chart A1: Financial System Vulnerabilities - Heat Map 45

Financial Stability Council | Financial Stability Report October 2023 v BOXES
Box 3.1: Tools for Assessing Excessive Credit Growth .........................................................................12
Box 3.2: Summary of the 2022 Household Indebtedness Survey...........................................................14
Box 4.1: The Deposit Insurance Scheme of Botswana............................................................................40
Box A1: Stress Tests Assumptions .........................................................................................................48
FIGURE
Figure 3.1: Macro-Financial Linkages (August 2023)............................................................................ 28

vi Financial Stability Council | Financial Stability Report October 2023 ABBREVIATIONS AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism AUM Assets Under Management BBI Botswana Bond Index BCBS Basel Committee on Banking Supervision BES Business Expectations Survey BIHL Botswana Insurance Holdings Limited BIS Bank for International Settlements BISS Botswana Interbank Settlement System BoBCs Bank of Botswana Certificates BPOPF Botswana Public Officers Pension Fund BSEL Botswana Stock Exchange Limited CAR Capital Adequacy Ratio CorpI Corporate Bond Index CPF Counter Proliferation Financing CRE Commercial Real Estate DCI Domestic Company Index DCTRI Domestic Company Total Return Index DIC Deposit Insurance Committee DISB Deposit Insurance Scheme of Botswana D-SIBs Domestic Systemically Important Banks D-SIFIs Domestic Systemically Important Financial Institutions DTI Debt-to-Income EFTs Electronic Funds Transfers EMDEs Emerging Markets and Developing Economies EPS Electronic Payment Services ERGRDP Economic Resilience and Green Recovery Development Policy ERTP Economic Recovery and Transformation Plan ESG Environmental, Social and Governance ETF Exchange Traded Funds EU European Union FATF Financial Action Task Force FCI Foreign Company Index FIA Financial Intelligence Agency FPC Financial Policy Committee FSB Financial Stability Board FSC Financial Stability Council FSR Financial Stability Report FX Foreign Exchange GCF Green Climate Fund GDP Gross Domestic Product GFC Global Financial Crisis GFSR Global Financial Stability Report GovI Government Bond Index

Financial Stability Council | Financial Stability Report October 2023 vii G-SIB Global Systemically Important Bank IMF International Monetary Fund IOSCO International Organisation of Securities Commissions ISO International Organisation for Standardization IT Information Technology LAR Liquid Asset Ratio LHS Left Hand Side LTV Loan-to-Value MoF Ministry of Finance MPC Monetary Policy Committee MoPR Monetary Policy Rate MVTSP Money Value Transfer Service Providers NAV Net Asset Value NBFIs Non-Bank Financial Institutions NBFIRA Non-Bank Financial Institutions Regulatory Authority NFCs Non-Financial Corporates NFS Non-Financial Sector NIIP Net International Investment Position NPL Non-Performing Loans NPS National Payment System OFCs Other Financial Corporations PFR Pension Fund Investment Rule RSA Republic of South Africa RHS Right Hand Side RMCI Real Monetary Conditions Index RPC Regulatory Policy Committee RSF Resilience and Sustainability Facility SACU Southern African Customs Union SARB South African Reserve Bank SCF Standing Credit Facility SDR Special Drawing Rights SDF Standing Deposit Facility SNB Swiss National Bank SOEs State Owned Enterprises STR Suspicious Transactions Report SSA Sub-Saharan Africa TNDP Transitional National Development Plan UK United Kingdom USA United States of America USD United States Dollar WEO World Economic Outlook

viii Financial Stability Council | Financial Stability Report October 2023 ACKNOWLEDGEMENT The October 2023 issue of the Financial Stability Report (FSR) was prepared by the Bank of Botswana (the Bank) in collaboration with the Ministry of Finance (MoF), the Non-Bank Financial Institutions Regulatory Authority (NBFIRA), the Financial Intelligence Agency (FIA), the Deposit Insurance Scheme of Botswana (DISB) and the Botswana Stock Exchange Limited (BSEL). The Report was approved for publication by the Financial Stability Council (FSC/Council), a statutory body established by the Bank of Botswana (Amendment) Act, 2022. The Council consists of five members, being the Governor of the Bank of Botswana (Chairperson); Permanent Secretary of the Ministry of Finance; Chief Executive Officer, NBFIRA; Director General, FIA; and Director, DISB; while the Chief Executive Officer, BSEL is an observer member, thus a non-voting member. www.bankofbotswana.bw REPUBLIC OF BOTSWANA MINISTRY OF FINANCE Republic of Botswana Ministry Of Health & Wellness

Financial Stability Council | Financial Stability Report October 2023 ix PREFACE Purpose of the Report The Financial Stability Report (FSR) provides an assessment of the vulnerabilities that could elevate risks to the stability and resilience of the Botswana financial system by the Financial Stability Council (FSC/Council). The Report provides analytical and performance updates for the financial sector and its impact on economic activity and welfare; encourages public discourse and engagement on financial stability issues; and helps provide information that major participants in the Botswana financial industry and elsewhere may use as input into their own financial risk assessment processes. The FSR is published twice a year (that is May and October) following discussion and approval at the FSC meetings. Macroprudential Policy Framework The primary objective of the macroprudential policy framework is to limit systemic risk and its transmission to the broader economy. This is predicated on the observation, and understanding, that the financial system is interconnected and vulnerable to contagion risk, with the result that crises emanating from the financial sector can spill-over rapidly to the real economy. At the same time, sectoral or broader economic weaknesses could adversely affect the financial system and trigger instability or cause a systemic financial crisis. In turn, this can cause widespread disruption to the provision of financial services, with serious negative consequences for macroeconomic stability and the real economy. In order to limit systemic and spill-over or contagion risks, financial sector regulators pursue a variety of key intermediate objectives, among others: minimising and mitigating excessive credit growth and leverage; mitigating and preventing significant maturity mismatches and market illiquidity; controlling structural vulnerabilities in the financial system that arise through interlinkages; limiting direct and indirect exposure concentrations from domestic systemically important financial institutions (D-SIFIs); reducing the systemic impact of misaligned incentives with a view to reducing moral hazard; monitoring systemic risks from activities outside the banking system and implementing appropriate policy responses to contain such risks; and strengthening the resilience of the financial system and related infrastructure to mitigate aggregate shocks. Given the structure of the Botswana economy, the macroprudential policy framework views the external sector vulnerabilities of the domestic economy through trade shocks and capital outflows, as having the greatest potential for elevated financial stability risks. There are also potential risks to the stability of the domestic financial system emanating from economic and trade disruptions induced by geopolitical tensions and economic fragmentation; continued exposure to cyber threats due to increasing usage of technology, as well as climate-related financial risks. The
FSR provides an analysis of these vulnerabilities where they persist - their interaction, as well as the potential impact and response to spill overs from regional and global financial stability developments and trends. Financial soundness and macroeconomic indicators are used to assess risks to and within the financial system. Relevant and appropriate policy instruments and tools are available for use as intervention measures during periods of financial instability. The instruments and policy tools would be adjusted accordingly and timeously to mitigate the envisaged threats. Macroprudential interventions in this regard would be communicated through circulars issued, periodically, by the FSC. Decision-making Process The FSC of Botswana, a multi-agency body, was established to, among others, collaborate and share information on policy and other related issues on strengthening the financial system and making it more robust, in order to mitigate financial stability risks, and take prompt action in response to a perceived build-up of systemic risks; ensure a coordinated response to financial stability issues that may require cross-agency collaboration; request information from any financial institution, exchange information on financial stability issues, and communicate systemic risk warnings.

x Financial Stability Council | Financial Stability Report October 2023 The FSC is a statutory body as per Section 30 (54B) of the Bank of Botswana (Amendment) Act, 2022. It is responsible for (a) preserving the stability of the financial system; (b) ensuring cooperation between its members with respect to the assessment of the build-up of economic and financial sector systemic risks in Botswana; (c) developing coordinated policy responses to risks including crisis management; and (d) making recommendations, issuing warnings or opinions addressed to regulatory bodies regarding financial institutions. The FSC is chaired by the Governor, and the Bank acts as the secretariat. The work of the FSC used to be governed by a memorandum of understanding signed in February 2019, and has since been subsumed into the FSC Charter. Announcement of Macroprudential Policy Decisions Proceedings of the FSC are communicated through a Press Release, shortly after a Council meeting, to inform the public of the discussions and conclusions regarding the stability of the domestic financial system. The Press Release further highlights the key risks in the financial system and recommendations to address such vulnerabilities. Policy decisions are communicated through a circular to all affected financial institutions. The circular provides a brief description that links the identified risk with the intermediate objective and explains the way measures taken are expected to mitigate the risk.

Financial Stability Council | Financial Stability Report October 2023 1

EXECUTIVE SUMMARY
1.1 Global financial stability risks remain elevated since April 2023, according to the October 2023
International Monetary Fund (IMF)’s Global Financial Stability Report (GFSR), due to high inflation, sustained tight financial conditions and debt sustainability. This outlook by the IMF is shared by the Financial Stability Board (FSB) Chair’s letter to the G20 on September 5, 2023, and the 2023 Annual Report, which raised concerns about the high interest rate environment due to long and sustained monetary policy tightening, and higher debt servicing costs as risks to global financial stability. The 2023 Annual Economic Report of the Bank for International Settlements (BIS) indicates that the global economy has reached a critical juncture where policymakers are facing a unique combination of challenges on a global scale, with tight financial conditions having led to episodes of financial distress in some parts of the global financial system in March 2023, hence disarray for central banks in the pursuit of price and financial stability objectives. The BIS Quarterly Review of September 2023 asserts that the March 2023 banking crises in advanced countries brought renewed attention to bank