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Investment weakness in commodity exporters

Introduction


Investment growth in commodity-exporting EMDEs has also slowed substantially, falling from 7.1 percent in 2010 to 1.6 percent in 2015. In about two-thirds of commodity-exporting EMDEs, investment growth was below its long-term average in 2015. Weakness in investment has been broad-based and includes both public and private sources.

 

Subdued growth prospects and deteriorating terms of trade, compounded by rising political instability, contributed to the investment slowdown. The fall in commodity prices, for instance, accounts for 1.5 percentage point of the total decline in investment growth in commodity exporters between 2011 and 2015. A 10 percent increase in VIX volatility index is associated with a 0.5 percent decline in investment growth within a year in these countries.

 

Weakening investment occurs at a time when many of these economies have major investment needs, especially in the areas of health, education, infrastructure, and urbanization (World Bank 2017). Despite stabilization in commodity prices over the course of 2016, a double-digit cumulative decline from early-2011 peaks created a major terms-of-trade shock for commodity-exporting EMDEs. A number of them are still struggling to adjust to the prospects of continued low commodity prices. GDP in commodity-exporting EMDEs is estimated to have grown by 0.3 percent in 2016, well below the 5.6 percent pace of commodity-importing EMDEs.


Against this background, this Special Focus section addresses the following questions: (1) How has investment growth in commodity-exporting EMDEs evolved? (2) What are the sources of the investment slowdown in commodity-exporting EMDEs? (3) Which policies can help reignite investment growth? How has investment in commodity exporting EMDEs evolved?


During 2003-08, investment growth in commodity exporting EMDEs reached historic highs, averaging 11.7 percent per year, more than twice the long-term average growth rate of 4.6 percent. The investment boom in commodity exporters reflected soaring commodity prices, which encouraged investment in resource exploration and development and, in anticipation of higher future incomes, non-resource projects (World Bank 2016).


However, investment growth in commodity exporters slowed steadily from 7.1 percent in 2010 to 1.6 percent in 2015. The deceleration was even more pronounced among energy exporters, where investment eased from 8.9 percent in 2010 to 1.8 percent in Investment growth in commodity-exporting emerging market and developing economies (EMDEs) has declined sharply since 2010, and was below its long-term average in about two-thirds of these economies in 2015.

 

This slowdown reflects weak growth prospects, elevated uncertainty, deteriorated terms of trade, and increased private debt burdens, among other factors. Policymakers face weakened fiscal positions and generally above-target inflation levels and therefore have limited macroeconomic policy space to reignite investment growth.


Conditions should improve, however, in light of the expected recovery in commodity prices. In addition, possible fiscal stimulus in key major economies and potential positive spillover effects to other economies represent an upside risk to the global outlook (World Bank 2017). What are the sources of investment growth slowdown in commodity- exporting EMDEs? Headwinds to investment include weak growth prospects, severe adverse terms-of-trade shocks, rapid accumulation of private debt, and recently, heightened policy uncertainty in major economies.


Weak GDP growth prospects


Output growth in commodity-exporting EMDEs has slowed since the financial crisis, dropping from 8.9 percent in 2011 to 0.4 percent in 2015, levels well below the pre-crisis average (2003-08) of 11.5 percent (World Bank 2017). Decelerating output growth prospects accounted for about 1.3 percentage points of the slowdown in investment growth in commodity exporters since 2011.

 

Growth prospects in these economies have been dampened by a deteriorating outlook for major economies that are important trading partners, as well as sluggish productivity growth and demographic factors. In particular, growth in China has slowed in the face of weak external demand and policy measures aimed at shifting economic activity from manufacturing to services. This has reduced global commodity demand and generated adverse spillovers to commodity-exporting EMDEs (World Bank 2016).


In commodity-exporting EMDEs, private investment during 2010-15 accounted for roughly 78 percent of total investment. Some of these countries unwound fiscal stimulus only slowly in 2008-09 as public investment growth remained positive despite a slowdown during 2010-13. Since 2013, however, public investment growth in commodity exporters has dropped sharply and shrank in 2015.

 

In contrast, private investment growth has slowed more gradually from its post-crisis peak in 2010, a tentative stabilization in 2015 notwithstanding. Post-crisis investment weakness in commodity-exporting EMDEs occurs against a global macroeconomic backdrop that presents such obstacles as stagnant trade and heightened policy uncertainty.


Worsening terms of trade


As a result of the sharp commodity price slide from early-2011 peaks, the terms of trade—the ratio of export prices to those of imported goods and services—of commodity exporters deteriorated by 4 percent since 2011, on average. Oil exporters experienced a 21 percent plunge (Figure F6). These terms-of-trade shocks accounted for 1.5 percentage points of the investment growth slowdown in commodity exporters between 2011 and 2015, and 3.4 percentage points in energy exporters (World Bank 2017).


Rapid credit growth and debt overhang


On average, private credit in commodity exporters has increased by nearly 20 percentage points of GDP from 2000 to 2015. In about half of these economies credit to the non-financial private sector (as a ratio of GDP) grew more than 4 percentage points from 2015Q2 to 2016Q2.

 

This is well above the long-term average yearly increase of 1 percentage point (World Bank 2016). Credit booms since 2010 have been unusually “investment-less” in commodity-exporting EMDEs.1 Historically, when such investment-less credit booms unwind, output contracts more than when booms were accompanied by an investment surge (World Bank 2017).


Heightened uncertainty


Uncertainty has increased in many commodity-exporting EMDEs since the 2008-09 global financial crisis. This is a by-product of geopolitical tensions in Eastern Europe, security challenges and conflicts in the Middle East, and acute domestic political tensions in several large commodity-exporting EMDEs. Deteriorated political stability in some commodity-exporting EMDEs may have accounted for 0.7 percentage point of the total slowdown in investment growth in 2011-2015 (World Bank 2017).

 

In addition, policy uncertainty in major advanced economies and in some major EMDEs has further weighed on investment growth in commodity-exporting EMDEs. For example, a 10 percent increase in the VIX volatility index can reduce investment growth in commodity exporting EMDEs by 0.5 percentage point within a year.


Which policies can help reignite investment growth?


Both external and domestic factors—low commodity prices, policy and political uncertainty, and weak growth prospects—are weighing on investment in commodity-exporting EMDEs. In the near-term, some of these headwinds are expected to diminish, but only gradually. Investment growth is likely to remain subdued. However, many commodity-exporting EMDEs have large unmet investment needs.

 

A number require investment in health, education, and infrastructure, and are poorly equipped to keep pace with rapid urbanization and changing demands on the work force. In addition, investment in the nonresource sector is needed to smooth a transition from natural resource-driven growth to more sustainable sources. Finally, a boost to investment, particularly private investment, would help revive slowing productivity growth.

 

Robust policy action, even in countries with limited room to mobilize domestic resources, is needed to accelerate investment growth prospects. Although the specific policy needs depend on country circumstances, a full range of policies are needed to improve investment growth prospects.

 

Counter-cyclical fiscal and monetary stimulus may not be effective given low commodity prices, diminished government revenues, and above-target inflation rates. On the other hand, structural policies could support investment by addressing the factors holding back private investment. These include measures to improve productivity and business climate, as well measures to reduce investor uncertainty.


Macroeconomic policies


Low commodity prices have weakened fiscal positions in commodity exporting EMDEs. Widening fiscal deficits and rapidly rising government debt levels leave only limited space for fiscal stimulus, despite the current low-interest rate environment. In about half of commodity-exporting EMDEs with sovereign wealth funds, assets cover less than one year of government expenditures. Absent fiscal space, shifting expenditures toward growth-enhancing investment or improving revenue collection, particularly in commodity exporters with low revenue-to-GDP ratios, can boost spending on public investment.


Alternatively, authorities can gear policy efforts to developing private funding sources for investment. Many countries still lack adequate frameworks for effective public-private partnerships, which can improve the effectiveness of public investment (Engel, Fischer, and Galetovic 2008). Like fiscal stimulus, monetary policy can boost growth and investment in a cyclical slowdown.

 

However, with inflation already above target (about 3 percent on average), most commodity-exporting EMDEs have limited monetary policy space . Several commodity-exporting EMDEs have elevated external debt. Insofar as a large share of this debt is denominated in foreign currency, it can restrict policy makers’ ability to allow currency depreciation in response to terms-of-trade shocks.


Structural policies


Structural reforms are particularly important for supporting investment in commodity-exporting EMDEs with limited room to deploy fiscal and monetary policies to generate stronger growth. Improving the business climate can both stimulate investment (domestic and foreign) and amplify the crowding-in effects of public investment.

 

It can also offer indirect benefits through higher growth, less informality, and more dynamic job creation (Didier et al. 2015). For instance, lower startup costs are associated with higher profitability of incumbent firms, greater investment in information and communications technology, and more beneficial effects of FDI for domestic investment.


Reforms to reduce trade barriers can encourage FDI and aggregate investment. Governance and financial sector reforms can improve the allocation of resources, including capital, across firms and sectors. Labor and product market reforms that increase firm profitability can encourage investment. Stronger property rights can encourage corporate and real estate investment.


Improved access to power supplies can increase firm investment and productivity. An important additional policy ingredient to strengthen prospects in commodity-exporting EMDEs is a robust fiscal framework for managing commodity price cycles that could turn commodity wealth into a steady flow of income and support long-term macroeconomic sustainability.

 

In addition, promoting innovation and growth in non-extractive sectors, investing in research and development, and facilitating links between various industries can be effective policy options to boost investment growth. Three factors are critical for maximizing the benefits from structural policies: (i) strengthening fundamentals (stable growth and inflation, an open trade policy, transparency and good governance, and financial stability); (ii) enhancing infrastructure (roads, communication, and access to electricity and water); and (iii) human capital (World Bank 2015). Progress in some structural areas has slowed in commodity-exporting EMDEs in recent years.

 

During the six years preceding 2011, policymakers cut the cost of doing business considerably. Since then, however, while improvements have continued in some EMDEs, they have proceeded at a slower pace.3 However, large reform spurts in commodity exporting EMDEs have historically been associated with a higher investment growth of 5.7 percent.


Conclusion


In line with the subdued economic activity, investment growth in commodity-exporting EMDEs has slowed sharply since 2010. Deteriorating terms of trade, rising private sector debt burdens, and growing uncertainty have contributed to this slowdown. Policies to remedy investment weakness in commodity exporting EMDEs could include both cyclical and structural actions.

 

However, commodity-exporting EMDEs have limited room to implement fiscal or monetary stimulus given eroded government revenues due to historically low commodity prices and above target inflation rates. Structural reforms to enhance business environments, encourage economic diversification, and improve governance are therefore necessary to spur stronger investment public and private investment, attract foreign direct investment, and improve longer-term growth prospects.


Adopted from a World Bank Report for 2017 Q1 – Investment weakness in commodity exporting countries – Commodity Markets Outlook

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Business

New study reveals why youth entrepreneurs are failing

21st July 2022
Youth

The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.

The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.

University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.

According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.

The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”

The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”

According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”

The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.

Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”

According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”

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Business

BHC yearend financial results impressive

18th July 2022
BHC

Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.

The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.

Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.”
He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.

It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.

He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.

The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.

On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.

BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”

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Business

Commercial banks to cash big on high interest rates on loans

18th July 2022
Commercial-banks

Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.

In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.

Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.

Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.

The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.

The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.

“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.

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