2008:botswana – recent economic developments and prospects
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BOTSWANA – RECENT ECONOMIC DEVELOPMENTS
FEBRUARY, 2008
Keith Jefferis
Structure of Presentation
� Botswana Economic Developments
� Growth
� Exchange Rates
� Inflation and Interest Rates� Inflation and Interest Rates
� Government Budget
� Economic scenario 2008
Economic Growth
Recent Economic Growth Experience
� Long term decline in economic growth rates
� Overall growth rate volatile due to mining
� Diversification has been slow - mining and government still account for over 50% of GDP
� Non-mining private sector growth has been weak� Non-mining private sector growth has been weak
� But, signs of significant improvement in past 18 months
� Good export performance, including reduced dependence upon diamonds
� Non-mining private sector growth has picked up, although still dependent upon government
Growth Developments - Mining
� Good conditions in mining sector
� world commodity markets tight, although for metals less so than in 2006;
� copper & nickel prices at high levels by historical standards, but off their peak in 2007H2; but off their peak in 2007H2;
� widespread prospecting taking place in Botswana, (copper, nickel, zinc, diamonds, gold, PGMs, uranium, coal, gas)
� Market for diamonds weak in short-term� US slowdown & dollar weakness will hurt in 2008
� but long-term supply-demand imbalance will support prices, with long-term real price rise forecast
Mining-related Developments
� Ongoing and Forthcoming Projects� Diamonex, 2008 (Tuli Block – licensed, funded and under construction)
� African Diamonds AK6, 2008/9 (Orapa) – mining licence applied for
� African Copper 2008, (Dukwe – licensed, funded and under construction)
� Norilsk Nickel/Tati Nickel Activox refinery (Cu/Ni/PGMs), 2007-9 (Francistown) – under construction
� CIC coal/power, 2008-12 (Mmamabula) – moving closer to conclusion of negotiations
� BPC expansion (coal, power) (2008-11)� BPC expansion (coal, power) (2008-11)
� Diamond aggregation/cutting, 2008 onwards
� Discovery (nickel, zinc) and A-Cap (uranium) – very good prospecting results & favourable price developments
� Longer-term possibilities: gas, trans-Kalahari coal
� Huge investments in processing as well as mining
� Positive impact on exports, jobs, spin-offs
� Very active prospecting continuing
� Not yet impacting on economic growth data, although signs of capex feeding through to trade data
Economic Growth
8%
10%
12%
14%
16%� Headline GDP growth has
recovered from (a revised ) 0.6% in 2005/06 to 6.2% in 2006/07
0%
2%
4%
6%
8%
GDP NMPS
2006/07
� Confirms earlier signs of recovery from other indicators
� Growth in NMPS even more buoyant – up from a revised 5.3% (previously 2.5%) to 9.7%
Economic Structure (GDP, 2006/07)
Trade, hotels etc.
11%
Govt16%
Soc. & Per. Serv4%
� Mining still dominates GDP
� Mining & government contribute 58% of GDP, so non-mining private
Mining42%
Manuf4%
Water & elec2%
Constr.4%
Trade11%
Transp. & comms
4%
Fin. & bus. Serv11%
so non-mining private sector well under half of the economy
Growth by Sector, 2005/6 & 2006/7
Total GDP
Construction
Manuf'g
Trade
Transp & comms � Transport & communications, trade, manufacturing and construction fastest growing sectors
-5 0 5 10 15 20
Soc/pers. serv.
Government
Agriculture
Mining
Water & elec
Fin/bus. serv.
% growth
'06/07
'05/06
sectors
� All showing improved performance over the previous year
� However, growth figures are preliminary and are subject to revisions
Growth by Sector 2005/06: Original & Revised
Fin/bus. serv.
Water & elec
Government
Soc/pers. serv.
Transport � Previous year’s growth performance revised upwards for several sectors
� Notably, finance/business, trade and manufacturing,
-10 -5 0 5 10 15 20
Mining
Agriculture
Construction
Manuf'g
Trade
Fin/bus. serv.
Revised (2008) Original (2007)
trade and manufacturing, which all had appeared to do badly
BoB Business Confidence Survey
40%
50%
60%
70%
80%
90%
% rating conditions sa
tisfactory
� Clear upturn in confidence shown in BoB survey
� Striking recovery amongst firms serving the domestic market
0%
10%
20%
30%
40%
% rating conditions sa
tisfactory
Exporters Non-exporters All
market
� Surprising decline in confidence amongst exports, but BoB caution about small sample
Growth Indicators - 1
12%
14%
16%
Non-mining electricity consumption (y-o-y growth)
20%
25%
30%
Real business credit (y-o-y growth)
0%
2%
4%
6%
8%
10%
Source: BPC
-10%
-5%
0%
5%
10%
15%
Source: BoB
Growth Indicators - 2
10%
15%
20%
Real Government Spending
10%
12%
14%
16%
15%
20%
25%
30%
Multiple Indicators
-15%
-10%
-5%
0%
5%
0%
2%
4%
6%
8%
10%
-15%
-10%
-5%
0%
5%
10%
Govt. Exp RBC NMEC
Investment (GFCF) & Savings
30%
40%
50%
60%
% of GDP
� Declining rate of investment (% GDP) does not augur well for future growth
� Not due to shortage of
-10%
0%
10%
20%
% of GDP
GFCF Savings
� Not due to shortage of savings, which remain very high
� Reinforces need to improve investment climate, encourage FDI
World Bank “Doing Business” 2007
0 50 100 150
Paying Taxes
Getting Credit
Closing a Business
Ranking (178 countries) � Botswana amongst the top performers in African on the WBDB survey, but slow slipping
� Regulatory reform can Registering Property
Doing Business
Employing Workers
Enforcing Contracts
Starting a Business
Protecting Investors
Dealing with Licenses
Trading Across Borders
� Regulatory reform can address some of the weaknesses
External Sector
Exchange Rates
� Rate of crawl reduced from 4% to 2% in July -reflecting smaller inflation gap between Botswana and trading partners
� Basket weights adjusted –ZAR reduced - presumably
100
110
120
130
Index
1996=100
ZAR reduced - presumably reflecting growth of non-diamond exports outside of the region
� Will make BWP slightly more volatile against ZAR
� Basket parameters still not disclosed (against advice of IMF, credit rating agencies & BoB)
50
60
70
80
90
2003 2004 2005 2006 2007
Index
1996=100
NEER BWP/ZAR BWP/USD
Exchange Rate Forecasts to 2012
1.15
1.16
1.17
1.18
ZAR per BWP
8
9
10
BWP per USD & EUR
USD
1.10
1.11
1.12
1.13
1.14
5
6
7
8 USD
EUR
Real Effective Exchange Rate (REER)
� Long period of REER appreciation (declining competitiveness) through to 2004
� Devaluations and crawling 110
115
120
125
Index
1996=100
� Devaluations and crawling peg have achieved REER depreciation and restored competitiveness
90
95
100
105
110
Index
1996=100
Exports & Imports
2000
2500
3000
3500
Monthly (Pmn)
� Much faster export growth than imports – as intended by exchange rate policy
� Healthy balance of trade surpluses & accumulation of
0
500
1000
1500
2003 2004 2005 2006 2007
Monthly (
Exports Imports
Exp trend Imp trend
surpluses & accumulation of fx reserves
� Recent pick up in imports driven by capital goods –suggesting investment may be recovering
Export growth, Jan-Sep 2006-7
100%
150%
200% � Strong export growth in 2007, driven by non-diamond exports
� Textiles, Cu-Ni & Meat the best performers
-50%
0%
50%best performers
� Diversification of exports taking place
Non-diamond Exports, Jan-Sep 2007
Meat
Soda ash4%
Textiles17% Other
17%
� Nickel & copper dominate non-diamond exports, but the rest is quite diversified
Nickel/copper51%
Gold2%
Machinery2%
Meat7%
Foreign Exchange Reserves (Pula)
� Trade performance resulting in rapid growth of fx reserves – more than doubled since late 2003. 40
50
60
70
Pula m
illion
2003.
� Import cover approx. 30 months
0
10
20
30
Pula m
illion
Inflation & Monetary Policy
Inflation
� Inflation fell sharply early in 2007, as expected, from 14.2% in April 06 to a low of 6.3% in April 07� falling away of one-off impacts (devaluation, school
fees)fees)
� lower world fuel prices in late 06/early 07
� Subsequent increase (to 8.1% in December) due to:� Higher fuel prices
� Higher food prices (esp. cereals and dairy)
� Rising domestic demand
Inflation
� Inflation likely to continue rising, should end year around 8%;
� Main risks:� world fuel and food prices� further BTC telecomms rebalancing� further BTC telecomms rebalancing� administered prices (health costs, housing, water, electricity)� rising world and SA inflation
Inflation & Forecast
10%
12%
14%
16% � Inflation likely to continue rising in 1st half of 2008, due to� world fuel and food
prices� administered prices
(housing, water)
0%
2%
4%
6%
8% (housing, water)� rising power costs� rising world and SA
inflation� But should peak and fall in
H2
� Forecast of inflation around 8% by year-end
Fuel Prices
600
700
800
400
450
500
550
600
Brent crude (pula/barrel
Petrol (Thebe/litre)
� Close relationship between local fuel prices and world crude prices, with a 4 month lag
� Still may be further rises
200
300
400
500
150
200
250
300
350
400
2005 2006 2007
Brent crude (pula/barrel
Petrol (Thebe/litre)
Crude Oil Petrol (lagged 4 months)
� Still may be further rises if international fuel prices do not fall
Monetary Policy
� Interest rates cut by 0.5% in June 2007, but no more rate cuts likely in the short term:� Inflation now above BoB target range
� High credit growth pushing up demand pressures
� Increasing government spending also contributing to inflationary pressurespressures
� Next move likely to be upwards
� 2008 Monetary Policy Statement� Due late February
� Likely to have less positive outlook than 2007 MPS
� MPC meetings slightly more transparent
Credit growth (yoy)
15%
20%
25%
30% � Credit growth has risen sharply
� Now well above BoB target range (11%-14%)
0%
5%
10%
15%
2005 2006 2007
14%)
� Driven by improving economic sentiment, inflow of funds from non-bank BoBCs in 2006
Inflation and Interest Rates
10
12
14
16
18
%
Prime Rate & Inflation
8%
10%
12%
Real Prime Rate
0
2
4
6
8
10%
Inflation Prime Rate
0%
2%
4%
6%
Government Budget
Govt Revenue & Spending - actual
35%
40%
45%
% of GDP
� After deficits in the late 1990s and early 2000s, spending is now well below revenues
� Decline in spending (as
25%
30%
35%
% of GDP
Expenditure Revenue
� Decline in spending (as % of GDP) has led to major reduction in demand
Budget Balance
5%
10%
15%
% of GDP
� Budget situation has turned around significantly in last two years
-10%
-5%
0%
5%
% of GDP
� 2006/07 surplus over 11% of GDP – largest since late 1980s
Budget balance – actual vs. forecast
4%
6%
8%
10%
12%
% of GDP
actual
� Quality of budget forecasts seems to have declined
� Mainly due to
-6%
-4%
-2%
0%
2%
% of GDP
forecast
� Mainly due to shortfalls on expenditure
Budgeted Expenditure
8,000
10,000
12,000
14,000
16,000
P m
n
+36%
+37%
+110%
� 2008/09 Budget entails major increase in spending compared to last year of actual data (2006/07)
� Total +53%
0
2,000
4,000
6,000P m
n
2006/07 2007/08 2008/09
� Total +53%
� Recurrent +36% (without public sector pay rise)
� Development +110%
� Demands much improved implementation capacity
Expenditure Budget Efficiency
90%
95%
100%
105%
110%
% of budget actually spent
� Progressive decline in proportion of budget actually spent
� Particularly a problem with development
70%
75%
80%
85%
90%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
% of budget actually spent
with development budget – only 67% spent in 2006/07
Government Spending Cycle
� Long-term decline in growth rate of government spending –which is appropriate
� Budgeted figures for 2007/08 suggest much 20%
25%
30%
35%
40%
Spending Growth (%)
2007/08 suggest much larger increase in spending than has been achieved in recent history – and are therefore unlikely to be realised
� Likely to be destabilising
0%
5%
10%
15%
20%
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
Long-term Mineral Revenues
5000
6000
7000
Source: IMF
0
1000
2000
3000
4000
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
Diamond revenue
in millions of
dollars
Recycling of existing waste
(higher production of lower-
quality diamonds as
underlined by a lower price
trend)
Mining goes
underground before
resources are
totally depleted
Economic Prospects
Botswana Economic Prospects 2008-9
� 2008: improved growth to continue, driven by� Rising government spending
� Mining projects
� Export uncertainty, due to US recession and international economic slowdown, but impact will be confined and not economic slowdown, but impact will be confined and not widespread through the economy, as long as growth slowdown is not long-term
� Main threats to domestic growth:
� Volatility in government spending, and hence uncertainty
� Power constraints
� Sharply higher inflation, and rising interest rates
Power Supply Issues
200
250
300
/month
Sources of Supply
200
250
300
Sources of Demand
0
50
100
150
‘000 M
Wh/m
onth
Morupule Imports - Eskom Imports - other
0
50
100
150
Mines Non-mining
Power Supply Issues
500
600
700
800
Peak demand (MW)
Emerging Supply Deficit � Peak demand increasing at around 8% p.a.
� Tati, other new mines excluded
� Eskom firm supply reducing
0
100
200
300
400
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Peak demand (MW)
Morupule Eskom Deficit
� Eskom firm supply reducing from 2008-2011
� Gap emerging – around 80MW in 2008
� 60MW from HCB in 2008, but then what?
� Major shortfalls from 2010
Thank You
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