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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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Slight growth in GDP as economy battles return

28th July 2021
Peggy-Serame

Botswana’s economy showed slight growth signs in the first quarter of 2021, following a devastating year in 2020.

During 2020, the entire second quarter was on zero economic activity as the country went on total lockdown in an effort to curb the spread of the virus.

Diamond trade plummeted to record low levels as global travel restrictions halted movement of both goods and people and muted trade.

The end result was a significant decline for the local economy, at an estimated 7 percent contraction, just marginally below the 2008/09 global financial crises.

According to figures released by Statics Botswana this week, the country’s nominal Gross Domestic Product for the first quarter of 2021 was P47.739 billion compared to a revised P45.630 billion registered during the previous quarter.

This represents a quarterly increase of 4.6 percent in nominal terms between the two periods.

During the quarter, Public Administration and Defence became the major contributor to GDP by 18.4 percent, followed by Wholesale & Retail by 11.4 percent. The contribution of other sectors was below 6.0 percent, with Water and Electricity Supply being the lowest at 1.6 percent.

Real GDP for the first quarter of 2021 increased by 0.7 percent compared to a contraction of 4.6 percent registered in the previous quarter.

The improvement in the first quarter 2021 GDP reflected continued efforts to reopen businesses and resume activities that were postponed or restricted due to the COVID-19 pandemic.

The real GDP increased by 0.7 percent during the period under review, compared to an increase of 1.2 percent in the same quarter of 2020.

The recovery in the domestic economy was observed across majority of industries except Accommodation & Food Services, Mining & Quarrying, Manufacturing, Construction, Other Services and Agriculture, Forestry & Fishing.

The overall slow performance of the economy was mainly due to the impact of measures that were put in place to combat the spread of the COVID-19 pandemic.

The Non-mining GDP increased by 4.1 percent in the first quarter of 2021 compared to 4.0 percent increase registered in the same quarter of the previous year.

Agriculture, Forestry and Fishing industry decreased by 2.0 percent in real value added during the first quarter of 2021, relative to a contraction of 5.2 percent registered during the same quarter of 2020.

The main driver of the unfavorable performance stems from a decrease in real value added of Livestock farming by 3.0 percent.

Mining and Quarrying registered a decrease 11.4 percent in the real value added, this was mainly influenced by the drop in the Gold and Diamond real value added by 17.5 and 12.5 percent respectively.

Diamond production in carats went down by 12.1 percent while the tonnage of Gold produced went down by 17.5 percent.

The poor performance of the diamond sub-industry is attributed to the reduction in production due to a lower grade feed to the plant at Orapa in response to heavy rainfall and operational issues, including continued power supply disruptions.

With regard to Gold is due to diminishing resource base which affect production.

The Manufacturing industry recorded a decline of 7.4 percent in real value added during the first quarter of 2021, compared to a decrease of 2.3 percent registered in the corresponding quarter of 2020.

The deep low performance in the industry is observed in the two major sub-industries of Beverages & tobacco and Diamond cutting, polishing and setting by 57.0 and 38.5 percent respectively.

The reduction in Beverages is attributed to alcohol sale ban imposed during the quarter under review in order to reduce the spread of the COVID-19 virus. On the other hand, exports of polished diamonds went down by 24.9 percent compared to a decrease of 11.5 percent registered in the same quarter of the previous year.

The construction industry recorded a decline of 4.8 percent compared to an increase of 4.3 percent realized in the corresponding quarter in 2020.

This industry comprises of buildings construction, civil engineering and specialized construction activities. The industry is still showing signs of the consequences of COVID-19 pandemic. The industry recorded a negative growth of 7.4 percent in the previous quarter.

Water and Electricity Water and Electricity value added at constant 2016 prices for the first quarter of 2021 was P506.2 million compared to P378.2 million registered in the same quarter of 2020, recording a growth of 33.8 percent.

In the first quarter of 2021, Electricity recorded a significant growth of 62.4 percent compared to a decrease of 67.6 percent recorded in the corresponding quarter of 2020.

The local electricity production increased by 22.4 percent while Electricity imports decreased by 33.3 percent during quarter under review. The water industry recorded a value added of P231.3 million compared to P209.0 million registered in the same quarter of the previous year, registering an increase of 10.7 percent.

Wholesale and Retail Trade real value added increased by 11.4 percent in the first quarter of 2021 compared to an increase of 5.5 percent registered in the same quarter of the previous year. The industry deals with sales of fast moving consumer goods.

Diamond Traders recorded a significant growth of 112.7 percent as opposed to a decline of 22.7 percent recorded in the corresponding quarter last year. The positive growth is due to improved demand of diamonds from the global market.

The Transport and Storage value added increased by 0.6 percent in the first quarter of 2021, compared to a 2.4 percent increase recorded in the same quarter of the previous year.

The slight improved performance of the industry was mainly attributed to the increase in real value added of Road Transport and Post & Courier Services by 4.3 and 2.1 percent respectively.

The slow growth was influenced by a significant reduction in Air Transport services of 69.7 percent due to reduced number of passengers carried. Rail goods traffic in tonnes went down by 6.4 percent and passenger rail transport was not operating during the quarter under review.

Accommodation and Food Services Accommodation and Food Services real value added declined by 31.7 percent in the first quarter of 2021 compared to a decrease of 4.4 percent registered in the same quarter of the previous year. The reduction is largely attributed to a decrease of 42.1 percent in real value added of the Accommodation activities subindustry.

The suspension of air travel occasioned by Covid-19 containment measures impacted on the number of tourists entering the borders of the country and hence affecting the output of Hotels and Restaurants industry. COVID-19 restriction measures resulted in reduced demand for leisure and conferencing activities, as conferences are largely held through virtual platforms.

Finance, Insurance and Pension Funding industry registered a positive growth of 8.3 percent due to the favorable performance from monetary intermediation and Central Banking Services by 16.4 and 5.4 percent respectively during quarter under review.

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Chobe Holdings secures P16 million for dark days

28th July 2021
Chobe Holdings

It is still tough in the tourism industry — big players in this sleeping giant are not having it easy, but options are being explored to keep the once vibrant multibillion Pula sector alive until the world gets back to normalcy.

One of the primary measures against the spread of Covid-19 is to stay home; this widely pronounced precaution against the global contagion that has claimed over 4 million lives across the world is however a thorn in the flesh of one of the major industries in the global economy — the tourism sector .

This sector is underpinned by travel – an act which is the virus‘ number one mode of spread, especially across borders.

Chobe Holdings Limited, one of Botswana’s leading high end eco-tourism giants said its survival strategies are underpinned by well-crafted stakeholder engagements in the mist of these unprecedented times of muted trading activity.

“Throughout the COVID-19 pandemic, Chobe continued to invest in and strengthen its relationships with key stakeholders in both its traditional markets and the SADC region,” the company directors updated shareholders this week.

To keep the business afloat, the company which owns and operates some of the exquisite tourism destinations along the banks of the mighty Chobe said it has triggered its existing available debt financing avenues.

Chobe revealed that its current overdraft of BWP 25 million has been extended on favourable terms.

The company shared that it has negotiated a further USD 1.5 million (over P16 million) standby loan with a flexible settlement terms and preferable cost implications to the bottom line.

“We are confident that the Group has sufficient cash inflows, cash reserves and un-utilized prearranged borrowing in place to settle any liabilities falling due and support the smooth recovery of operations in the short and medium term,” the company directors said, noting that they will retain the flexibility to vary operations should market conditions change.

Early this year, Chobe announced that the ongoing crisis in the tourism industry forced the company to draw from its prearranged overdraft facility of P25 million to the extent of P11.6 million.

Last year Chobe’s occupancy levels around its lodges and hotels went down 89 percent. This resulted in unprecedented revenue decline of 93% to P27.78 million from the P373.94 million in the previous year ended February 2020.

Operating profits went down 159% with profit after tax down 170%, mirroring a loss of over P67 million.

Chobe management said during the last half of the financial year they have done all they could to contain costs across the company’s operations.

During the last half of the year Chobe’s marketing and reservations teams continued to pursue the “don’t cancel but defer policy”.

“We thus continue to hold advance travel receipts, to the value of about P34 million at the financial year end,” the company revealed early this year.

Chobe said it continues to engage Government, through HATAB and BTO to prioritize the vaccination of workers in the tourism sector.

“Throughout the pandemic we have ensured that employees are trained in and comply with COVID-19 infection mitigation protocols as well as ensuring that all visitors to our remote camps and lodges as well as our staff and contractors are tested for COVID-19 before reaching the camp or lodges,” the company said.

However, the company said vaccinating the tourism staff will provide the best way to ensure that both employees and guests are protected from the virus.

“We continue to manage our cashflow through stringent cost control measures, balanced against the protection of the Group’s physical assets and the wellbeing and retention of its people,” the company said.

Chobe has successfully retained its top management through the pandemic.  To this end the company directors continue to closely monitor the Group’s recovery from COVID-19 and adjust salary reductions to support operations and aid retention.

Domestic and regional travel resumed during the second quarter of the 2020/21 financial year with the Group opening a strategic mix of camps and lodges.

A comprehensive domestic, regional and international marketing plan was put in place to support these openings.

International travel resumed in the first quarter of the 2021/22 financial year with occupancies forecast to steadily increase, albeit from a low base, through the second quarter.

The company is optimistic that forward bookings are strong for the 2022/23 financial year.

“There is pent-up demand from our traditional source markets to travel now, but this is tempered by uncertainty and access constraints,” the company stated.

“Both the domestic and international markets are sensitive to such uncertainty, and it is critical that both the private and public sector work together to develop and publish clear, authoritative and consistent travel information in order to build confidence”

Chobe entered the pandemic with the Shinde camp rebuild in progress — one of its high end camps and this was completed in the first half of the 2020/21 financial year accounting for the majority of the Group’s capital expenditure for that period.

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De Beers Q2 production jumps in response to strong rough diamond demand

28th July 2021
De-Beers -jwaneng-mine

De Beers Group, the world’s leading rough diamonds producer by value and Botswana’s partner in the diamond business, ramped up its production in the second quarter of 2021, in response to stronger demand for rough diamonds in the global markets.

The London headquartered diamond mining giant revealed in its production report this week that rough diamonds output  increased by 134% to 8.2 million carats in the three(3) months  of quarter 2 2021, “reflecting planned higher production to meet stronger demand for rough diamonds”.

This was against the backdrop of curtailed demand in the same quarter last year, mirroring the impact of Covid-19 lockdowns across southern Africa during that period.

In Botswana, where De Beers sources majority of its rough diamonds through partly government owned Debswana, production increased by 214% to 5.7 million carats. The percentage jump mirrored planned low production in the second quarter of 2020 where output was adjusted to market demands and implemented Covid-19 protocols.

Debswana operates four (4) Mines: Jwaneng Mine- being its flagship producer and largest revenue contributor. Jwaneng Mine which is the wealthiest diamond mine in the world by value is envisaged for multi-billion expansion to an underground operation in future to stretch its existence by few more decades.

The underground project which is anticipated to cost a whooping P65 billion will be the world‘s largest underground diamond mine.

The company which accounts for over 65 % of De Beers’s global production also operates Orapa Mine- one of the world’s largest by area, Letlhakane Mine currently a tailings treatment operation and Damtshaa Mine which is under care and maintenance following market shrink in 2020.

Namibia production decreased by 6% to 0.3 million carats, primarily due to planned maintenance of the Mafuta vessel which was completed in the quarter and another vessel remaining demobilized.  In Namibia De Beers sources diamonds both in land and marine through Namdeb and Debmarine respectfully.

In South Africa-the spiritual home ground of De Beers Group, production increased by 130% to 1.3 million carats, due to planned treatment of higher grade ore from the final cut of the Venetia open pit, as well as the impact of the Covid-19 lockdown in Q2 2020.

Production in Canada increased by 14% to 0.9 million carats, primarily reflecting the impact of the Covid-19 measures implemented in Q2 2020.

De Beers said consumer demand for polished diamonds continued to recover, leading to strong demand for rough diamonds from midstream cutting and polishing centers, despite the impact on capacity from the severe Covid-19 wave in India during April and May.

Rough diamond sales totaled 7.3 million carats (6.5 million carats on a consolidated basis), from two Sights, reflecting the impact of the reduced Indian midstream capacity on Sight 4, compared with 0.3 million carats (0.2 million carats on a consolidated basis) from two Sights in Q2 2020, and 13.5 million carats (12.7 million carats on a consolidated basis) from three Sights in Q1 2021.

The H1 2021 consolidated average realized price increased by 13% to $135/ct (H1 2020: $119/ct), driven by an increased proportion of higher value rough diamonds sold.

While the average price index remained broadly flat, the closing index increased by 14% compared to the start of 2021, reflecting tightness in inventories across the diamond value chain as well as positive consumer demand for polished diamonds.

Full Year Guidance Production guidance is tightened to 32–33 million carats (previously 32-34 million carats (100% bases)), subject to trading conditions and the extent of any further Covid-19 related disruptions.

When commenting to 2021 quarter 2 production figures, Mark Cutifani, Chief Executive of Anglo American- De Beers parent, said the entire Anglo American Group delivered a solid operational performance supported by comprehensive Covid-19 measures to help safeguard the lives and livelihoods of its workforce and host communities.

“We have generally maintained operating levels at approximately 95% of normal capacity and, as a consequence, production increased by 20% compared to Q2 of last year, with planned higher rough diamond production at De Beers” he said.

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