1. Recent Economic
Developments & Prospects
September 2006
Keith Jefferis

2. Structure of Presentation
Economic Growth
Exchange Rates, Foreign Trade
Inflation, Monetary Policy & Banking
Fiscal Developments
Outlook

3. Economic
Growth

4. Botswana Prospects (Sept. 2005)
Evidence of short-term cyclical
recovery
Higher inflation & interest rates
Longer-term reforms pending:
Sustainable budget
FIAS report recommendations
Real focus on competitiveness
Privatisation, liberalisation, PPPs

5. %
19
75
0
5
10
15
20
25
/7
19 6
77
/7
19 8
79
/8
19 0
81
/8
19 2
83
/8
19 4
85
/8
19 6
87
/8
19 8
89
/9
19 0
91
/9
19 2
93
/9
19 4
95
/9
19 6
97
/9
GDP Growth – Long Term
19 8
99
downward trend
/0
20 0
01
/0
20 2
03
/0
May not yet have stabilised
4
Growth volatile but long-term

6. GDP growth – mining vs non-
mining
35%
30%
Contrast between mining and
25%
non-mining sector growth
20%
15%
10%
5%
0%
-5%
96
97
98
99
00
01
02
03
04
05
5/
6/
7/
8/
9/
0/
1/
2/
3/
4/
'9
'9
'9
'9
'9
'0
'0
'0
'0
'0
Mining Non-mining priv.sect.

7. Growth Developments
Good conditions in mining sector
world commodity markets very tight;
copper & nickel prices at very high
levels;
widespread prospecting (copper, nickel,
zinc, diamonds, gold, PGMs, coal, gas)
Good long-term prospects
Possible temporary weakness ahead
market for diamonds weakening (US)
metals prices expected to fall

8. Copper & Nickel Prices
35000 Ni prices more than doubled during 10500
2006; Cu up 70%
30000 9000
Copper, US$/t
Nickel, US$/t
25000 7500
20000 6000
15000 4500
10000 3000
r
ar
l
n
g
ay
n
b
Ju
Ap
Ja
Ju
Au
Fe
M
M
Nickel Copper

9. Growth Developments
Forthcoming Mining & Related
Projects
Diamondex mine early 2007 (Tuli
Block)
African Diamonds AK6 2007 (Orapa)
African Copper 2008 (Dukwe)
LionOre/Tati Nickel Activox refinery
(Cu/Ni/PGMs) (Francistown)
Mmamabula coal/power
Diamond aggregation/cutting

10. Growth Developments
Weak conditions in non-mining
sector
Recession in manufacturing, trade;
Impact of:
declining real incomes in public sector
slow public spending growth
credit squeeze
devaluation
HIV/AIDS

11. Is There a Recovery?
No new GDP data (only to June 05)
BoB Business Expectations survey
less pessimistic in 2006H1 compared to
2005H2;
contrast between domestic and
exporting sectors
overall confidence below 50%, but
improving

12. BoB Business Confidence Survey
80%
70%
60%
50%
40%
30%
20%
10%
0%
2005H1 2005H2 2006H1
Exporters Non-exporters All

13. Growth Indicators – Private
Business Credit
40%
35%
Strong signs
30% of business
Business credit
25% recovery
growth
20%
15%
10%
5%
0%
-5%
2000 2001 2002 2003 2004 2005 2006

14. Growth Indicators – Non-Mining
Elec. Consumption
18%
Non-mining electricitygrowth
16%
14%
12%
10%
8%
6%
4%
Only weak evidence of
2% recovery, and later
0%
2000 2001 2002 2003 2004 2005 2006

15. Growth Indicators – Electricity
Consumption
Clear contrast
Electricity consumption growth
18% between mining &
16% non-mining sectors
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
2000 2001 2002 2003 2004 2005 2006
Non-mining Mining

16. Exchange Rates
FX Reserves
Exports

17. Exchange Rates
140
130
120
Index 1996=100
110
NEER
100 BWP/ZAR
90 BWP/USD
80
70
60 Crawling peg:
started at 5%
50
now 4%
2002 2003 2004 2005 2006

18. Real Effective Exchange Rates
1995-2005
125 Devaluations and crawling peg
120 have restored competitiveness
115
110
105
100
95
90
85
80
95
96
97
98
99
00
01
02
03
04
05
06
19
19
19
19
19
20
20
20
20
20
20
20

19. Forecasts 2006-2011
Pula vs. ZAR
1.20
1.15
1.10
R/P
1.05
1.00
Rand/pula parity approaching –
0.95 but probably not in next 5 years
0.90
2
3
4
05
06
07
08
09
10
11
Q
Q
Q
20
20
20
20
20
20
20

20. Forecasts 2006-2011
Pula vs. USD, EUR
0.19
0.18
USD, EUR per P
0.17
0.16
0.15
0.14
0.13
0.12
0.11
0.1
2
3
4
11
05
06
07
08
09
10
Q
Q
Q
20
20
20
20
20
20
20
USD/BWP EUR/BWP

21. Export growth (US$), 2003-05
341%
100% Export growth very buoyant across
a range of commodities
Increase in US$ terms
69%
80%
57%
60% 54%
28% 39%
40%
11% 13%
20%
0%
i
es
er
s
h
l
.
ds
-N
ta
c
ile
As
et
th
cl
on
To
Cu
xt
hi
O
da
t
m
ea
Te
Ve
So
ia
M
D

22. Major Exports (>P2m)
June 2006
1 Diamonds 11 Plastics
2 Copper-nickel 12 Meat
3 Apparel/clothing 13 Paper products
4 Stamps, banknotes 14 Hides & skins
5 Sugar confect. 15 Pers. effects
6 Vehicles & parts 16 Optical equip.
7 Machinery 17 Salt
8 Pasta & biscuits 18 Fuels & oils
9 Iron & steel 19 Meat products
10 Electrical mach. 20 Pharmaceut. prods.

23. Foreign Exchange Reserves (Pula)
45000
40000
35000
30000
Pula mn
25000
20000
15000 Good exports resulting in reserves
10000 surpassing 2001 peak in Pula terms
Import cover approx. 24 months
5000
0
1
02
03
04
05
06
200
20
20
20
20
20

24. Foreign Exchange Reserves
(SDR, USD)
8000
7000
6000
SDR, USD mn
5000
4000
3000
2000 Also recovery in SDR & USD terms - reserves at
1000 highest ever USD level
0
012
03
04
05
06
20 0
20
20
20
20
20
US dollar SDR

25. Botswana’s International Assets
Official reserves now complemented by substantial
60,000 privately held foreign assets (e.g. pension funds)
50,000
40,000
P mn
30,000
20,000
10,000
0
2001 2002 2003 2004 2005
Official reserves Direct inv. Portfolio inv. Oth. inv.

26. Inflation
Monetary Policy
Banking

27. Inflation
Inflation rose sharply to 14.2% in
April 2006, above expectations
Main cause was 2005 devaluation,
compounded by:
world fuel prices
regional food prices
telecomms tariffs rebalancing
school fees

28. Inflation
Steady decrease since April, down to
11.9% in July
Decline should continue; inflation to end
year below 10%;
Should fall to 7%-8% by Q1 2007
Main risks:
world fuel prices
further telecomms rebalancing
rising world and SA inflation
New CPI index before end of year will
help more accurate measurement of
inflation

29. Inflation Forecast
16% F’cast
14%
12%
10%
8%
6%
BOB target range
4%
2%
0%
2002 2003 2004 2005 2006 2007

30. Inflation – Quarterly annualised
18%
Devaluations
16%
14%
12%
10%
8%
Inflation has fallen more
6%
slowly after second
4% devaluation – due to
2% crawl, oil prices
0%
Mar
Mar
Mar
Jul
Jul
2004
2005
2006
Sep
Sep
Nov
Nov
May
May
May
July

31. Monetary Policy
Revision to inflation data in April has avoided
need for further interest rate increases (since Feb
2006)
Declining inflation favours rate reduction, but:
inflation way above BoB target range, and unlikely
to fall within it
BoB inflation range too low, given crawling peg
may see small reduction in rates in late 2006/early
2007
Mid-Year Review of 2006 Monetary Policy
Statement – no change to inflation objective

32. Prime Lending Rate and Inflation
BoB has traditionally been reluctant to cut rates much
even when inflation falls sharply
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006
Prime Inflation

33. Banking System Developments
Banking system going through
period of change
Regulatory changes
BoBCs
Reserve requirements
FX dealing
Rapid expansion of deposit base,
banks very liquid, additional profits
May conflict with objectives of
restraining credit growth

34. BoBC Holdings
Change in BoB regulations has altered composition
of BoBC holdings, but total is up
Feb
May
0 2000 4000 6000 8000 10000 12000 14000
P mn
Banks - own Banks - cust Other FIs Other private

35. Banking Assets
30000
25000 Effect has been to push funds into the
banks – assets up nearly 50% in 3 months
Assets, Pmn
20000
15000
10000
5000
0
3
4
5
6
'0
'0
'0
'0
Loans BoBCs Other

36. BoB Liabilities
BoB cannot force reduction in BoBCs while reserves
(=assets) are driving increase in liquidity
50,000
BoBC change will not save interest costs for BoB
45,000
40,000
35,000
30,000
Pmn
25,000
20,000
15,000
10,000
5,000
0
2003 2004 2005 2006
BoBC's Govt Cap & res Oth

37. Credit Growth
30%
25%
20%
15%
10% Banking sector liquidity may
contribute to further credit growth
– perhaps above BoB range
5%
0%
2000 2001 2002 2003 2004 2005 2006

38. Credit Growth
50% Much stronger resurgence in business
credit growth than household
40%
30%
20%
10%
0%
-10%
2000 2001 2002 2003 2004 2005 2006
Business (priv) H'holds

39. Rising Indebtedness
Ratio of Credit to Non-mining GDP
18%
Credit to Non-mining GDP
16%
14%
12%
10%
8%
6%
4% HH credit may be saturated, private
2% business sector under-borrowed
0%
93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06
H'hold Pvt Business

40. Banking – Loans in Arrears
But concern about rising arrears rates will constrain lending out
of new funds
8%
% of credit in category
7%
6%
5%
4%
3%
2%
1%
0%
03
06
01
02
04
05
20
20
20
20
20
20
Households Business

41. Fiscal Developments

42. Govt Revenue & Spending (Pmn)
Concern over rapidly rising expenditure and deficits from
30,000 2001-03 – possibly unsustainable budget trends
25,000
20,000
P million
15,000
10,000
5,000
0
-5,000
9
0
1
2
3
4
5
6
'9
'0
'0
'0
'0
'0
'0
'0
Expenditure Revenue Balance

43. Govt Revenue & Spending (% GDP)
Expenditure capped at 40% of GDP – in line with long-
60% term revenue expectations – “Fiscal Rule” (NDP9 MTR)
50%
40%
% of GDP
30%
20%
10%
0%
9
0
1
2
3
4
5
6
'9
'0
'0
'0
'0
'0
'0
'0
Expenditure Revenue

44. Budget Balance
Deficits reversed; budget stabilising around balanced
10% budget
8%
6%
4%
% of GDP
2%
0%
-2%
-4%
-6%
-8%
6
7
8
9
0
1
2
3
4
5
6
'9
'9
'9
'9
'0
'0
'0
'0
'0
'0
'0

45. Government Budget
Immediate problems averted
2006/07 budget combined fiscal
restraint with expansion of
development budget
Concern that authorised funds not
being spent, delaying domestic
economic recovery
Fiscal balance still a challenge in
future years

46. Economic Prospects

47. Botswana Economic Prospects
2006
2006H2 - 2007: slow resumption of growth
declining inflation, and eventually lower
interest rates;
positive impact of salary and govt. spending
increases (eventually);
improved international competitiveness;
positive devaluation impact feeding through
impact of telecomms liberalisation
impact of ART rollout

48. Botswana Economic Prospects
2006
But overall growth rate likely to stay low
– long-standing constraints remain:
Land cost and availability
Skilled labour – same
Slow privatisation
And some new ones
Anti-foreigner/FDI perceptions
Increasing crime
Competition from opportunities elsewhere in
the region
What will BEAC deliver?

49. Economic Prospects
Growth Forecasts
MFDP: 4.3% avg. to end NDP9
IMF: 2005 3.8%;
2006 3.5%;
2007 3.5%
S&P: short-medium term 3.5% - 4%

50. %
Zi
m
-10
-5
0
5
10
Sw 'bw 15
az e
Le 'lnd
B o so t
ts h o
M wa
au n a
rit
Na i u
m s
IMF Forecasts
S. ibi
A a
fri
Z a ca
m
M bi
growing economies in SADC
d' a
Botswana amongst the slowest
gs
cr
T a DR
nz C
SADC GDP Growth 2006
M an
oz i
'b a
qu
M e
al
a
An w i
go
la
27%

51. Thank You
Email: info@econsult.co.bw
www.econsult.co.bw