Bifm Economic Review 3rd Quarter 2006 Economic Review has appreciated by 7% against the rand regression analysis yields not just the rateSummary of (to R1.20=P1) and depreciated by 16% of crawl but also the “secret” weights ofEconomic against the US dollar (to P6.4=$1). While there is not much that can be done about currencies in the basket. It is not clear why the government is unwilling to discloseDevelopments this, it adds to the uncertainty facing producers and traders. these details; fears of inviting speculative attacks on the pula are unfounded, as thereDr Keith Jefferis, There are several reasons for the rand’s many other factors that would discourage speculation even if the crawl and basketChairman of weakness: in May, it was affected by general negative sentiment towards weights were disclosed. In any case, any serious speculator would have worked outBifm Investment emerging markets, as well as the peaking of some commodities prices. More recently, the basket and crawl details themselves.Committee however, it has been affected by factors more specific to South Africa rather than As Moody’s noted in their 2006 review of Botswana’s credit rating, “internationalI emerging markets in general, as concerns experience has shown that crawling have been rising about the current account exchange rates work best when the rate deficit, which had risen to around 6% of of crawl is pre-announced”. In line with ntroduction GDP. The rand weakened as capital inflows international best practice and in theGood data on recent economic growth is proved insufficient to finance the growing interests of promoting transparency andscarce at present; the last data on GDP deficit at prevailing exchange rates, understanding of the exchange rateissued by the Central Statistics Office (CSO) reinforced by some negative sentiment mechanism, it is high time that the rate offor the year 2004/05 is now more than 15 towards the currency. While many of South crawl and the basket weight componentsmonths old, and thus of little guide to Africa’s exporters will be happier with the were publicly disclosed.recent economic developments. With no exchange rate closer to R8 than R6 to the Trade and External Developmentsnew GDP data expected until the Budget dollar, the rapid movements in the currencyin February 2006, we are in something of have raised fears of rising inflation and Monitoring of international tradea “black hole” with regard to real activity increases in interest rates. developments has been made easier by adata. Other evidence presents a mixed recent innovation by the CSO, the Botswana’s exchange rate mechanism alsopicture, suggesting a slow pickup in activity, publication of monthly trade statistics went through a small change in July, whenwith the major increase in government within a relatively short period after the the crawling peg was adjusted. For 12development spending provided for in the end of the month (for instance, the latest months from its introduction in June 2005,2006 Budget only slowly making its impact data covers the period to July 2006, and the pula crawled downwards against thefelt, perhaps reflecting continued was published in September). This makes basket at an annual rate of 5.1%; sinceimplementation constraints. Our the trade data amongst the most up-to- July 10th, the crawl has been adjustedcommentary this quarter focuses on date macroeconomic economic data downwards to an annual rate of 3.9%.exchange rate, trade, inflation and banking available in Botswana (after data on This presumably reflects the expectedsector developments. inflation from the CSO and credit growth closing of the gap between Botswana and from BoB), and marks a commendableExchange Rates trading partner inflation rates, and the improvement on the previous situation stabilisation of the real effective exchangeRecent months have seen considerable when trade data was only available with rate.exchange rate volatility, driven by the rand a very long lag.weakening sharply against the US dollar – The effectiveness of the crawling peg is, however, hampered by a lack of The Monthly Trade Digest provides detailedfalling from R6.15 to the dollar at the end transparency over its operation, as the information on Botswana’s imports andof April to R7.67 at the end of September. government has been unwilling to disclose exports, and has been made possible byGiven the nature of the pula basketmechanism, the pula has shared in this details of the rate of crawl or how it isvolatility; over the same period, the pula determined. Nevertheless, it is fairly easy to work out - simple econometric continue...
2 Economic Reviewthe automation of data collection at border some 11%. The composition of the P38m million over 6 months, which is whatposts by the Department of Customs & remaining 10% of exports is quite the CSO data indicates.Excise. It reveals some interesting facts diversified, with clothing, beef, electricalabout Botswana’s main exports (see Table & mechanical machinery, vehicles & parts, Whereas the CSO data is collected from1). As is well known, diamonds dominate iron & steel products, and confectionary border post customs declarations, the BoB’sexports, with 79% of the total over the 6 (mostly chewing gum) each accounting for data is collected directly from exportingmonths from February to July 2006 (for significant proportions of non-diamond companies, which in many cases are solesome reason the January data has not been exports. exporters of the commodity in question. Itpublished), and copper- nickel is the next seems likely that the BoB data is the moremost important export, accounting for Nevertheless, there are some puzzles in the accurate, and that the CSO data is perhaps data. Perhaps most importantly, there are being affected by the inaccurate major differences between the data classification of exports on customsTable 1: Botswana’s Top 20 Exports by published by the CSO and that published declaration forms. While the CSO initiativeCategory, February-July 2006 by the Bank of Botswana (BoB). Amongst is commendable, more work needs to be the most serious of these is the apparent done by the CSO and the Department ofRank Trade Category Exports % of Pmn non-diamond under-recording of gold and soda ash Customs & Excise on ensuring the accuracy exports exports by the CSO. BoB data indicates of published data. 1 Diamonds 8,950 that Botswana exported P242 million of soda ash and P92 million of gold over the Notwithstanding the concerns over the 2 Copper-nickel 1,275 53.9% first six months of 2006, making them accuracy of some of the trade data, some approximately the 4th and 8th biggest interesting trends are revealed, which are 3 Clothing 352 14.9% exports respectively, but these items are generally positive. Exports have been 4 Meat (beef) 144 6.1% recorded at much lower levels in the CSO growing steadily over the past 3 years, and data. There are also major discrepancies at a much faster pace then imports (see 5 Machinery 111 4.7% between BoB and CSO data on exports of Figure 1). While much of this growth is 6 Vehicles & parts 99 4.2% diamonds and copper-nickel in some driven by diamonds, exports of other months; for instance, BoB recorded commodities have also grown rapidly. 7 Iron & steel products 55 2.3% diamond exports of P1 337 million in April Exports generally exceed imports, and as 8 Sugar confectionary 44 1.9% 2006, whereas the CSO recorded only P360 a result, Botswana’s trade balance is positive (chewing gum) million. Finally, some of Botswana’s recorded in most months (see Figure 2). 9 Printed items 41 1.7% exports are odd: the 9th largest export (unused stamps & Data on the rest of the balance of payments banknotes) category is “printed items”, which (BoP) (e.g. trade in services, transfers, comprises mostly unused stamps and 10 Plastics 41 1.7% investment and capital flows) are not yet banknotes; while there is undoubtedly available on a regular basis – it would be 11 Cereal products 36 1.5% some interest in these from collectors (pasta & biscuits) helpful if at least quarterly BoP data could worldwide, it seems highly unlikely that the value of such exports amounts to continue... 12 Personal effects 30 1.3% 13 Paper articles 22 0.9% Fig 1: Exports & Imports 14 Hides & skins 15 0.6% 3,50015 Pharmaceutical prods. 15 0.6% 3,000 (animal vaccines) 2,500 16 Salt etc. 14 0.6% 2,000 P million 17 Mineral fuels, oils 11 0.5% 1,500 18 Beverages 10 0.4% 1,000 19 Food residues, 7 0.3% animal fodder 500 20 Optical etc. 6 0.3% equipment 0 2004 A J O 2005 A J O 2006 A J Imports Exports Exports trend Imports trendSource: CSO Monthly Trade Digest.Note: major sub-categories in italics
3 Economic Review Fig 2: Balance of Trade Fig 3: Foreign Exchange Reserves 2,000 45,000 9,000 1,500 40,000 8,000 1,000 35,000 7,000 P million 500 US$mn P million 0 30,000 6,000 -500 25,000 5,000 -1,000 -1,500 20,000 4,000 03 2001 02 05 04 2004 A J O 2005 A J O 2006 A J 06 20 20 20 20 20 Pula (lh axis) USD (rh axis) Source: BoBbe provided by the Bank of Botswana, and consumers. It is interesting to note that August. The main driver of the decline isthe improved availability of trade data clothing and footwear has had the lowest the falling away of the impact of the 2005should facilitate this – but movements in rate of price increases of any category in pula devaluation. It is expected thatthe foreign exchange reserves provide some Botswana’s CPI basket over the past 3 inflation will continue to fall for the nextindication of what is happening. The years, due mainly to imports from China, few months (see Figure 4) and should endreserves have been growing rapidly in pula and without this Botswana inflation would the year in single figures, before stabilisingterms, and in July 2006 reached have been even higher. The negative impact between 7% and 8% by the middle ofP44 billion, exceeding their previous peak of the restrictions on Botswana is 2007. There are some risks to inflation,of P41 billion reached back in December something that should be taken up by the arising from the rebalancing of Botswana2001. Part of the pula value increase has government within the framework of the Telecommunications tariffs as well as frombeen driven by exchange rate changes, but SACU Agreement. higher international inflation. South Africaneven in US dollar terms, the reserves have headline inflation reached 5.4% in August,been rising strongly, to $7.5 billion (see While the quota restrictions on Chinese up from 3.3% in April, while producerFigure 3). The reserves are now equivalent clothing imports are likely to have a price inflation reached 9.2% in August.to around 24 months of imports of goods negative impact on Botswana – and most Both are likely to increase further due toand services. likely on South Africa as well – South Africa higher import prices resulting from rand is not alone in adopting such measures. weakness since May.Botswana’s recent trade experience – with Botswana has various import bans in placeexports rising faster than imports – (for instance on bread, poultry, sugar in Inflation has also been driven upwardscontrasts with that of South Africa, which retail packs etc.). Economically, these are during the year by higher international oilhas experienced a widening current account counterproductive as they penalise prices, but price pressures from this sourcedeficit. Partly in response to this, as well consumers in general (through higher prices may now be abating. Benchmark crude oilas concerns about import competition and restricted choice) and benefit only a prices have fallen by 25% from their peakfacing South Africa’s struggling textile & few, protected producers, and make the in August (see Figure 5) in US dollar terms,garment industry, quota restrictions have economy less competitive. Furthermore, and although the fall in pula terms hasbeen introduced on imports of garments such measures are not permitted under been less (20%), due to pula weaknessfrom China into South Africa. While these the SACU agreement, to which Botswana against the dollar, this should be enoughquotas do not officially apply to Botswana, is a signatory, as this clearly rules out to bring the recent cycle of fuel pricethey will effectively apply in practice, due unilaterally-imposed import restrictions increases to an end. Whether fuel pricesto the nature of the customs union (SACU). between member states for protectionist will come down in the near future is,This is likely to be problematic for purposes. however, less certain: the Ministry of TradeBotswana, which will face higher clothing and Industry’s price stabilisation fund hasprices as a result (as low-price imports from Inflation and Monetary Policy been depleted as oil prices have been rising,China are restricted), thereby penalising and the opportunity provided by falling Inflation continued to decline in the third prices may be used to rebuild the fund. quarter, as expected, reaching 10.7% in continue...
4 Economic Review Fig 4: Inflation – Actual and Forecast Fig 5: Oil Prices, 2006 (Brent Crude) 16% 100 500 95 14% 90 450 12% 85 Pula/Barrel 80 400 US%/Barrel 10% 75 8% 70 350 65 6% 60 300 4% 55 50 250 2% 0% Brent spot USD Brent BWPFurthermore, there may still be fuel-related as, if inflation remains consistently outside would be no longer be allowed to do so,price rises to come, from higher public the upper end of the range, there is unlikely has resulted in a major inflow of funds totransport fares. to be any significant reduction in interest the banking system. The deposit base of rates. Prior to the introduction of the the banking system increased by 58%, orThe impact of rising fuel prices on inflation crawling peg, when the exchange rate was P8.2 billion, over the four months fromcould, however, be reduced by a partial fixed against the basket, the inflation range March to June, with total banking assetsdecontrol of fuel prices. At present, fuel was set with reference to expected foreign and liabilities up by 44% over the sameprices are fixed by government, meaning inflation (an average of Botswana’s trading period. The vast bulk of this deposit inflowthat competition plays no role in price partners’ inflation rates), so that if achieved, – P7.8 billion - has been used by the banksdetermination, and nobody is allowed to inflation within the range would lead to a to purchase BoBCs. As a result, while thecharge less than the regulated price. If constant real effective exchange rate, thus composition of BoBC holdings hasgovernment wishes to retain some measure supporting international competitiveness. changed, the total of BoBCs outstandingof consumer protection it could do so by With a crawling peg, the inflation target has continued to rise (see Figure 6). Thisfixing maximum prices only, and allowing range should be adjusted upwards to reflect is to be expected, as changing the BoBCfuel retailers to compete by cutting prices this, both because expected inflation is ownership rules does not change theif they wished. Even though prices might higher and also because a higher inflation amount of liquidity that needs to beonly come down by a few thebe per litre, rate is consistent with a constant real absorbed from the financial system; liquiditythis would help to reduce the impact of effective exchange rate, due to the is driven by the growth of foreign exchangehigher fuel prices and make the economy compensation provided by the crawl. In reserves net of absorption by governmentmore competitive. fact, a range extending up to 9% would budget surpluses, which are in turn driven be consistent with real exchange rate by the balance of payments and fiscalAlthough inflation is likely to keep falling stability, given the current rate of crawl of policy.for the next few months, it is unlikely to around 4% and expected foreign inflationfall far enough to enter the Bank of Bank credit growth has picked up strongly of around 5%. A higher upper end to theBotswana’s current target range of 4%- since the beginning of the year (see Figure range would also enable lower interest7%. The reason is that imported inflation 7), reaching 13.7% growth in the year to rates, and therefore be supportive of higherprovides an underlying rate of around 5%, August. Both credit to households and to economic growth.to which the crawling exchange rate peg private businesses show higher growth (atadds another 2%-3%. In current Banking and the Financial Sector 15.9% and 18.1% respectively), whilecircumstances, these factors mean that credit to parastatals has contracted sharply.inflation is unlikely to fall below 7%-8%. The banking sector has experienced Higher credit growth may reflect several significant changes in recent months. The factors, including an improved businessThis raises questions as to whether the Bank of Botswana’s announcement that climate and increased household borrowingchosen range of 4%-7% (falling to 3%- only banks would be permitted to hold following the April public sector pay rise.6% for the medium term) is appropriate BoBCs after March 1, and that the private sector and non-bank financial institutions continue...
5 Economic Review Fig 6: Distribution of BoBC Holdings, 2006 Fig 7: Credit Growth Rates 50% 40% June 30% 20% 10% Feb 0% -10% 0 3,000 6,000 9,000 12,000 15,000 Value (Pmn) Banks – own Banks – customers Other financial insts. Other private Total Private Business HouseholdsIt may also be being driven by the inflow mid-2005; both of these changes stronglyof funds into the banks following the BoBC favour the banks.changes, providing the banks with moreresources to finance lending. Further High banking sector profits continue toincreases in credit growth may be of attract new entrants to the banking sector. Bifm Botswana Limited Asset Management. Property Management.concern from an inflation perspective, if The newly-established Bank Gaborone Private Equity. Corporate Advisory Services.the upper end of the BoB’s target range commenced retail operations in September Private Bag BR 185, Broadhurst, Botswana Tel: +(267) 395 1564. Fax: +(267) 390 0358.for credit growth (currently 11%-14%) is 2006, and other applications for banking Website: www.bifm.co.bwbreached. licences are under consideration by the Bank of Botswana. Bank Gaborone is aBank profits have risen sharply in the first subsidiary of Capricorn Holdings ofhalf of 2006, up by around 20% over the Namibia, owner of Bank Windhoek, onesame period in 2005. This has been driven of the largest Namibian banks. Bankby faster credit growth, higher interest Windhoek has introduced innovativerates, the changes in the BoBC system, and products catering to the low-incomethe wider bid-offer spread on foreign banking market in Namibia, and it is to beexchange dealing introduced by BoB in hoped that Bank Gaborone follows a similar strategy in Botswana, where more than half of the adult population remains unbanked.