2006:Botswana - Recent Economic Developments and Prospects

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2006:Botswana - Recent Economic Developments and Prospects

  1. 1. Recent EconomicDevelopments & Prospects September 2006 Keith Jefferis
  2. 2. Structure of Presentation Economic Growth Exchange Rates, Foreign Trade Inflation, Monetary Policy & Banking Fiscal Developments Outlook
  3. 3. Economic Growth
  4. 4. Botswana Prospects (Sept. 2005)Evidence of short-term cyclicalrecoveryHigher inflation & interest ratesLonger-term reforms pending: Sustainable budget FIAS report recommendations Real focus on competitiveness Privatisation, liberalisation, PPPs
  5. 5. %19 75 0 5 10 15 20 25 /719 6 77 /719 8 79 /819 0 81 /819 2 83 /819 4 85 /819 6 87 /819 8 89 /919 0 91 /919 2 93 /919 4 95 /919 6 97 /9 GDP Growth – Long Term19 8 99 downward trend /020 0 01 /020 2 03 /0 May not yet have stabilised 4 Growth volatile but long-term
  6. 6. GDP growth – mining vs non- mining35%30% Contrast between mining and25% non-mining sector growth20%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. 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. 8. Copper & Nickel Prices 35000 Ni prices more than doubled during 10500 2006; Cu up 70% 30000 9000 Copper, US$/tNickel, US$/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. 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. 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. 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. 12. BoB Business Confidence Survey 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005H1 2005H2 2006H1 Exporters Non-exporters All
  13. 13. Growth Indicators – Private Business Credit 40% 35% Strong signs 30% of businessBusiness credit 25% recovery growth 20% 15% 10% 5% 0% -5% 2000 2001 2002 2003 2004 2005 2006
  14. 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. 15. Growth Indicators – Electricity Consumption Clear contrastElectricity 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. 16. Exchange Rates FX Reserves Exports
  17. 17. Exchange Rates 140 130 120Index 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. 18. Real Effective Exchange Rates 1995-2005125 Devaluations and crawling peg120 have restored competitiveness115110105100 95 90 85 80 95 96 97 98 99 00 01 02 03 04 05 06191919191920202020202020
  19. 19. Forecasts 2006-2011Pula vs. ZAR 1.20 1.15 1.10R/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. 20. Forecasts 2006-2011Pula vs. USD, EUR 0.19 0.18USD, 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. 21. Export growth (US$), 2003-05 341% 100% Export growth very buoyant across a range of commoditiesIncrease in US$ 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. 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. 23. Foreign Exchange Reserves (Pula) 45000 40000 35000 30000Pula 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. 24. Foreign Exchange Reserves (SDR, USD) 8000 7000 6000SDR, 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. 25. Botswana’s International Assets Official reserves now complemented by substantial 60,000 privately held foreign assets (e.g. pension funds) 50,000 40,000P mn 30,000 20,000 10,000 0 2001 2002 2003 2004 2005 Official reserves Direct inv. Portfolio inv. Oth. inv.
  26. 26. InflationMonetary Policy Banking
  27. 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. 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. 29. Inflation Forecast16% F’cast14%12%10%8%6% BOB target range4%2%0% 2002 2003 2004 2005 2006 2007
  30. 30. Inflation – Quarterly annualised18% Devaluations16%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. 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. 32. Prime Lending Rate and Inflation BoB has traditionally been reluctant to cut rates much even when inflation falls sharply18%16%14%12%10% 8% 6% 4% 2% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 Prime Inflation
  33. 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. 34. BoBC Holdings Change in BoB regulations has altered composition of BoBC holdings, but total is upFebMay 0 2000 4000 6000 8000 10000 12000 14000 P mn Banks - own Banks - cust Other FIs Other private
  35. 35. Banking Assets 30000 25000 Effect has been to push funds into the banks – assets up nearly 50% in 3 monthsAssets, Pmn 20000 15000 10000 5000 0 3 4 5 6 0 0 0 0 Loans BoBCs Other
  36. 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 30,000Pmn 25,000 20,000 15,000 10,000 5,000 0 2003 2004 2005 2006 BoBCs Govt Cap & res Oth
  37. 37. Credit Growth30%25%20%15%10% Banking sector liquidity may contribute to further credit growth – perhaps above BoB range5%0% 2000 2001 2002 2003 2004 2005 2006
  38. 38. Credit Growth50% Much stronger resurgence in business credit growth than household40%30%20%10% 0%-10% 2000 2001 2002 2003 2004 2005 2006 Business (priv) Hholds
  39. 39. Rising IndebtednessRatio 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 Hhold Pvt Business
  40. 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. 41. Fiscal Developments
  42. 42. Govt Revenue & Spending (Pmn) Concern over rapidly rising expenditure and deficits from 30,000 2001-03 – possibly unsustainable budget trends 25,000 20,000P 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. 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. 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. 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. 46. Economic Prospects
  47. 47. Botswana Economic Prospects2006 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. 48. Botswana Economic Prospects2006 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. 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. 50. % Zi m -10 -5 0 5 10 Sw bw 15 az e Le lndB o so t ts h oM 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 2006M an oz i b a qu M e al a An w i go la 27%
  51. 51. Thank YouEmail: info@econsult.co.bw www.econsult.co.bw

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