2008 Q3: The Impact of the Global Financial and Economic Crisis on Botswana
Bifm Economic Review 3rd Quarter 2008 Economic ReviewThe Impact of the it is very difficult to predict how events may turn out, but at a minimum financial markets growth), perhaps prolonged, with rising unemployment and declining real incomes;Global Economic and and most likely the real economy will be • falling commodity prices (oil, other energy co-Financial Crisis on adversely affected for quite some time. The mmodities, metals etc.) as economic growth main developments can be summarised as: slows.Botswana • the “credit crunch” – a reduction in credit availability, notably in interbank markets, In this Review we consider whether BotswanaI has been affected by these developments, but extending to many other credit markets and how it might be affected over the including mortgages, other forms of asset coming months. We deal firstly with the ntroduction finance, working capital for businesses and potential impact on the financial sectorAs a small open economy, Botswana is highly personal credit; (given that this is where the crisis has ori-integrated into the world economy. Inter- • sharp falls in the value of financial assets, ginated internationally) and then considernational trade (both imports and exports) plays including shares, with commensurate de- the potential impact on the real economy.a crucial role in terms of driving growth and clines in stock markets around the world;ensuring the availability of consumer and Impact on the Financial Sector • a rise in risk aversion, with financial instit-investment goods. Several sectors of the Fortunately Botswana’s financial markets utions and markets less willing to provideeconomy have benefitted from incoming are somewhat insulated from the turmoil risk finance, especially in emerging markets;foreign direct investment. Botswana is also a gripping global financial markets, and havemajor international creditor with substantial • major losses in the financial sector as the not been negatively affected so far. Shareinvestments in global financial markets. Thus, value of financial assets has fallen and prices on the Botswana Stock Exchange (BSE)Botswana is likely to be affected, in a variety arrears and defaults on loans have risen, are primarily determined by domestic factorsof different ways, by global economic and with some financial institutions collapsing, and do not appear to have been affectedfinancial developments. Over the past year others requiring government rescue pack- by contagion from global markets, unlikeor so this has shown up in the form of rising ages, and many requiring recapitalisation; many other emerging markets. As Figure 1inflation, due to higher world food and fuel • intensifying concerns about the eco- shows, the BSE Domestic Companies Indexprices. In addition, the resource boom that nomic growth slowdown, which will be (DCI) has experienced a steady recovery sincetook place in the years up to 2007 has felt globally, with several countries likely to May 2008, which mirrors almost exactlybenefitted Botswana’s mining sector. Rising experience recession (a period of negative the decline in global stock markets. The BSEglobal commodity prices (especially for metalsand fuels) and the search for new sources Figure 1: Botswana and Global Stock Marketsof supply have stimulated exploration and Market Index (Jan 3, 2008 =100)investment in the mining sector, notably fordiamonds, copper, nickel, zinc, uranium, coaland gas.However, the situation has changed dram-atically over the past year or so, with adeterioration in financial and economicconditions that has intensified in recentmonths. Financial sectors in major developedcountries are in the midst of a crisis that isarguably the worst that has been experienced Source: BSE & MSCI Barrasince the 1930s. In a fast-changing situation
2 Economic Reviewrecovery persisted even as global markets As is now well known, the origins of the Africa, Malaysia and Taiwan) had mortgagedropped sharply in late September and early financial crisis lie in the sub-prime mortgage lending equivalent to 30% or more of GDP.October 2008. Over the period from 1 January market and associated financial instruments Most developing countries had much lowerto 8 October 2008, global markets fell by in the USA. Financial institutions in other exposure, however, of less than 10% of39%, emerging stock markets fell by 51%, developed countries, particularly in Europe, GDP. Botswana falls into the category ofwhile the BSE rose by 2%. have also experienced problems resulting “developing countries” with low exposure from property lending. The problems have to property lending, which amounted toThe recovery in the BSE is particularly striking arisen from a combination of excessive around 3.6% of GDP (by the banks andgiven that the fortunes of the DCI are lending (relative to borrowers’ incomes and Botswana Buliding Society) in mid 2007.dominated by financial sector stocks, and property values) and poor supervision of There is no evidence of any problems in theelsewhere these have suffered from the most financial markets and institutions. The property market, and even if there were, it isdramatic losses as banks have been at problems have been greatest in countries unlikely that the Botswana banking systemthe centre of global problems. Botswana’s with very high levels of mortgage lending: would be vulnerable in the same waybanking sector, however, remains robust. in the USA, for instance, mortgages were that banks in industrialised countries are,Credit growth has continued at high rates, equivalent to around 70% of GDP, while due to the relatively low level of propertyin contrast to the credit crunch afflicting in the UK they were as much as 90% of lending. Furthermore, over 40% of com-financial markets around the world. Although GDP. Germany and Japan also had high mercial banks’ assets comprise Bank of Bo-quarterly credit growth has slowed down in levels of mortgage exposure, at 50% and tswana Certificates or Treasury Bills, whichrecent months (see Figure 2), it still remains 40% of GDP respectively. Most developing have a zero risk weighting. This further re-reasonable by historical standards, with countries have much lower levels of duces the potential for any sharp reductionparticularly strong growth in credit to the mortgage exposure, although a few (South in the value of assets held by Botswana banks.private business sector. Banks still have ampleliquidity to finance credit expansion, and there Figure 2: Bank Credit Growthis no sign of a downturn in demand for credit.Banks elsewhere in the world have sufferedlosses due to a deterioration of the value oftheir assets, which has in turn caused a Annual Growthreduction in their capital base and, in somecases, the collapse of financial institutions.There is no sign of this happening in Botswana.The capital base (equity and reserves) of thecommercial banks grew by 38% in the yearto June (the most recent data available), andthe banking system as a whole remainedsound and highly profitable.Nevertheless, there has been an increase inbad debts, and arrears have been risingsteadily to levels that are high by historical Figure 3: Arrears on Bank Creditstandards. Rising arrears have been driven Arrears as % of loans outstandingby a few large corporate failures (such asLobtrans and African Express) and by a smallincrease in arrears on loans to individuals.Although the level of arrears is not high enoughto be of major concern, it nevertheless has tobe watched closely lest it become a moreserious problem. The need to make higherprovisions against loan defaults hit bankprofits in 2007 (and this was one of themajor factors behind the decline of the BSEDCI in that year) but the first half of 2008has seen a strong recovery in profitability.
3 Economic ReviewThe credit crunch and heightened risk aversion does not borrow internationally to any the overall impact is diluted because bothhas adverse implications for those developing significant extent, and is a substantial net the reserves and pension fund assets arecountries that are dependent upon inter- international creditor. This status is reflected extensively diversified, and are invested acrossnational borrowing. This is particularly so for in the country’s low level of international a range of financial markets, instrumentscountries (such as South Africa) which have debt and large holdings of foreign currency and currencies. Pension funds, for instance,low savings rates, large deficits on the assets by both the public sector (in the have a minimum of 30% of assets investedcurrent account of the balance of payments form of official foreign exchange reserves) within Botswana, and, as noted above, theand low levels of foreign direct investment, and the private sector (the offshore assets of BSE has performed relatively well, while globaland which are dependent upon short-term pension funds). Although Botswana’s inter- stock markets have fallen.capital inflows. It is likely to become more national financial position is fundamentally Even though the reserves and pension fundsdifficult to secure such funding, putting strong, the global financial crisis will never- may suffer losses as a result of global financialcurrencies such as the Rand under pressure, theless have a negative impact. This is because problems, this does not raise any immediateand higher risk premiums will lead to both the foreign exchange reserves and the problems. Both represent long-term savingsincreased interest costs. offshore holdings of pension funds include that are in place to meet long-term finan-Botswana is unlikely to face this problem investments in global stock markets, most of cial obligations rather than short-termas it has a high domestic savings rate, which have fallen sharply in value. However, needs, and can thus benefit from eventualruns a substantial current account surplus, while some losses will have been incurred, market recovery.Impact on the Real Figure 4: Real GDP Growth (Annual)EconomyHaving reviewed the impact on the fin-ancial sector, what might the impact ofglobal economic problems on inflation andthe real economy be? The world economy iscertain to experience slower growth in theremainder of 2008 and 2009. The latest IMFforecasts suggest that developed countriesas a whole are expected to have virtually Source: CSOzero growth in 2009, although there willbe somewhat stronger growth in develop- that at least up to the first quarter of the The traditional driver of growth, the mininging countries which will support global year, economic growth remained strong, sector, has been growing relatively slowly.growth of 3%. However, there are considerable with overall GDP growth for the year to This may seem surprising, given that miningdownside risks to this forecast, which could March rising to 8.5% (see Figure 4), marking has been the focus of much attention ininvolve long and deep recessions in the USA a continuation of the recovery from the eco- recent years. However, new mines are onlyand other developed economies. nomic slowdown in 2005 to 2006. Growth just reaching production stage (the LeralaEconomic Growth diamond mine and Mowana copper was particularly strong in the non-miningFor Botswana, assessing the impact on eco- private sector, rising to 11.5%. Growth was mine) and are in any case relatively smallnomic growth is constrained by the fact also quite diversified, with five sectors re- compared to existing operations. Otherthat available data only covers the period cording growth of over 10% (construction, projects that offer promising prospectsto March 2008 (although to give credit to social and personal services, manufacturing, (Gope and AK6 diamond mines, Bosetothe CSO, the delay in releasing GDP data transport and communications, as well as copper project, and various coal and gashas been much reduced). These data show wholesale and retail trade). projects) are still at the development phase.
4 Economic Review Figure 5: Sectoral Growth Rates (year to March 2008) Figure 6: Fuel and Crude Oil Prices Brent crude (pula/barrel) Petro/diesel (thebe/litre) Source: CSO Source: US Energy Information Administration; EconsultThe mining sector therefore remains domi- increase in the CPI, at 0.3%, was the lowest domestic fuel prices may be possible. Thenated by Debswana’s diamond mines, since November 2007, and may indicate fuel price reduction in August contributed towhere production is growing only slowly. that inflationary pressures are beginning to the moderation of inflation in that month, abate. Second, while food prices are still while the further reduction announced inAlthough there are encouraging signs of rising, albeit more slowly, fuel prices have September will itself reduce inflation bydiversified growth, some parts of the begun to decline, reflecting developments around 1%. Hence there is a good chancenon-mining private sector remain heavily in international oil prices. During the third that August will mark the peak of thedependent upon government spending. quarter of 2008, oil prices were extremely current inflation cycle.The strong performance of the constructionsector is at least in part attributable to the volatile, with Brent crude reaching a peak Besides reducing domestic inflation, fallingrapid increase in government development of $146 a barrel in early July and falling international oil prices will help to relievespending, which was up 59% in the year to a low of $86 in mid-September (a fall global inflationary pressures and henceto March. Indeed, government spending of 41%) before rising again to $94 by the import prices. Indeed, global concerns shiftedin general is growing faster than it has end of the month. This enabled a reduction rapidly during August and September:done for several years. While there are in domestic pump prices of 15% to 20% whereas a few months back policy makerssome positive aspects of higher govern- between July and September. Depending were primarily concerned with risingment spending (improved implementation on the course of international fuel prices inflationary pressures, the combination ofof development projects for example) the and exchange rates, further reductions in lower oil prices, improved inflation prospectsdanger remains that volatility in governmentspending can cause economic instability, Figure 7: Inflationespecially as recent spending growth cannot f’castbe sustained indefinitely.InflationInflation has been the major problem facingthe Botswana economy in recent months,with a rapid increase in inflation to over15% driven by rising international food and Bob inflation objectivefuel prices. August saw inflation rising forthe 11th successive month, to reach 15.1%.Although the level of inflation is of concern,and is the highest rate that Botswana hasexperienced since 1993, there are some Source: CSO, Econsultpositive aspects. First, the month-on-month
5 Economic Review Figure 7: Business Confidence Indexand intensified fears of economic recessionhave led to a focus on supporting growth Figure 8: Change in Imports, 2007 – 8 (H1)rather than containing inflation. The onepositive impact of global slowdown is that itwill help to contain inflationary pressures.Inflation prospects in Botswana have there-fore improved over the past two months.Our forecast is that inflation will fall fromSeptember onwards, but that the maindecline will occur during the first half of2009. By the middle of 2009 inflation shouldbe well within single figures, and there arereasonable prospects of achieving the Bank ofBotswana’s 3 – 6% inflation objective by the Source: Calculations based on CSO Trade Statisticsend of next year. However, if the proposed30% tax on alcoholic beverages is imple-mented, this could add up to 2% to inflation. Figure 9: Copper and Nickel PricesTradeGiven Botswana’s reliance on international Copper (US$’000/tonne) Nickel (US$’000/tonne)trade, developments with regard to exportsand imports will be one of the mostimportant channels through which externaleconomic developments are transmittedto the economy. These developments canbe positive or negative. Rapid growth inthe regional and global economies during2006 and the first part of 2007 supportedstrong export performance, and nickelproducers in particular benefitted from rising Source: London Metal Exchangecommodities prices. Over the past year,however, external developments have been slows. Falling prices have affected most other well, growing by 12% over this period (Seemuch less favourable for Botswana. Increased commodities. Of particular relevance for Bo- Figure 10).food and fuel prices have pushed up import tswana, is that at the end of September 2008costs sharply, with total imports 42% higher The combination of rapid import growth nickel prices had fallen by 70% from theirin the first half of 2008 than they were in the and slow export growth has led to a sharp peak in April 2007, while copper prices werefirst half of 2007 (see Figure 8). Much of this down by 30% from their peak in July 2008 fall in the balance of trade (exports lessis being driven by the cost of fuel imports, (see Figure 9). Prices for both metals fell imports), which fell from a monthly averagewhich are up 69% and averaged nearly further in early October. surplus of P880 million in the first half ofP500 million a month in the first half of the 2007 to P256 million in the first half of The rapid growth of imports has beenyear, accounting for nearly 20% of total 2008 (See Figure 11).This is not of any im- combined with sluggish export performance.imports. Nevertheless, rising import costs mediate concern, given Botswana’s high level Total exports were only 4% higher in the firstshould be alleviated by lower fuel prices of foreign exchange reserves and the fact half of 2008 compared to the same periodfrom August onwards. that the balance of payments as a whole in 2007 (a reduction in real terms). SeveralThe recent reduction in fuel prices is being commodities (textiles, meat and copper- remains in surplus. However, a continuationdriven partly by expectations of lower nickel) have suffered sharp declines. Diamond of these trends (rapid import growth and poorconsumption as global economic growth exports, however, have held up surprisingly export performance) could be problematic.
6 Economic ReviewConclusion Figure 10: Export Growth, 2007 – 8 (H1)Botswana’s financial sector has so far beenimmune from the problems facing stockmarkets and banking systems in othercountries, particularly the major developedeconomies. Due to a combination of high levelsof liquidity, the structure of bank lending,strong capitalisation and prudent bank super-vision, it is unlikely that similar problems willbe experienced here. Botswana’s low level ofdependence upon foreign borrowing will alsohelp to limit the impact. Nevertheless thisdoes not mean that Botswana will escapeunscathed. The value of some of the country’s Source: calculations based on CSO Trade Statisticsforeign assets has been reduced, although thisis not an immediate concern.The main threat lies in the potential impact Figure 11: Balance of Trade (half years)of prolonged global economic slowdownon the mining industry. The combination ofdramatic falls in commodities prices andexpectations of slower global economicgrowth has led to downward revisions offuture expected metals prices. This has major P millionimplications for the (recently restored) financialhealth of BCL, for Tati Nickel and the newMowana copper mine, and may also deterprospecting and exploration activity. Lowermetal prices, combined with the creditcrunch, and increased risk aversion willcertainly make it more difficult to financeand develop new mines, especially as theseare intrinsically risky ventures. Hence the Source: calculations based on CSO Trade Statisticssharp falls in the share prices of junior miningcompanies around the world, including to Botswana depends on how long the At the mines themselves, diamond outputthose with dual listings on the BSE. economic slowdown lasts, and in particular can be maintained and excess productionWhile diamond prices have been more whether the USA enters a long and deep stockpiled for a while, but in the worststable than those of some other primary recession. If so, Botswana could experience case scenario it would be necessary tocommodities, there are signs that diamond a substantial reduction in sales of its major reduce production. Both the Governmentexports may soon come under pressure. The export commodity. In the short term, this will and Debswana should be preparing con-largest market for diamonds is the USA, and not cause a problem given the healthy state tingency plans for how to respond to awith recession looming the expectation is of the balance of payments and high levels prolonged decline in diamond sales, exportthat diamond sales will fall in the remainderof 2008 and in 2009. Diamond prices in of foreign exchange reserves. However, if earnings and government revenues, even ifmarkets such as Antwerp are reported to prolonged it could have a serious impact, at this point this may not be the most likelybe falling, and stocks of unsold diamonds with trade deficits and sharp reductions in scenario. The next three to six months willin the production and marketing chain are government revenues, which would in due be crucial in determining how the impact ofrising. Whether this will be of major concern course require a domestic policy response. the global crisis on Botswana will play out. 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 thegate100160