Bifm Economic Review 3rd Quarter 2007 Economic Review markets, and neither the stock market nor to 7.2% in August and 6.8% in September.Summary of the money market experienced any of the The main culprits behind the rise in inflationEconomic volatility afflicting markets elsewhere in the world. More generally, as an emerging market were food prices and transport costs, which between them account for 40% of theDevelopments with good economic fundamentals, strong consumer price index basket. Over the six months to September, food prices were up foreign reserve levels, limited dependenceDr Keith Jefferis upon external credit and a sound financial sector, Botswana is well placed to withstand 19% at an annual rate, and transport costs up 14%, with particularly large increase for bread and cereals, dairy products and fuel.Chairman of turbulence in credit markets elsewhere. (See Figure 1)Bifm Investment Turning to the domestic economy, economic developments have generally been positive, The causes of higher inflation are largelyCommittee with signs of higher growth and continued outside of Botswana’s control. The prices of food and fuel are determined on world trade diversification, although inflation markets, and so it is not just Botswana that remains a concern. The government has is suffering from rising inflation, as higher recorded a substantial fiscal surplus for food and fuel prices affect almost allThe past few months have seen turbulence 2006/07, although this was largely countries. Nor is there likely to be much reliefin financial markets around the globe. unplanned. Positive external assessments from these price pressures in the short term;Markets in major industrialised countries have been received from Moody’s, the IMF, food prices, especially for grains and cereals,experienced a “credit crunch” as normal the World Bank and Transparency are being pushed up by demand for biofuelsliquidity flows dried up, risk aversion increased International. amongst other things, and it will take aand many financial institutions took large while for higher prices to encourage greater Inflation and Monetary Policylosses on assets that turned out to have been foodgrain production. Oil prices are beingovervalued or overpriced. Although emerging While the early months of 2007 were kept high due to a very fine balance betweenmarkets shared in the initial turmoil, the characterised by a steady decline in inflation, supply and demand as well as geopoliticalimpact on many has been short lived and prompting a 0.5% cut in interest rates in concerns, which also leads to volatility;most emerging markets have come through June, the experience in recent months has a sharp reduction in international oil pricesthe crisis unscathed. Botswana has felt little been mixed. After declining to 6.3% in April, in August led to hopes of fuel price reductionsor no impact, partly because financial markets the lowest figure for two years, inflation then but this was follow by a spike to the highestare reasonably independent from global rose to 7.5% in July before dropping back ever levels in September. Figure 1: Inflation by Group Figure 2: Inflation (6 months to September, annualised) 25% 16% 20% 14% 15% 12% 10% 10% 5% 8% 0% -5% 6% n ar n n c. g p. b. s rt ls d th 4% tio we tio tio is sin ui to em po ote Foo eal ica f uca rea M Hou eq l & ll it rans & h H un g & Ed ec H ho H o A T r. 2% m m thin R & c st Co Clo rn Al Re 0% Fu 2002 2003 2004 2005 2006 2007 2008 Source: CSO, Econsult Source: BoB, CSO, Econsult
2 Economic Review Figure 3: Real GDP growth (annual) Figure 4: Growth Indicatiors (year-on-year) 12% Real business credit Real govt.exp. Electricity cons. (non-mining) 10% Real gov. exp, business credit 30% 16% 8% 25% Electricity consumption 14% 6% 20% 12% 4% 15% 10% 10% 2% 8% 5% 0% 0% 6% -2% -5% 4% -10% 2% 02 2 3 20 4 03 2 3 20 4 04 2 3 20 4 05 2 3 4 06 2 3 4 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q -15% 20 20 0% 02 03 04 05 06 07 20 20 20 20 20 20 GDP Non-mining GDP Source: CSO, Econsult Source: BoB, BPC, EconsultAlthough causes of higher inflation are however, been improved by the recent Government Budgetlargely global, recent developments are publication by the Central Statistics Office Preliminary data on government revenue andnonetheless discouraging. Inflation forcasts (CSO) of quarterly GDP data up to the end spending for the 2006/07 financial yearnow suggest that it will increase above of 2006. While this still falls some way behind shows revenues more or less in line withthe Bank of Botswana’s 4%-7% objective the CSO’s stated objective of making the projections contained in the Februaryrange as it rises towards 8% in early 2008 quarterly data available within 90 days of 2007 Budget, but – as anticipated – a major(See Figure 2).External price pressures may the end of the relevant period, it is expenditure shortfall. The result was a budgetalso be reinforced by domestic price nevertheless a step forward, and it is to be surplus of P7.6 billion, or an estimated 12.2%developments, as administered prices (for hoped that the improvements will continue. of GDP, the largest deficit (in relation to thetelecommunications, Botswana Housing size of the economy) since the late 1980s.Corporation rentals, water and electricity) What does the new data tell us? First, growth Expenditure grew by 11% over the previousare likely to increase. There is also some remains volatile, especially in the mining year, only a small increase in real terms, anddomestic demand pressure, with credit sector, with considerable quarter-to-quarter was 13% below the amount provided in thegrowth rising steadily to reach nearly 23% variations that can obscure longer-term revised budget for the year. Developmentin August, well above the BoB’s desired range trends. Second, the data confirm spending only grew by 6.6%, and at P4.03bnof 11%-14%, along with some evidence that the economic recovery that has been taking was 28% below the figure projected for thegovernment spending growth is picking up. place over the past year or so, a development year (P5.6 bn). This suggests that major that we had earlier highlighted based problems remain in implementation capacity.As a result of the turnaround in inflation, on other growth indicators such as (See Figure 5)and buoyant domestic credit growth, it is business credit and electricity consumption.unlikely that June’s cut in interest rates will Third, although there are signs of recovery, By contrast, revenue was buoyant, with mostbe followed by any more rate reductions over growth nevertheless remains low; annual categories showing healthy increases overthe next six months, even though real interest growth was only 3.3% in 2006 (with 2005/06. The 28% increase in non-mineralrates in Botswana remain high. 3.2% for non-mining growth), which is income tax receipts suggests either that still below the rates required for a steady the economy is more buoyant than theEconomic Growth i n c re a s e i n l i v i n g s t a n d a rd s a n d GDP growth figures indicate, or that taxKeeping track of economic growth in employment opportunities. (See Figure 3) compliance is improving, or both. The factBotswana has often been difficult in view that VAT collections only increased byof the frequency with which GDP data However, the quarterly GDP data is still 13% suggests that the larger rise in incomeare published – in the past, data have been somewhat outdated, in that it is nine months tax collections is due to improved compliance,made available only once a year, typically old and only runs to the end of 2006. which reflects positively on the newly-more than six months after the end of Other growth indicators suggest that the established Botswana Unified Revenue Servicethe relevant time period. The data have recovery has continued to gather pace during (BURS). (See Figure 6)therefore been more useful for historical 2007, and that current growth is probablypurposes than for tracking current or recent some way above the end-2006 figure. Government spending has been declining,growth developments. Data availability has, (See Figure 4) relative to GDP, and in 2005/06 and 2006/07
3 Economic Reviewwas the lowest for many years. The very adjustments in the parameters of the pula countries, continued to be stable, therebylarge drop in government spending, relative basket mechanism relating to the rate supporting international competitiveness.to the size of the economy, between 2002/03 of crawl and the weights of currenciesand 2005/06 most likely accounts for a large in the basket. Such changes are not The benefits of the exchange rate policy arepart of the slowdown in economic activity officially disclosed and it is left to market showing up clearly in the trade data. In theover this period. In 2005/06 and 2006/07, observers to spot them from daily exchange first half of 2007, total exports were up 37%spending was well below the “fiscal rule” rate movements. It is not clear why the over the same period in 2006. However, thisof 40% of GDP introduced in the mid-term government is so reluctant to officially reflects quite different export performancesreview of NDP 9. This under-spending is not disclose information that can in any case be across different commodities and sectors.necessarily a bad thing (although an determined through statistical analysis of The dominant diamond sector performedunplanned underspend probably means that publicly available data. In its 2006 Article relatively badly – exports were only up 7%,actual spending is not in line with priorities). IV Report on the Botswana economy, the which is more or less flat in real terms.Government mineral revenues are projected IMF “urged the authorities to announce the Non-diamond exports were up 141% overto drop sharply between 2018 and 2029, weights and the rate of crawl for the the same period, and as a result increasedand an adjustment will be required to much exchange rate”, as this would help to reduce from 22% to 39% of total exports overlower levels of government spending uncertainty and stabilise expectations of this period, indicating significant exportthan we have at present. This long-term future inflation (which is greatly influenced diversification. Much of this increase wasadjustment process will be easier, and less by exchange rate developments). Similar due to a sharp jump in nickel/copper exports,painful, the earlier it starts. Taking a long sentiments have been expressed in the past which were up 162% due to mainly to higherterm perspective, government should not by Moody’s Investors Services in their credit prices. However, even if this is excluded, theattempt to raise spending significantly rating reports. remaining exports also grew rapidly, byabove present levels, but should instead 123%, with textiles, meat and miscellaneousfocus on spending more efficiently. Notwithstanding the lack of transparency manufactured goods all growing strongly.Spending restraint would also help to relieve regarding the exchange rate, the pula basket (See Figure 7)inflationary pressures. mechanism has continued to serve Botswana well. During the third quarter of the year Other Economic DevelopmentsDespite the low spending growth for the the pula depreciated slightly (0.3%) against Air Botswana Privatisation2006/07 financial year as a whole, there the rand, but appreciated against the US In early October it was announced that theappears to have been a pick-up in spending dollar (by 2%) and depreciated against the proposal to privatise Air Botswana throughgrowth in recent months, with spending euro (by 3.1%), as the dollar weakened on the establishment of a new airline as ain the year to June 2007 up 16% over the international markets. The overall nominal partnership between Airlink of South Africaprevious year. effective exchange rate (NEER) depreciated and the Government of Botswana had by 0.5%, reflecting the impact of the crawling been shelved. This marks the third time thatExchange Rates and International Trade peg. The real effective exchange rate (REER), the proposed privatisation of Air BotswanaExchange rate policy has continued broadly which adjusts the nominal exchange rate for has failed. The proposal had run into severeunchanged, but there appear to have been inflation in Botswana and in trading partner political opposition, and seems to have Figure 5: Budget Balance Figure 6: Government Revenue & Spending 9, 000 18% 50% 8, 000 16% 7, 000 14% 6, 000 12% 45% % of GDP P million % of GDP 5, 000 10% 4, 000 8% 40% 3, 000 6% 2, 000 4% 1, 000 2% 35% 0 0% -1, 000 -2% -2, 000 -4% 30% /00 1 2 3 /04 5 6 7 19 6 /97 19 8 19 9 20 0 20 1 /02 20 3 20 4 20 5 /06 /07 0/0 /0 2/0 4/0 /0 /0 /9 /9 /9 /0 /0 /0 /0 /0 99 01 03 05 06 95 96 97 98 99 00 01 02 03 04 05 06 0 0 0 19 20 20 20 20 20 20 20 19 19 20 20 P mn % of GDP Revenue Spending Source: BoB, Econsult Source: BoB, Econsult
4 Economic Review Figure 7: Export Growth, 2006-7, H1 200% 150% 100% 50% 0% -50% So rts Di ash ds M old y el l s cs Te l s r t ta e he ea de ile Iro iner ck ste sti on pa To G M Ot xt Hi Ni da Pla am h & & ac n esl hic Ve Source: CSOfoundered on essentially nationalistic concerns back by over-priced and inefficient air improved fiscal position, and encouragingregarding the effective control of the transportation. The main hope for improved signs of economic diversification takingproposed new airline by a South African air travel within Botswana and internationally place. Negative factors cited include theentity, as well as the inevitable job losses that now rests with the anticipated liberalisation eventual levelling off and decline of diamondwould have resulted from the winding up of process which should permit additional production, continued high levels ofAir Botswana. It is now intended that Air airlines to fly both domestically and poverty and unemployment, and theBotswana will be recapitalised by the internationally in competition with the impact of HIV/AIDS.Government, presumably to finance the incumbents, in contast with the existing The IMF’s Article IV report for 2006 alsoacquisition of new aircraft as well as to meet situation which gives Air Botswana paints a positive economic picture, althoughongoing operating losses, and will remain a domestic monopoly and restricts the the very long lag between the IMF team’sunder Government control. Although number of airlines on international routes. visit (in June 2006) and the publicationprivatisation is said to remain the ultimate External Assessments of the report (in July 2007) indicatesobjective, these developments leave both disagreements between the IMF and thethe Air Botswana privatisation and the A number of external assessments of the Government of Botswana over its content.broader privatisation process in disarray. Botswana economy have been released in While supportive of the overall economic recent months, which provide an interestingAs for Air Botswana, its future remains in framework, the IMF takes the view that much perspective on current economic conditions.doubt. Although some of its losses result tighter policies could have been pursued These include the Moody’s Investors Servicesfrom the financial burden of poor to prevent the increase in inflation in credit rating, the IMF Article IV Countrymanagement decisions taken in the past 2005-6, either through much higher interest Report, the World Bank “Doing Business”(such as excessive aircraft leasing costs), rates or a slower rate of crawl for the assessment and Transparency International’sthe fact is that it remains too small to be exchange rate. More generally, the IMF takes Corruption Perceptions Index.commercially viable and maintain an efficient the view that exchange rate policy shouldservice. The Airlink proposal dealt with The Moody’s credit rating review focus on restraining inflation and should notthis problem through the planned integration maintained Botswana’s investment grade be directly concerned with competitivenessof the Botswana airline’s activities into credit ratings (A2 for foreign currency and and the level of the real exchange rate, anda larger operation, enabling substantial A1 for local currency), which remain the comments that the present policy frameworksavings on overhead costs and significant highest in Africa. The good news is that the includes the pursuit of a range of objectivesefficiency gains that would have resulted outlook on the foreign currency rating was that may be mutually inconsistent. The IMFin a more competitive and viable entity. raised to positive (from stable), which also recommends that government spendingAbandoning the proposal suggests that suggests that an upgrade might be possible should be gradually reduced (relative to GDP),improving efficiency and competitiveness over the next 12-24 months. The 2007 both in anticipation of the anticipated declineis less of a priority than it should be, which Moody’s report was more positive than some in diamond revenues over the next 15-20is unfortunate as the development of of their past reports, due to continued years, and to prevent the inflationary impactBotswana’s tourism sector is being held large balance of payments surpluses, an of excessive spending.
5 Economic Review Figure 8: Botswana-World Bank “Doing Business” Survey, 2007 Paying Taxes Closing a Business Getting Credit Registering Property Doing Business Employing Workers Enforcing Contracts Starting a Business Protecting Investors Dealing with Licenses Trading Across Borders 0 20 40 60 80 100 120 140 160 Rank (out of 178 countries) Source: World BankWhile the IMF’s comments may be technically in detail on specific aspects of the business to be paid to facilitating other aspectscorrect, it is important to note that in recent environment, based on measurable indicators of trade (such as reducing bureaucracyyears the policy framework has served such as the number of days it takes to open and border post hassles) to compensate.Botswana well. Although inflation has a business, the costs of hiring and firing The poor ranking on business licences couldrecently been much higher than desirable - workers, and the ease of access to credit. also be resolved through appropriatealbeit temporarily - it is unlikely that a much Many countries now target an improvement deregulation and is an unnecessary “owntighter monetary policy would have been in their business climate and country ranking goal”. Botswana’s better performances comevery effective at bringing inflation down a as measured in the WBDB report as a specific from the tax system (with relatively low taxgreat deal. In the pre-crawling peg days policy objective. Botswana has always done rates), the ease of closing a business (whichthe exchange rate was used as a nominal quite well in the WBDB report, generally encourages business flexibility and innovation)anchor for inflation in the way that the IMF ranking in the top third of countries globally. and getting credit.suggests, and did not succeed in bringing In 2007 Botswana ranked at number 51 (outinflation down to international levels, Transparency International released their of 178 countries), a slight deterioration frombut did cause competitiveness problems 2007 Corruption Perceptions Index in number 48 in 2006 and 44 in 2005 (althoughthrough an overvalued real exchange rate, September. At number 38 in the world (out the number of countries ranked has alsothus inhibiting growth and diversification. of 179 countries), Botswana was rated the increased over this period so the rankingsThe real depreciation that the devaluations least corrupt country in Africa, a position it are not entirely comparable from year toand crawling peg have achieved has has held for 12 years running. Botswana’s year). In Africa, Botswana has consistentlyfacilitated the rapid growth of non-traditional ranking was largely unchanged from its ranked fourth, after Mauritius, South Africaexports. The IMF’s points should be viewed 2006 position (37), although this marked a and Namibia. Botswana’s ranking puts it atas a guide to future policy choices that will slight deterioration from its 31st position in similar levels globally to Romania, Taiwan,have to be made, rather than as a proposal 2005. Botswana’s very good ranking on Italy and Slovenia.for a change of policy in the short term. corruption measures also feeds into theNevertheless, it will be necessary to guard Botswana’s rankings vary considerably across Index of African Governance 2007against the macroeconomic and financial the sub-categories from which the released for the first time by the Mo Ibrahimimbalances that could arise from the present overall assessment is constructed. As Figure Foundation, which also considers Safety &policy combination. 8 shows, the worst rankings are related to Security, Rule of Law, Participation and international trade and dealing with licenses. Human Rights, Sustainable EconomicThe annual World Bank Doing Business Trade constraints relate mostly to Botswana’s Opportunity, and Human Development.(WBDB) report has become an increasingly landlocked position and the resulting high Botswana’s overall ranking in this index isimportant assessment of the business costs and delays of shipping across borders, number 3 (after Mauritius and Seychelles),environment in different countries. It focuses and illustrate that more attention has the highest in mainland sub-Saharan Africa. 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. Website: www.bifm.co.bw