1. Bifm Economic Review 3rd Quarter 2010
Economic Review
Dr. Keith Jefferis
Chairman of Bifm Investment Committee
INTRODUCTION Annual GDP Growth
The third quarter of 2010 marked a continuation of the 30%
recovery from the global economic crisis of 2008-09. Recovery Source: CSO, Econsult
20%
in Botswana’s most important industry – diamond mining –
has been stronger than earlier expectations, with the global 10%
diamond market increasingly robust. This has had a positive
0%
impact on the trade balance and the government budget, and
has helped to stabilise some of the adverse macroeconomic -10%
developments that were in full swing a year ago. But in many -20%
respects, economic conditions remain challenging and far
from the “pre-crisis normal”. At the same time the economy is -30%
going through a period of transition, from “recovery” mode to 2005 2006 2007 2008 2009 2010
“adjustment” mode. With recovery from the crisis well under
Mining Non-mining private sector GDP
way, the priority is now changing to adjustment, and dealing
with the structural challenges that need to be addressed to
ensure sustainable growth.
Another note of caution stems from the performance of the rest
of the economy. Annual growth (of value added) in the non-
ECONOMIC GROWTH mining private sector declined to 4.5% in the second quarter, the
Overall GDP growth in the year to June 2010 rose for the second lowest rate for almost five years. The general pattern of growth
quarter running, reaching 9.2% - the highest growth rate for so far in 2010 is therefore largely as anticipated, combining a
five years - driven by the sharp resurgence in mining output post-crisis upsurge in export-led, mining sector growth with a
(notably diamonds) in first half of 2010. On the surface, this deterioration in non-mining growth as government spending
appears good - this rate of growth makes Botswana one of the levels off as the focus turns to fiscal sustainability. This is reflected
fastest growing economies in the world, at least temporarily. But in sectoral growth rates, with manufacturing, government and
the result should be interpreted with some caution. It is driven finance & business services experiencing negative growth in the
by the growth in mining output, which reached 16% in Q2, but year to June 2010, and low growth in the trade (wholesale,
this largely reflects a comparison with 2008-9, when diamond retail, hotels & restaurants) sector. Nevertheless, growth for
production fell to very low levels – so most of this is simply a base 2010 is in line with the IMF’s recent forecast of 8.4% for the
effect, and actual output still remains well below pre-crisis levels. year as a whole.
As such, the impact is likely to be temporary.
2. 2 Economic Review
Fig 2: Sectoral Output Growth (VA) Fig 3: DTC Diamond Sales
Source: CSO, Econsult Source: Rappaport Diamond Report
800
Agric 39%
Mine 700
Transp & comms
600
Constr
U$S (million)
Total 500
Soc & pers serv
Water & elec 400
Trade 300
Fin & bus serv
Govt 200
Manuf
100
-10% -5% 0% 5% 10% 15% 20% 0
Growth in Year to June to 2010 2007 2008 2009 2010
FOREIGN TRADE Some other categories of exports have also recovered well,
Mining sector recovery has been driven by the upsurge in exports, with strong performance in the first half of 2010 from gold,
notably diamond exports. The global market for rough diamonds machinery & electrical equipment, and meat exports. The only
has recovered faster than anticipated a year ago, with both sales really problematic area is textiles and garments, with exports
volumes and prices ahead of expectations. This is somewhat only half the level of the previous year. While there are many
surprising, as the world’s largest market for diamonds, the USA, reasons for the problems faced by the textiles industry, some
remains weak, with slow economic growth, continued high related to changes in the operation of trade agreements, the
unemployment, and weak consumer confidence. The recovery fundamental problem is a lack of competitiveness. However,
in diamond sales seems to be driven mainly by restocking by even with the problems afflicting textiles, overall exports are
wholesalers and the cutting and polishing industry, while retail some 40% higher than in the first half of 2009.
demand remains sluggish. This trend has also been reflected
in a sharp increase in rough diamond prices, which has not
Fig 4: Change in Exports Jan-Jun 2010
been matched by an increase in polished prices, resulting in
compressed margins in the distribution, manufacturing and 80%
Change from Jan - June 2009
retail segments of the industry. All of this suggests that the 60%
recovery in the international diamond industry that has been
40%
witnessed in the past 12 months may not be sustainable, and a
forthcoming correction may lead to lower rough prices. 20%
0%
Nevertheless, all of this has been beneficial for Botswana and -20%
has boosted export earnings. Overall diamond sales through the -40%
Diamond Trading Company (the majority of which is Botswana
-60%
diamonds) have generally been improving through 2010, and
sales in the first eight sights (out of a total of ten for the year)
were 71% higher than in 2009. However, sales remain lower
than in the pre-crisis period of 2007 and the first half of 2008.
3. 3 Economic Review
Nevertheless, the general trend is that exports are well below Fig 6: Foreign Exchange Reserves
-&./01$-(23&.)$4567,).3$83932:39$
imports, which have continued to rise steadily. As a result the Source: Bank of Botswana
balance of trade has been in deficit since late 2008, although
70 14
a small surplus was finally recorded in June 2010, after 20
successive months of deficits. The overall balance of payments
60 12
Pula billion
US$ billion
(including trade, capital and other flows) has generally been in
deficit since that time, apart from the third quarter of 2009
50 10
when the proceeds of borrowing from the African Development
Bank were received.
40 8
Fig 5: Balance of Payments 30 6
Source: Bank of Botswana 2006 2007 2008 2009 2010
6.0
Pula US$
5.0
4.0 Inflation and Monetary Policy
Pula billion (quartely)
3.0 Inflation has hovered in the range of 6%-8% in recent months
2.0 without any clear direction. A gradual decline from 7.8% in
1.0 May to 6.7% in August was reversed with an increase to 7.0%
0.0 in September, and it is anticipated that inflation will continue to
-1.0
fluctuate in the same 6%-8% range through to March 2011.
-2.0
Beyond that time, however, there are good prospects of a
-3.0
further decline in inflation that will take the rate back within the
-4.0
Bank of Botswana’s 3%-6% inflation objective range, sometime
-5.0
in the second quarter of 2011. Our view is that, barring any
2004 2005 2006 2007 2008 2009 2010
unforeseen oil price shocks from the international market, or
further changes in domestic taxes such as VAT or the alcohol
The result of ongoing balance of payments deficits is that levy, inflation should then remain within the BoB’s range for the
inevitably, the foreign exchange reserves have declined. Between foreseeable future. This reflects both low international inflation
January and July 2010 the reserves fell by around 9% in pula and weak domestic demand pressures.
and US dollar terms, and by July were around 20% lower than
their peak in mid-2008. The decline in reserves is not of any
Fig 7: Inflation & Forecast
immediate concern, as they still remain high with around 17 Source: CSO, Econsult
months of import cover. 16%
14%
The main concern is that, going forward, the country continues 12%
to run balance of payments deficits and the reserves fall further.
10%
This would eventually have implications for the exchange rate,
as the current exchange rate policy is dependent upon a high 8%
level of reserves to support the crawling peg. Preventing this 6%
outcome requires restoring a balanced government budget, as 4%
the fiscal deficit is one of the main drivers of the balance of
2%
payments.
0%
2003 2004 2005 2006 2007 2008 2009 2010 2010
4. 4 Economic Review
However it appears that there is not much consensus regarding This has implications for interest rates. After cutting rates by a
inflation expectations, with wide divergence between private total of 5.5% in 2008 and 2009, the BoB has kept rates on hold
sector and official views. According to the BoB’s Business even with the pick-up in inflation in recent months, reflecting
Expectations survey, private sector businesses anticipate the expectation that inflation will be contained in the medium
inflation to average 8.8% in 2010 and 9.5% in 2011. The Bank term. Indeed, from a monetary policy perspective the relevant
of Botswana’s forecasts in its 2010 Monetary Policy Statement, measure of inflation excludes tax increases, and so if the increase
however, show that the Bank expects inflation to fall to 5% in VAT in April 2010 is excluded, inflation remains within the
in 2011. More recent projections from the IMF (in the 2010 Bank’s objective range. Our expectation is that the next move
Article IV report), provide forecasts that are closer to the BoB’s in interest rates will be downwards, although probably not until
projections. the headline rate falls below 6% sometime in 2011. If inflation
behaves in line with the IMF projections, then further interest
rate cuts can be expected in 2012.
Fig 8: Inflation Expectations
Source: BoB, IMF, Econsult
10%
FINANCIAl SECTOR
8% In the second half of 2009 and the early months of 2010, a
recovery in credit growth appeared to be under way, following
6%
the sharp contraction in early 2009 as the international crisis
4% took hold. In recent months, however, this recovery seems to
have faded. Quarter-on-quarter credit growth, which provides
2%
a more accurate picture of recent changes than annual growth
0% rates, had fallen to zero by July 2010.
2010 2011
Fig 9: Credit Growth
Business BoB IMF Source: Bank of Botswana, Econsult
70%
This most likely reflects the backward-looking nature of inflation 60%
Growth (qoq, annualised
expectations in the market – the anticipated level of inflation in 50%
the future is similar to what it has been in the past. This may work 40%
some of the time, but will not work if there is structural change 30%
taking place in the determinants of inflation. It is possible that 20%
we are currently at such a juncture. International inflationary 10%
0%
pressures are low, with persistent excess productive capacity
-10%
likely to keep inflation low for some time. Domestically, the
-20%
likelihood that government spending will be growing slowly,
2005 2006 2007 2008 2009 2010
if at all, due to the need to balance the budget, means that
demand pressures will also be weak. Hence there are good Total HH Priv. bus.
prospects that inflation will remain relatively low by historical
standards in coming years. IMF forecasts, for instance, project
average annual inflation remaining between 5% and 6% from
2012 through to 2015.
5. 5 Economic Review
The reasons for this sharp drop in credit growth are not at all diamond earnings. This also means that the 2010/11 budget
clear. There are concerns about household debt sustainability, deficit is likely to be smaller than anticipated.
and arrears remain high on lending to households, but the
position appears to have stabilised since the beginning of the The opening up of fiscal space is very welcome, given the
year. For credit to the private business sector, this may simply unanticipated outcome of the introduction of the new Public
reflect the slowdown in growth that is showing up in the GDP Service Act in May 2010. This appears to have resulted in an
data. effective salary increase of around 10% throughout the public
sector. Given concerns about the size of the public sector salary
bill raised by the IMF and the World Bank (see below), this is
GOvERNMENT BUDGET potentially problematic, and makes it less likely that there will
No data on the government budget have been published since be a pubic sector salary adjustment at the time of the 2011
February, and we still do not have the final budget figure for Budget. It is likely, however, that the effective public sector
the 2009/10 financial year that finished in March. This lack pay rise, combined with back-pay, will lead to an increase in
of fiscal transparency is itself a concern. However, indications consumption spending and credit growth that could provide a
are that budget was underspent last year, and that the deficit short-term boost to the economy. Nevertheless, the size of the
figure, when eventually published, will be significantly smaller increase, the fact that Government seems to have been unaware
than the figure projected at the time of the 2010 Budget in that the new Act would have this outcome, and the negative
February. In the current financial year (2010/11), indications are impact that it has had on labour relations in the public sector,
that mineral revenues are ahead of budget due to improved do not augur well for achieving public finance sustainability.
Box: IMF Article IV Report, 2010 and
World Bank Public Expenditure Review
The 2010 IMF Article IV report was released on September 9, Substantial fiscal consolidation to put the public finances
following the visit of an IMF team in June. The relatively quick back on a sustainable footing, to be achieved by lower public
release of the report represents a step forward, as previous spending (relative to GDP, not necessarily in absolute terms);
Article IV reports have been subject to lengthy delays (the 2009
Report was only released in June 2010). The Article IV reports Improved management of public debt; within an
provide a general economic overview, highlighting issues (mainly integrated framework for managing public sector assets
macroeconomic issues) that the IMF considers to be important. (including the foreign exchange reserves) and liabilities (debt
and guarantees) and a medium-term debt strategy, which is
The 2010 report focused on four areas: fiscal policies; monetary currently lacking;
and exchange rate policies; financial sector policies; and
reforming public finances. The general tone of the report is quite Caution in reducing interest rates further, until there are
positive, and notes that the Botswana showed considerable signs that inflation expectations have been revised downwards;
resilience during the global financial and economic crisis. Key
priorities highlighted by the IMF include the following: Policies and reforms to create a leaner and more
effective public sector, providing greater value for
money; key reforms include strengthening of public financial
6. 6 Economic Review
management, moving beyond the current NDP framework to Many of the IMF’s recommendations with regard to public
programme-based budgeting and the implementation of a finance endorse more detailed recommendations made by the
medium-term expenditure framework. World Bank in its Public Expenditure Review (PER), released
in August. The PER undertakes a long term analysis of public
Promoting private sector led growth through structural finance, budgeting and planning, and concludes that, with
reforms to encourage entrepreneurship and investment, with government revenues projected to decline significantly in the
a focus on cross-cutting reforms that can benefit the whole medium-term, present systems are not well suited to making
economy, including privatisation, greater use of PPPs, and the necessary adjustments. The PER makes a number of key
rationalisation of commercial services provided by government. recommendations, including:
The overall economic outlook is quite positive, on the assumption • Re-examining policies and institutions and undertaking
that the necessary reforms will be undertaken. Economic fiscal reforms to ensure medium-term fiscal sustainability;
projections are provided through to 2015. The IMF’s baseline • Limiting the growth of the government workforce and
forecasts entail real GDP growth averaging 6% a year over wage bill;
this period, inflation falling to below 6% on a sustained basis,
and a gradual return to budget surpluses. The IMF cautions • Raising domestic revenues and bringing down public
that failure to undertake the necessary reforms to the public spending levels;
finances and investment climate would lead to severe adverse
outcomes, including slower growth, debt accumulation, and • Introducing new measures of fiscal sustainability;
the running down of foreign exchange reserves which would in
turn undermine exchange rate policy. • Replacing the project-focused National Development
Planning (NDP) framework with programme-based
Fig 10: IMF GDP Growth Forecasts budgeting and a Medium-Term Fiscal Framework;
Source: IMF
• Improving the capacity for project screening and appraisal,
20
15 and making public investment more efficient;
10
5 • Modernising the system of social safety nets and making
Percent
0 them more cost-effective and better targeted towards
-5 assisting low-income households.
-10
-15 • Increasing transparency and improving data and information
-20 on public finances and debt.
-25
2007 2008 2009 2010 2011 2012 2013 2014 2015 The PER recommendations are currently being reviewed by the
Ministry of Finance and Development Planning.
Total Mineral Non-mineral
7. 7 Economic Review
OUTlOOK
So far in 2010 the Botswana economy has demonstrated of the medium-term economic outlook and, in the words of
strong overall GDP growth, driven by a good recovery in the World Economic Forum’s Global Competitiveness Report, to
the diamond sector. This is likely to continue in the coming move from a “factor driven economy” to an “efficiency driven
months, which should continue to have a beneficial impact economy” as diamonds gradually run out. Discussions at the
on the trade balance, the foreign exchange reserves and the National Business Conference in Francistown on the theme of
government budget. This provides breathing space, but should “Deepening diversification through private sector leadership”
not be interpreted as meaning that the pressure to reform highlighted the wide range of reforms that need to take place to
is off. The IMF and the World Bank have highlighted major provide an environment supportive of private sector led growth.
challenges remaining in dealing with public finance reform, But as the IMF points out, if these reforms are undertaken, the
planning and budgeting reform, and improvements to the prospects for the achievement of respectable economic growth
business climate to support diversification. That these changes rates in the medium term are good.
are necessary is not because of the global crisis, but because
Bifm Botswana Limited
Asset Management, Property Management, Private Equity, Corporate Advisory Services.
Private Bag BR 185, Broadhurst, Botswana, Tel: +(267) 395 1564, Fax: +(267) 390 0358, www.bifm.co.bw
Dynamic Wealth Management Disclaimer: The views expressed in this publication are those of the author and do not necessarily reflect those of Bifm