The results of the Bank of Botswana Business Survey suggest that firms were optimistic about economic activity in the second quarter of 2019. Overall, businesses expected an increase in sales, capacity utilisation and profits in the second and third quarter of 2019.
“Firms intended to increase investment in buildings, plant and machinery, vehicles and equipment, and ‘other’ category, despite anticipating tight access to credit in the domestic market. Meanwhile, firms expect cost pressure to rise in the third quarter of 2019, mainly reflecting the anticipated upward pressure on costs of materials, wages and transport. However, firms expect inflation to remain stable and within the Bank’s medium-term objective range of 3 – 6 percent going forward,” reads the report.
This Report presents results of the survey carried out in the second quarter of 2019, covering the second quarter of 2019 (Q2:2019 – the current period); the third quarter (Q3:2019); and M12, the twelve-month period from July 2019 – June 2020 (Q3:2019-Q2:2020). The survey samples 100 businesses from eight economic sectors and these are: agriculture; mining; manufacturing; water and electricity; construction; trade; transport and communications, and business services. The response rate for this survey is 82 percent.
Economic Growth is expected to be lower in 2019, than in 2018
Meanwhile Firms are less optimistic about economic performance in 2019 expecting a growth of 3.8 percent, which is less than the projection of 4.2 percent made in the 2019 Budget Speech and the 4.5 percent growth in 2018. According to the Survey, it was expected that economic activity in the second quarter of 2019 would be mainly driven by mining and quarrying; finance and business services; and a combination of trade, hotels restaurants and transport and communications sectors.
“The optimism in mining and quarrying, and the trade, hotels and restaurants and the transport and communications sectors could be attributable to the positive prospects for global demand, sales and prices for diamonds, as well as the improvement in tourism prospects,” says the Business Survey report. On the other hand, construction was the only sector which anticipated business conditions to remain unchanged in the second quarter of 2019.
“This is possibly due to the slowdown in the construction of projects since the completion of some major construction works (such as the Botswana Unified Revenue Services building in the Gaborone Central Business District and various Economic Stimulus Programme projects) and the lower rate of increase in funds allocated for development in the current financial year. Meanwhile, all sectors, led the by trade, hotels and restaurants and the transport and communications sectors anticipate improved economic activity in the third quarter of 2019 and the year to June 2020.”
Overall, business conditions are expected to remain positive during the second quarter of 2019, with the level of optimism at 52 percent. However, optimism eases to 48 percent in the third quarter of 2019 and 47 percent, in the twelve-month period to June 2020. Firms, mainly in mining and retail trade, hotels and restaurants intended to increase investment in buildings, plant and machinery, and vehicles and equipment during the second quarter of 2019. Furthermore, firms had also anticipated to increase: capacity/resource utilisation; production/service capacity; sales; and profitability during the same period.
According to the Survey, Firms intend to lower their levels of investment in the third quarter of 2019, possibly due to the expected dampening effect arising from the perceived tight access to credit. Furthermore, firms anticipate reduced levels of stocks/inventories in the third quarter of 2019. “The domestic market-oriented firms were confident about business conditions in the second quarter of 2019 and the optimism improves in the third quarter of 2019 and the twelve-month period to June 2020 (M12).
Confidence in the domestic market-oriented firms is mainly driven by trade, hotels and restaurants, transport and communications and the finance and business services sectors. Export market-oriented firms are more optimistic about the third quarter of 2019 compared to other periods of the survey especially those engaged in the manufacturing business.”
Domestic lending rates and borrowing are expected to rise in the year to June 2020
Firms expect the lending rates and the volume of borrowing from all markets (domestic South African and elsewhere to increase in the twelve-month period to June 2020. Notwithstanding the expected increase in lending rates, the anticipated increase in borrowing volumes is consistent with the expected rise in investment, especially in buildings. Firms in the domestic and export-oriented markets perceived access to credit to have been tight in the second quarter of 2019, mainly because they consider the cost of credit to have been high in the period.
During the year ending in June 2020, there is an inclination among firms, especially those targeting the domestic market, to borrow from domestic creditors, the Survey has found. “Conversely, export oriented firms tend to prefer to borrow from the international markets other than South Africa Looking at factors that affect borrowing decisions, most of the firms which indicated preference to borrow from a particular market (domestic, South Africa and elsewhere), cited the availability of the required loan products in the respective markets as the basis for their choice. Affordability and accessibility of credit facilities influenced borrowing plans of about 30 percent of businesses irrespective of whether funds are to be sourced from Botswana or abroad.”
According to the Survey the majority of firms prefer to finance their business operations from retained earnings and loans. Retained earnings as a source of finance is more prominent in the trade, hotels and restaurants, and the transport and communications sectors. On the other hand, most of the firms in manufacturing, finance and business services and the construction sectors plan to fund their businesses through loans.
Pressure from rising costs expected to increase in the third quarter of 2019
“Overall, there is a strong expectation of cost escalation in the third quarter of 2019, attributable to the expected rise in wages and cost of materials and transport. Firms’ expectations about domestic inflation have generally been on a downward trend since 2013, and within the Bank’s inflation objective range of 3 – 6 percent since 2014. Furthermore, uncertainty about future inflation has generally declined as shown by the narrowing standard deviation (std dev) from the average expectations. Firms’ inflation expectations for 2019 average 3.6 percent, suggesting that inflation expectations are well anchored within the Bank’s objective range.”
Lack of external financing is perceived to be a major challenge to doing business
Meanwhile a number of firms (predominantly market-oriented ones) across various sectors, cited the difficulty in accessing financing from abroad as the greatest challenge to their business operations in the second quarter of 2019. “The second major business impediment is shortage of raw materials, commonly cited by the manufacturing sector, followed by construction and trade, hotels, restaurants and transport and communications.”
On the positive side, the political climate, domestic demand and the current exchange rate are viewed as being the most supportive factors to doing business in Botswana during the second quarter of 2019. Another observation is that water and electricity sub-sectors reportedly contribute positively to economic activity. There are ongoing efforts to improve the supply of these utilities through measures such as the implementation of the North-South Carrier 2 water project and the North-West Transmission Grid electricity connection. Overall, firms are confident about business conditions in the second quarter of 2019.
However, the level of optimism declines in the third quarter of 2019, consistent with the anticipated higher cost pressures. Firms expect the economy to grow by 3.8 percent in 2019, lower than the 4.2 percent projection stated in the 2019 Budget Speech. Furthermore, on average, firms expect inflation to be slightly below 4 percent, which is consistent with the Bank’s projection that inflation will remain within the objective range of 3 – 6 percent in the medium term.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”