Botswana’s heavy dependence on a single commodity as a key economic driver coupled with unexplored and narrow economic base continues to feature in the country’s financial trends and analysis as a major credit constraint.
This has once again been reiterated by international finance and economic commentator and rating agency, Moody’s in their annual report released this week. Botswana is currently heavily reliant on the mining sector as the main foreign income earner and key fiscal revenue window predominantly the diamond industry.
The country’s flagship diamond company, Debswana, a 50-50 venture between global diamond giants De Beers is the largest private sector employer, only the Government of Botswana employs more people than Debswana. The mining sector accounts for almost a quarter of the national Gross Domestic Product (GDP).
This according to Moody’s and many other global finance and economic observers signals a ticking time bomb and continues to pose a threat to the country future as diamonds and minerals are finite and also vulnerable to global economic uncertainties in terms of fluctuating commodity prices.
Moody's Corporation, an American business and financial services company on an annual basis releases credit rating reports zooming into world economies and analysing global financial trends through its rating subsidiary Moody's Investors Service (MIS). In this latest report, Moody’s says Botswana's key credit strengths includes the government's large fiscal reserves and very low debt levels, “Botswana’s credit profile balances the government's strong balance sheet, net external creditor position and low debt burden against the country's small and undiversified economy”, highlights the report.
Noting in the annual credit analysis Daniela Re Fraschini, Moody's Assistant Vice President underscored that, "Botswana’s narrow economic base, with its heavy reliance on the diamond industry, remains a key credit constraint”. By the end of 2017, the mining industry’s share of nominal GDP remained high at around 18%, while diamond revenue accounted for close to 90% of export proceeds and around 35% of fiscal revenue.
“The large public sector, which has relatively weak social outcomes, and high poverty, unemployment and inequality are additional credit constraints”, submits the Moody’s Analyst. MIS estimates Botswana’s real GDP to expand by 4.5% on average in 2018-2019, supported by a recovery in the diamond sector and by an expansionary fiscal stance ahead of elections next year. Beyond the near-term recovery, growth in the mining sector is expected to be subdued, balancing the gradual expansion in diamond production against the closure of the BCL copper-nickel mine and delays in the construction of a new copper mines.
According to Re-Fraschini, Botswana's high institutional strength reflects its strong performance on the Worldwide Governance Indicators, particularly in terms of control of corruption. “Botswana pursues a monetary policy that is supported by a well-designed framework akin to inflation targeting, which has met its objective range over the past five years. The government has a transparent and rule-based fiscal policy which is commendable,” he said.
Botswana’s fiscal strength is supported by a low debt stock, with a very small foreign-currency exposure and a strong government balance sheet. According to Moody’s, general government debt is projected to remain at around 16.0% of GDP by 2019, compared with a peak of 20.7% in 2011. “The government's cost of debt is likely to remain very low in the near term”.
Moody’s also underscored other positives such as Botswana's sound external position, modest government borrowing requirements, healthy banking system and overall stable political environment with low susceptibility to event risk. The stable rating outlook reflects Moody's assessment of policymakers' continued commitment to a prudent fiscal stance while utilizing some of the significant fiscal policy space.
On key challenges, the American based rating organisation notes that Botswana‘s credit strengths are however balanced by medium- to long-term challenges to the country 's economic model, structural rigidities in the labour and product markets and weak governance of state-owned enterprises. State owned enterprises have over the years continued to remain a worrisome factor with government recapitalizing some with hundreds of millions of pulas from time to time in a bid to sustain the enterprises while containing and managing job shedding.
Moody’s notes that poor management of State owned enterprises and weak corporate governance contributes to credit constraints that continue to limit Botswana ‘s economic expansion efforts. The Government of Botswana over the years adopted various initiatives to diversify the economy beyond diamond production, Moody’s decry limited success and little return on investment from these efforts.
“While the services sectors' share of GDP has increased, the share of manufacturing, a key source of productive employment, has remained limited. A vibrant private sector with high value-adding jobs remains underdeveloped,” underscores the report. The international rating agency recommends that structural reforms that would significantly reduce rigidities in the labour and product markets, increase economic diversification and reduce inequality, boosting Botswana's growth potential, would put upward pressure on the rating.
“A broadening of the tax base that reduces fiscal vulnerability to sudden declines in Southern African Customs Union (SACU) revenue or mineral revenue would also be credit positive,” adds Daniela Re Fraschini, Moody's Assistant Vice President. “Conversely, the prospect of a significant and lasting erosion of fiscal reserves would put downward pressure on the rating. A lack of structural reforms that would weaken potential growth in the medium term would be also credit negative,” he said
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”