Stock Brokers Botswana has projected that the domestic economy has a robust outlook for the year as the diamond industry is expected to ride tailwinds of the global economic recovery.
“Anticipation of increased performance of the services sector as well as the continued expansion in government spending (2018/19 projected budget deficit: BWP8.06 billion) also contribute to the outlook. With the current President’s term due to end in March 2018 and the Vice President set to step in the following month in the run up to next year’s general elections, this presents further upside to government spending. The Ministry of Finance and Development Planning has forecasted a 5.3% growth rate for 2018 on the back of these aforementioned factors. This is slightly higher than the IMF’s forecast of 4.8%, however both estimations point to robust growth.”
In its Market Outlook for 2018, SBB observes: “On the ground, businesses also expect an improved outlook for 2018 as per the Bank of Botswana Business Expectations Survey September 2017. Firms expect business conditions to improve in 2018 with an overall confidence level of 52% for H1 2018 (H2 2017: 46%) and 64% for the whole of 2018. The survey reveals that businesses cite constrained domestic demand as the biggest challenge to doing business, reflective of the subdued consumer environment reported by a number of the listed companies in 2017.”
The recent bank rate cut should serve to ease pressures on the fragile consumer, further observation by SBB. However, the recent increases in fuel prices as well as the prospect of further increases could hurt disposable income, which is showing sluggish growth. Unemployment remains high, with the latest figure estimated at 17.7%.
“This figure includes individuals engaged in the Ipelegeng programme, which is essentially short term employment mainly targeted at vulnerable members of society. Further, overall employment has been showing negative growth. In cognizance of these factors, the consumer is likely to remain under pressure.”
The SBB general outlook for the stock market in 2018 is neutral. While macroeconomic indicators point to an overall improved domestic economy, SBB sees limited upside for equity prices given the absence of catalysts to drive consumer spending.
2017 in review – Mining recovery, fiscal stimulus, equities dip
“2017 saw the slowing of the economy from a macroeconomic front. Q3 Real GDP statistics show growth of 1.2% (Q3 2016: 6.9%). Although a rather subdued figure, all industries showed positive growth rates besides Trade, Hotels, and Restaurants (the largest contributor to GDP) which had a -9.3% growth rate on the back of negative contribution from downstream diamond industries. Real mining value added turned positive with a growth rate of 4.4% as the upstream diamond market continued firming.
Diamonds production increased 30% in carats as the Orapa and Jwaneng mines substantially ramped up production. With a buoyant diamond market, and the BCL effect on the mining figures expected to have disappeared in the Q4 statistics, government’s targeted GDP growth rate of 4.7% for 2017 could be realized.
Expansionary fiscal policy ensued in 2017 with the 2017/18 financial year marking the first year of implementation of National Development Plan 11. Government initiatives to stimulate the economy led to an estimated budget deficit of BWP6.56 billion for the 2017/18 financial year largely on the back of provisions for the Economic Stimulus Program (ESP) and water and power infrastructure projects.
With regard to monetary policy, the Central Bank ushered in further stimulus as well with a 50 bps cut in the Bank Rate to 5% in October 2017. Headline inflation came in at 3.2% in December and averaged 3.3% for 2017, just above the lower bound of Bank of Botswana’s 3 – 6% medium term objective range.
Despite the positive macros, equities underperformed. Given the capital intensive nature of the mining industry, growth in this sector has little spillover effects on the labor market. The fiscal stimulus measures had not trickled down to the consumer with employment numbers contracting and wages showing marginal growth.
On the backdrop of the strained consumer environment, the bear market ensued with the Domestic Company Index (DCI) closing the year 5.75% lower at 8860.13 points. Several blue chip counters shed a lot of value over the year with the delivery of either flat or dismal earnings. The correction of these counters outweighed the year’s gainers, resulting in the DCI’s negative performance.”
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”