Botswana Firms are less optimistic about economic performance in 2019 than projections made in the 2019 Budget Speech. According to a Bank of Botswana Business Expectations Survey released this week, businesses expect the economy to grow by 3.8 percent in 2019, compared to the estimate of 4.2 percent in the 2019 Budget Speech and the 4.5 percent recorded in 2018.
It is expected that economic activity in the first half of 2019 will be mainly driven by mining and quarrying, trade, hotels, restaurants and transport, finance and real estate and manufacturing – the report says. The results of the Survey suggest that the level of optimism by firms regarding economic activity has declined, compared to the previous survey. Overall, businesses expect lower sales, reduced capacity utilisation and lower profits, compared to the September 2018 survey.
Investment in buildings also declined in the current survey, in line with the dampening effect of the tight access to credit in the domestic market, as perceived by the respondents. The anticipated deterioration in business confidence among both domestic-oriented and export-oriented firms with respect to future prospects is expected to affect economic activity.
The optimism in mining and quarrying, and the trade, hotels, restaurants and transport sectors could be attributable to the positive prospects for global demand for diamonds, which are likely to lead to a rise in sales and prices of diamonds as well as prospects for tourism. Meanwhile, the BoB Survey notes that Construction is the only sector anticipated to produce less output in the first half of 2019, compared to the second half of 2018, possibly due to the completion of some of the construction projects under the Economic Stimulus Programme and some private construction projects, particularly in the Gaborone Central Business District (CBD) and Palapye, and he lower rate of increase in funds allocated for the development budget in the current financial year.
“Overall, business conditions are expected to remain positive during the first half of 2019, yet slightly weaker than in the final half of 2018. Optimism among businesses declined marginally from a confidence level of 28 percent in the second half of 2018 to 25 percent in the current survey period, and it is expected to fall to 21 percent in the second half of 2019.”
Furthermore, firms anticipate reduced levels of: capacity/resource utilisation; production/service capacity; sales; stocks/inventories; profitability; and investment on buildings and ‘other investment’ during the first half of 2019, compared to the second half of 2018. The BoB Business Expectations Survey reports that the decline in investment on buildings and ‘other’ is in line with the dampening effect arising from the tight access to credit, as perceived by the business community. On the other hand, intentions to invest in vehicles and equipment, and plant and machinery have strengthened, mainly among firms in consumer-related services, such as retail trade, hotels and restaurants.
But there is a reason as to why the decline – The Survey acknowledges that the slippage in perceptions about the overall business conditions in the first half of 2019 arises from the declining optimism among domestic-oriented firms, which comprise about 91 percent of the current survey respondents, compared to the second half of 2018. It states that this group of firms is also less optimistic about business conditions in the second half of 2019 and in the 12-month period to June 2020 (M12).
Meanwhile, export oriented firms are more optimistic about the first half of 2019 compared to the second half of 2018. However, their outlook on business conditions becomes negative in the second half of 2019 and in the 12-month period to June 2020, states the BoB report. “In general, the declining business confidence among both domestic-oriented and export-oriented firms is expected to negatively affect economic activity, as reflected in, among others, the anticipated decline in sales, capacity utilisation and investment in plant and machinery.”
Domestic lending rates expected to rise in both 2019, 2020
According to the BoB Business Expectations Survey, firms expect both lending rates and the volume of borrowing from the domestic market to increase in the second half of 2019 and first half of 2020. However, more firms expect both lending and borrowing rates to be higher in the first half of 2020 than in the second half of 2019.
“Similarly, in South Africa, lending rates are expected to rise in both the second half of 2019 and first half of 2020. The expected rise in lending rates in South Africa is consistent with the consensus forecast for market rates, obtained from Bloomberg3, for the same period. In line with this, borrowing volumes from South Africa are expected to decline in the second half of 2019, before rising in the first half of 2020”, reads the report.
The upward pressure on lending rates elsewhere (any market other than Botswana or South Africa) is expected to drop significantly in the first half of 2020, compared to the second half of 2019, while the expected increase in borrowing volumes over the period is marginal.
Inflation expected to remain within 3-6 percent objective range
The Bank of Botswana Survey further shares that although slightly higher in the current survey, firms’ expectations about the 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, on the whole, declined as shown by the smaller standard deviation from the average expectations despite the noticeable divergence in the current survey. “Firms’ inflation expectations have averaged 4 percent since 2016, suggesting that inflation expectations are well anchored within the Bank’s objective range.”
Factors Affecting Business Conditions
Unavailability of skilled labour is perceived to be a major challenge to doing business in Botswana, the BoB Business Confidence Survey has noted. It says the unavailability of skilled labour was cited as the greatest challenge facing businesses in the first half of 2019, arising from the reported difficulties experienced in recruiting foreign skilled labour. The new administration of President Dr Mokgweetsi Masisi has pledged to ease business in this area.
According to this report, difficulties in sourcing skilled labour is more pronounced in the construction sector, followed by trade, hotels, restaurants and transport. Meanwhile the 2018 Global Competitiveness report has also highlighted lack of skilled labour among the main challenges of doing business in Botswana. Meanwhile, the political climate, domestic demand and regulatory framework are viewed as being supportive to doing business in Botswana during this half year.
However, the BoB Survey says the number of firms viewing lack of skilled labour as a challenge has fallen notably compared to the previous survey. An interesting observation from the survey is that, ‘other’, which from the previous survey was viewed as a major challenge to doing business due to the dominance of government spending, is no longer considered a major impediment as government spending is now viewed to be neutral.
The BoB Survey says his may be partly attributable to a reduction in responses from sectors, such as manufacturing and construction, which rely mostly on government as a major client. “Another observation is that water and electricity continue to be viewed as contributing positively to the business climate, reflecting 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,” reads the report.
Overall, the Business Confidence Survey notes that business conditions are perceived to have marginally weakened compared to the last survey, and are expected to decline further in the second half of 2019. “The cost pressures are expected to decline in the second half of 2019, compared to the first half of the year. As firms’ inflation expectations seem to be anchored at rates of just below 4 percent, the survey responses are consistent with the official projection that inflation will remain within the Bank’s objective range of 3 – 6 percent going forward.”
The Business Expectations Survey (BES) was conducted by the Bank of Botswana in March 2019. It covers local business community’s perceptions about the prevailing state of the economy and economic prospects up to June 2020.
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”