Global economic conditions are improving, following a year of depressed economic activity. The global economic recovery is strengthening, supported by a continued upturn in manufacturing activity. In January, global industrial production increased at an annualized rate of nearly 6 percent, the strongest pace in ï¬ve years – The Pulse, a World Bank report has observed.
“Activity accelerated in the Euro Area, Japan, China, and India, while moderating somewhat in the United States, the United Kingdom, and the Russian Federation. The global manufacturing Purchasing Managers’ Index (PMI) improved further in February, while the services PMI remained high. Following four consecutive months of small gains, global (median) inï¬‚ation rose sharply in January, to about 2.3 percent year-over-year—the highest level since end-2014. The uptick reï¬‚ected the delayed impact of rising energy prices in 2016.
Global goods trade rebounded strongly in the fourth quarter of 2016. This improvement coincided with signs of a bottoming out in global investment growth, which tends to be more trade intensive than other components of aggregate demand. Global export orders point to further improvements in the coming quarters.”
According to the Pulse, global ï¬nancing conditions have been favorable since the start of 2017. Financial markets have continued to focus on the prospects of strengthening global growth, while discounting elevated levels of policy uncertainty. It notes that implied volatility in the equity and bond markets remains well below historical averages. Furthermore, the decision by the Federal Reserve to raise rates was expected, and markets reacted positively, with bond yields and the U.S. dollar declining somewhat, and global equity markets remaining buoyant.
The report states that the European Central Bank kept its stance unchanged, but conï¬rmed that it would begin scaling back its asset purchases in April. Supported by continued monetary policy accommodation, Euro Area bond yields remain exceptionally low. “Financial markets in emerging markets and developing economies (EMDEs) have continued to rebound, supported by the increased risk appetite of international investors, some improvement in growth prospects, and more stable credit ratings among commodity exporters.
Accordingly, capital inï¬‚ows to EMDE bond and equity mutual funds remained ï¬rm in March, while international debt issuance increased strongly from January to March. Recent bond issuances by the Arab Republic of Egypt, Nigeria, Oman, and Kuwait attracted strong demand. Bond spreads are currently around 300 basis points, which is lower than the pre-U.S. election levels. Excluding the República Bolivariana de Venezuela, Emerging Market Bond Index spreads are now back to mid-2014 levels.”
According to the report, commodity prices have ï¬rmed. Crude oil price jumped 8 percent in the ï¬rst quarter of 2017 averaging nearly $53/bbl. Prices dropped below $50/bbl in the second week of March due to concerns over compliance of the OPEC/non-OPEC cuts, larger-than-expected U.S. crude oil inventories, and robust recovery in U.S. shale oil activity.
“But, they recovered to $54/bbl in early April, on renewed expectations of tightening supply. However, rebalancing is under way as the global oil market is expected to tighten in the second half of the year. Meanwhile, metal prices, which made some further gains in 2017Q1 on stronger demand from China and some supply tightness are now 35 percent higher than their 2015Q4 lows.
Agricultural prices have been broadly stable on favorable growing conditions in most regions. Global growth is projected to pick up to 2.7 percent in 2017, and to an average of 2.9 percent in 2018–19, broadly in line with previous projections. Activity in advanced economies is expected to strengthen in 2017, supported by a projected upturn in the United Sates,” reads the World Bank report.
The report further indicates that forecasts for advanced economies have been slightly upgraded, reï¬‚ecting strengthening domestic demand and exports. After accelerating to 1.9 percent in 2017, growth in advanced economies is expected to moderate somewhat, to an average of 1.8 percent in 2018–19. Aggregate growth in EMDEs is projected to reach 4.1 percent in 2017 and 4.5 percent in 2018.
“Modestly rising commodity prices, a cyclical rebound in investment, and export growth are supporting a gradual recovery in commodity-exporting EMDEs. Among commodity-importing EMDEs, growth continues to be robust, as a gradual deceleration in China is oï¬€set by the rest of the group,” it reads.
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”