Bifm Economic Review 3rd Quarter 2005 Economic Review firms to fully pass on higher import costs to For the rest of the year and into the firstSummary of consumers. quarter of 2006, inflation is expected to beEconomic Nevertheless, inflation is likely to remain high some 3%-4% above the upper end of the Bank’s inflation objective range. The BankDevelopments for some time, especially with fuel costs adding further upward pressure to prices. Our forecast noted that “monetary policy will respond to any significant rise in inflation above the upper is for inflation to rise slightly from currentDr Keith Jefferis, levels, and to remain around 10%-11% until end of the revised objective” and that “overall inflation in the short run will only be allowedChairman of the second quarter of 2006, when it should drop fairly quickly to around 6%-7% (see to rise by around 2 percent without meeting increased policy resistance”.Bifm Investment Figure 1), although much depends on fuel price developments over the coming months. Following the increase in inflation to 10% inCommittee A key question is, what does this mean for September, the Bank raised interest rates by interest rates? The Bank of Botswana released a further 0.25%. This was a small increase, its mid-year review of the Monetary Policy intended mainly to influence inflationE Statement in early August, preceded by a expectations. Given the likelihood of inflation small increase (0.25%) in interest rates. The rising further, another increase in interest rates review made some changes to the Bank’s before the end of the year cannot be ruled conomic developments in the third targets for inflation and credit growth, raising out.quarter of 2005 have been dominated by both by 1%, so that the inflation objective Economic Growthcontinued concerns about the slow growth range for the rest of the year is 4%-7%, withof the economy and controversy over the costs a credit growth rate of 11%-14% considered There is no new national accounts dataand benefits of the 12% devaluation of the to be compatible with the inflation objective. available (since mid 2004) and so there is nopula in May. With regard to the devaluation, accurate data on recent economic growth. The increase reflected that some additionalthe main short-term impact has been on Nevertheless there is a general perception of inflation as a result of the devaluation wouldinflation, which rose to 10.0% in September, an economic downturn and weak business have to be accommodated, but thatthe highest level since mid-2003, compared conditions, with many businesses reportedly monetary policy would nonetheless aim atto 6.2% (and falling) in April (the last monthly struggling to achieve acceptable profitability. preventing any generalised increase infigure prior to the devaluation). In the absence of official GDP data, proxy inflation through higher inflationWhile an upward movement in inflation as a expectations and second round effects. continue...result of the devaluation was expected, the Figure 1: Inflation - Actual and Forecastextent of the increase has perhaps been below 14expectations, especially given that part of Actual Forecastthe increase has been due to rising fuel prices 12unrelated to the devaluation. After fourmonths, the main direct impact of the 10devaluation on prices has now been felt, andit appears that it will add around 4.5% to 8prices. 6Considering that the devaluation was 12%, BoB inflation objective rangeand that imports account for nearly 50% of 4the Consumer Price Index (CPI) basket, thisimpact is relatively small, and suggests that 2 Source: Central Statistics Office and own calculationsgenerally weak economic conditions and high 0levels of competition in the wholesale and 2002 Q2 Q3 Q4 2003 Q2 Q3 Q4 2004 Q2 Q3 Q4 2005 Q2 Q3 Q4 2006 Q2 Q3retail sectors are constraining the ability of
2 Economic Review economy – mining – has been doing well Figure 2: Index of Economic Conditions recently, with a number of new or prospective 60 mining ventures in the pipeline. The broad coverage of this new mining activity was 40 highlighted at a resources conference held in strong Gaborone in August. Key ongoing developments include: % deviation from mean 20 • the Mupane gold mine near Francistown, neutral 0 operated by Gallery Gold, which has reached full production capacity (100,000 ounces a -20 year) following its opening late last year, and which is evaluating additional gold deposits -40 weak in north-west Botswana to boost output further; Source: own calculations -60 • the expansion of copper and nickel 2000 2001 2002 2003 2004 2005 production from Lion Ore’s Phoenix mine, also near Francistown; the company is also evaluating the possibility of producing refinedindicators of economic conditions suggest 4.9% in 2004, and forecasts 3.8% growth in metals on site using its proprietary Activoxa mixed story (see Figure 2). Our index of 2005 and 3.5% in 2006. technology, rather than the current processeconomic conditions suggests that the While no commentary is yet available as to of shipping concentrated ore for smelting ateconomic environment remains weak by the reasoning behind the IMF’s lower growth BCL’s Selebi Phikwe plant to produce copper-historical standards and trends. However, there forecasts (this will have to await the release nickel matte which is refined outside of thehave been recent improvements, in that the of the annual IMF Article IV assessment of the country;weakest period was in the second half of 2004and early 2005, since when conditions have Botswana economy), it is likely that the IMF • the preparation of a bankable feasibilityimproved somewhat. Nevertheless, the has a more negative assessment of the study by African Copper for proposed Dukwerecovery appears to be fragile with low levels economic impact of HIV/AIDS and the slow copper mine, anticipated to produce 12,000-of confidence, and could easily be disrupted pace of the structural reforms (such as 25,000 tonnes of copper a year by 2008; theby adverse economic developments. privatisation and public-private partnerships) company is also re-evaluating other known and economic liberalisation (such as the freeing copper deposits in the Matsitama area ofAlong with relatively sluggish recent growth up of heavily regulated sectors such as north-west Botswana;performance, medium term growth forecasts telecommunications and air passengerhave been revised downwards. The • encouraging results from feasibility studies transport) that are necessary for Botswana toGovernment is in the process of finalising the being carried out by African Diamonds and move on to a higher growth path.Mid-Term Review (MTR) of NDP 9, in which Diamonex for the possible mining of knowneconomic growth forecasts have been revised Both Moody’s and Standard and Poors have diamond deposits (kimberlites) in the Orapadownwards. been in Botswana recently for their respective and Martins Drift areas respectively, which are 2005 credit rating assessments. It is likely that looking increasingly likely to result in one orThe MTR envisages average annual economic both agencies will highlight concerns about two new diamond mines;growth of 4.3% for the remainder of NDP 9 sluggish economic growth, the inadequate(through to 2008/09), compared to an original • detailed consideration of the expansion pace of economic diversification and the failuregrowth rate of 5.5% projected for the whole of coal mining to produce coal for direct to back up good policy intentions with theof NDP 9. The reduction is due to slower than export and/or to supply a new power station implementation of growth-supporting which would generate power to feed into theanticipated growth in the non-mining sector, structural reforms. Hopefully this will not lead Southern African Power Pool regional grid;now seen averaging 5.7% a year, compared to any change in the country’s credit rating, this would require a new mine(s) in theto an initial target of 7.7% a year. but it would not be surprising if the ratings Mmamabula coalfield south of Mahalapye;The IMF envisages an even lower medium outlook (currently “stable”) were downgraded in addition the existing Morupule coal mineterm growth rate for Botswana. In the data to “negative” in view of these concerns. is likely to be developed further to supply thesupporting its recently-released World projected expansion of the Morupule power Mining SectorEconomic Outlook (WEO), the IMF estimatesBotswana’s overall economic growth rate at On a more positive note, one sector of the continue...
3 Economic Review real exchange rate stable, thereby contributing Figure 3: Minerals Prospecting Licences to Botswana’s international competitiveness. 900 The devaluation and the new exchange rate 800 system has generated much discussion and 700 critical comment, largely focusing on the negative aspects (mostly short-term, such as 600 higher inflation and reduced real incomes), 500 with little understanding or recognition of the 400 benefits (improved potential for economic growth and diversification), which will tend 300 to occur in the medium to long term. Nor 200 indeed has there been much recognition of the very serious dangers of sustained real 100 exchange rate overvaluation. This is surprising, 0 as avoidance of “Dutch Disease” – whereby 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 earnings from mineral exports lead to Source: Ministry of Mineral Resources and Water Affairs Diamonds Other exchange rate appreciation and deindustrial- isation (or delayed industrialisation) – has beenstation to meet Botswana’s own energy needs. the economy would do well to draw lessons a key element of Botswana’s exchange rate from the successes of the mining sector. policy over the past three decades. Similarly,The level of interest in and potential of the sustained real exchange rate overvaluationmining sector can be seen from data on Exchange rates was a key element of the economic policyprospecting licences (Figure 3), which The crawling peg announced as part of the mistakes that impoverished many Africancontinues to grow steadily for both diamonds new exchange rate policy at the end of May countries over the same period – Zambia,and other minerals. 2005 has now been implemented. As noted Tanzania and Ghana being prime examples.There are a number of reasons why the mining at that time, the rate of crawl is determined While avoiding an overvalued exchange ratesector has done well while other sectors of with reference to the differential between and keeping the real exchange rate stable arethe economy have shown less dynamism: Botswana inflation and the average of trading essential components of Botswana’s growth partner inflation; this differential is currently strategy, this does not, however, remove the• there has been reassessment of Botswana’smineral potential using new exploration around 5-6%. Implementation of the crawl need to address the wide ranging constraintstechniques to go over ground that may has led to a further devaluation of to growth that devaluation cannot in itselfpreviously have been explored; approximately 1.5% against the pula basket address. between the end of June and the end of• the changed economics of mineral Taking account of the new exchange rate September, and the new system has broadlyproduction, given the sharp rise in the prices achieved its objective, so far, of keeping the continue...of several minerals in the past two years(especially copper and nickel), driven by Figure 4: Bank Credit Growthdemand from China, which is expected to 30%continue into the medium term; the rise inoil prices has also made the economics of 25%other energy sources (such as coal and gas)more attractive; 20%• an investor-friendly environment laid downin new legislation (the Mines and Minerals 15%Act 1999) which has clear and transparent BoB target rangeprocedures, is supportive of both domestic 10%and foreign investment, facilitates thenecessary access to land, and which, in general, 5%is efficiently administered. Source: Bank of BotswanaInitiatives aimed at boosting growth and 0% 2000 M S 2001 M S 2002 M S 2003 M S 2004 M S 2005 Mattracting investment into other sectors of
4 Economic Review source at least, inflationary pressures are Figure 5: Ratio of Bank Credit to Non-mineral GDP 18% minimal (see Figure 4). 16% The growth of credit to the business sector has picked up significantly over past few 14% months, providing some signs of economic 12% recovery. By contrast, the growth of household credit remains subdued, at least by past 10% standards of very high household credit 8% growth. The reasons for sluggish household 6% credit growth are not hard to ascertain: slow growth of incomes, especially for government 4% employees who received no salary increase in 2% 2005, has meant that rising household debt Source: BoB, CSO and own calculations 0% levels are harder and harder to sustain. As 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Figure 5 shows, the ratio of household credit Households Businesses to a simple measure of income – non-mineral GDP – has been rising steadily in recent years, and has in fact doubled between 1997 andsystem and forecast movements of exchange Credit Growth 2004. With no evidence to suggest that wagesrates between Botswana’s major trading The rate of growth of bank credit is one of have been rising as a share of non-mineralpartners, we obtain the following forecasts the most important economic variables on GDP, while at the same time interest ratesfor pula exchange rates over the next 12 which accurate and up-to-date data is readily have been rising, this clearly indicates thatmonths: available. Credit growth is important because the proportion of household income devoted Actual Forecast of its role in influencing inflation through its to servicing bank borrowing has been rising. End of Sep-05 End of Sep-06 Change contribution to aggregate demand, and also At the same time, borrowing from non-bankCross rates because the behaviour of different lenders – who charge much higher rates ofUSD/EUR 1.2071 1.3000 8% components of overall credit can reveal interest than the banks – has also been information about what is happening toZAR/USD 6.3719 6.6000 4% increasing. different parts of the economy.Pula exchange rates Not surprisingly, the result has been increasingZAR/BWP 1.1737 1.1544 -2% Overall credit growth has remained relatively arrears (see Figure 6). Arrears on household low, dropping to 9.5% in August, well belowUSD/BWP 0.1842 0.1749 -5% borrowing have been rising steadily and are lower end of the Bank of Botswana’s targetEUR/BWP 0.1526 0.1345 -12% much higher than arrears on business range of 11-14%, suggesting that from this borrowing. Although the level of household Figure 6: Arrears on Bank Credit arrears – around 4% - is not particularly high, 5% the steady upward trend indicates a problem. All this suggests that households as a whole 4% are over-borrowed, and the necessary % of credit outstanding in category adjustment – essentially bringing consumption 3% levels into line with income – compounds the problems being experienced as a result of sluggish economic growth. 2% 1% Bifm Botswana Limited 0% Asset Management. Property Management. 2001 2002 2003 2004 2005 Private Equity. Corporate Advisory Services. Private Bag BR 185, Broadhurst, Botswana Source: Botswana Financial Statistics (BoB) Businesses Households Tel: +(267) 395 1564. Fax: +(267) 390 0358. Website: www.bifm.co.bw