Coping with the Crisis and future Challenges: Economic Performance and Prospects Keith Jefferis 29 June 2010
The Botswana economy is … <ul><li>Highly dependent on mining for … </li></ul><ul><ul><li>GDP (40%) </li></ul></ul><ul><ul>...
Global Economy
Global growth slowdown ... and recovery <ul><li>Depths of recession – 4Q2008 and 1Q2009 </li></ul><ul><li>Recession was de...
Emerging markets leading the recovery <ul><li>Recovery has been driven by emerging markets </li></ul><ul><ul><li>Faster em...
Signs of recovery ... minerals prices <ul><li>Copper </li></ul><ul><li>Nickel </li></ul>Source: LME
Economic Growth
2009 – a year of recession for Botswana <ul><li>Annual growth in 2009 was minus 6% </li></ul><ul><li>Severe recession – fi...
Annual sectoral growth 2009 – contrasts between export and domestic sectors <ul><li>Overall growth dragged down by massive...
2009 – a year of recession …. but robust recovery forecast <ul><li>IMF forecasting growth around 6% for 2010 and 2011  </l...
Trade & Exchange Rates
DTC Diamond Sales <ul><li>DTC diamond sales reasonably good in 2010 H1, with improved prices and volumes </li></ul><ul><li...
Exports & imports ... in shock <ul><li>Exports have fallen dramatically .. but now recovering </li></ul><ul><li>Imports ha...
Trade balance .. big deficits <ul><li>Trade surplus has generally been strongly positive over past five years </li></ul><u...
Exchange rates <ul><li>Bilateral rates volatile </li></ul><ul><li>More volatility against USD </li></ul><ul><li>Short-term...
Nominal Effective XR (Pula basket) <ul><li>Exchange rate policy governed by pula basket composition and rate of crawl </li...
FX Reserves <ul><li>FX reserves peaked in 2008 – have since been depleted by BoP deficits resulting from global crisis </l...
Import cover <ul><li>FX reserves well below their peak but still respectable in terms of months of import cover </li></ul>
Inflation, Interest rates and Financial Sector
Inflation ... should stay low for a while, but how low? <ul><li>Inflation has recently been around upper end of BoB’s 3%-6...
Monetary policy – easing with large cuts in interest rates <ul><li>Interest rates sharply lower in response to declining i...
Financial sector: has remained strong during global crisis <ul><li>Banking sector has remained profitable, although profit...
Bank credit – growth recovery Arrears – a problem to watch
Government Budget
Fiscal policy – stimulus helped the economy, but at the cost of large deficits <ul><li>Govt spending rose sharply in 2009 ...
Impact of deficits on Govt finances <ul><li>Net financial position – govt. deposits & reserves at BoB less public debt (fo...
Summary and Outlook
Summary <ul><li>Headline GDP growth hit hard by recession – but concentrated on mining/exports </li></ul><ul><li>Non-minin...
Prospects <ul><li>International </li></ul><ul><li>Improving global growth prospects – but still volatile </li></ul><ul><li...
Thank You <ul><li>[email_address] </li></ul><ul><li>3900575 </li></ul>
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2010: Coping with the Crisis and Future Challenges

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2010: Coping with the Crisis and Future Challenges

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

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