2010: Coping with the Crisis and Future Challenges

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  • 1. Coping with the Crisis and future Challenges: Economic Performance and Prospects Keith Jefferis 29 June 2010
  • 2. The Botswana economy is …
    • Highly dependent on mining for …
      • GDP (40%)
      • Government revenues (40-50%)
      • Exports (75%)
    • Highly dependent on government (which is dependent on mining) for
      • Employment
      • Investment
      • Spending
    • Very open to international trade (exports + imports > 80% of GDP)
    • Hence highly vulnerable to adverse international economic developments, especially in mining
  • 3. Global Economy
  • 4. Global growth slowdown ... and recovery
    • Depths of recession – 4Q2008 and 1Q2009
    • Recession was deep, but recovery has been robust
    • Fears of prolonged depression not realised
    • Global growth projected to settle in 3% - 4% range in 2010-11
    • Danger of double-dip recession still a concern
    Source: JP Morgan
  • 5. Emerging markets leading the recovery
    • Recovery has been driven by emerging markets
      • Faster emergence from recession
      • Higher growth during recovery
    • Less affected by financial crisis and debt problems – more resilience
    • Developed economies – sluggish recovery:
      • Fiscal/debt problems
      • Unemployment
      • Euro-zone crisis
    Source: JP Morgan
  • 6. Signs of recovery ... minerals prices
    • Copper
    • Nickel
    Source: LME
  • 7. Economic Growth
  • 8. 2009 – a year of recession for Botswana
    • Annual growth in 2009 was minus 6%
    • Severe recession – first since data series started in 1975
  • 9. Annual sectoral growth 2009 – contrasts between export and domestic sectors
    • Overall growth dragged down by massive mining contraction
    • Manufacturing & tourism also weak
    • Healthy growth in parts of the non-mining private sector
    • Much of this driven by government spending
  • 10. 2009 – a year of recession …. but robust recovery forecast
    • IMF forecasting growth around 6% for 2010 and 2011
    • Driven by mining sector recovery
  • 11. Trade & Exchange Rates
  • 12. DTC Diamond Sales
    • DTC diamond sales reasonably good in 2010 H1, with improved prices and volumes
    • But well below peaks of 2007 and early 2008
    • Driven by retail market recovery and re-stocking of inventory
    • Supply restrictions also suporting prices
  • 13. Exports & imports ... in shock
    • Exports have fallen dramatically .. but now recovering
    • Imports have also dropped off
      • Lower oil prices
      • Fall in diamond imports
    • But much smaller decline than fall in exports
    • Balance of trade still negative
  • 14. Trade balance .. big deficits
    • Trade surplus has generally been strongly positive over past five years
    • Collapse of diamond exports has led to unprecedented deficits since 2008Q4
    • Large deficits still persisting into early 2010
  • 15. Exchange rates
    • Bilateral rates volatile
    • More volatility against USD
    • Short-term pula movements against USD and ZAR tend to be in opposite directions
  • 16. Nominal Effective XR (Pula basket)
    • Exchange rate policy governed by pula basket composition and rate of crawl
      • Both not disclosed
      • Basket is broadly trade weighted
      • Crawl gradually downward – approx 3% at present – to maintain competitiveness
    • No change as a result of global crisis
  • 17. FX Reserves
    • FX reserves peaked in 2008 – have since been depleted by BoP deficits resulting from global crisis
    • Supplemented by external borrowing (AfDB & World Bank) in 2009
  • 18. Import cover
    • FX reserves well below their peak but still respectable in terms of months of import cover
  • 19. Inflation, Interest rates and Financial Sector
  • 20. Inflation ... should stay low for a while, but how low?
    • Inflation has recently been around upper end of BoB’s 3%-6% target range
    • VAT and electricity prices pushed inflation to 7.8% in May
    • Underlying inflation remains low
    • Upside risk from international oil prices
    • BoB MPS 2010 forecasts inflation in range 4-5% in 2011
      • Low international and domestic inflation pressures
      • Well below historical inflation rates in Botswana
      • Market not convinced – expected inflation well above BoB forecasts
  • 21. Monetary policy – easing with large cuts in interest rates
    • Interest rates sharply lower in response to declining inflation
    • Bank rate cut by 5.5% since Nov 2008
    • But inflation has fallen faster than nominal interest rates, hence real interest rates have not fallen as much
    • BoB likley to pause and watch inflation developments
    • Further interest rate cuts justified if inflation stays below 6%
  • 22. Financial sector: has remained strong during global crisis
    • Banking sector has remained profitable, although profitability has declined
    • Slowdown in credit extension, but now recovering
    • Some problems with bad debts, but concentrated on households rather than businesses
  • 23. Bank credit – growth recovery Arrears – a problem to watch
  • 24. Government Budget
  • 25. Fiscal policy – stimulus helped the economy, but at the cost of large deficits
    • Govt spending rose sharply in 2009 – helped to maintain non-mining economy
    • Turnaround from fiscal surplus to substantial deficit, driven by both increased spending and falling revenues
    • 2009/10 deficit estimated at 15% of GDP is unsustainable
    • 2010/11 Budget has a continuation of revenue decline and P2bn cut in total spending
    • Deficit cut, but still huge
    • Revenues less than 30% of GDP – last seen in 1970s
    • Fiscal adjustment now needed
  • 26. Impact of deficits on Govt finances
    • Net financial position – govt. deposits & reserves at BoB less public debt (foreign & domestic)
    • Peaked at P41bn in 2008
    • Cumulative deficits in 3 yrs 2008-2011 = P30bn
    • Continuation of deficits will lead govt to become net debtors
    • Reason for credit rating downgrade
  • 27. Summary and Outlook
  • 28. Summary
    • Headline GDP growth hit hard by recession – but concentrated on mining/exports
    • Non-mining growth steady in 2009 – hence limited impact on employment
    • Fiscal stimulus helped – but deficit/debt problems resulted – with the crisis compounding adverse medium term trends
    • External sector: exchange rate steady, BoP deficit, but FX reserves helped to stabilise, with modest drawdown
    • Inflation – substantial decline, monetary easing helped to cushion impact of crisis
    • Financial sector stable, now growing after a pause in 2009H1
  • 29. Prospects
    • International
    • Improving global growth prospects – but still volatile
    • Shifting of global economic balance to emerging markets
    • Commodity markets strong – good for mining
    • Uncertainties remaining over govt debt, withdrawl of fiscal stimulus, de-leveraging, euro-zone stability
    • Domestic
    • Growth rotation in place :
      • 2009 – mining/exports weak, non-mining/domestic demand strong
      • 2010 – opposite
      • Weakness in household consumption and fiscal spending as export markets recover
    • Trade, balance of payments should continue to improve – but not back to normal
    • Fiscal sustainability the overriding issue
  • 30. Thank You
    • [email_address]
    • 3900575