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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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Diamond industry crises not over yet – De Beers Chief

13th January 2021
De Beers Group Chief Executive Officer: Bruce Cleaver

Following a devastating first half of the year 2020 due to COVID-19, the global diamond industry  started gaining  positive momentum towards the end of the year as key markets entered into  thanks giving and holiday season.

However Bruce Cleaver, Chief Executive Officer of De Beers Group cautioned that the industry is not out of the woods yet, citing prevailing challenges ahead into 2021.

The first half of 2020 was characterized by some of the worst challenges in history of global diamond trade.

The midstream, where rough diamonds are traded in wholesale and bulk to cutters and polishers, was for the most part of second quarter 2020, suffocated by international travel restrictions as countries responded to the contagious Corona Virus.

This halted movement of buyers and shipment of  the rough goods , resulting  in unprecedented decline of sales, in turn  ballooning stockpiles as the upstream  operations produced with little uptake by the midstream.

The situation was exacerbated by muted demand in the downstream where jewelry industries and tail end retailers closed to further curb the spread of COVID-19.

However towards the end of third quarter getting into the last quarter of the year, demand in both midstream and downstream started to steadily pick up as countries relaxed COVID-19 restrictions.

De Beers, the world’s largest diamond producer by value started reporting significant recovery in sales in the sixth and seventh cycle, figures began to reflect an upswing in sentiment as well as increase in uptake of rough goods by midstream.

Sales for the sixth cycle amounted to $116 Million, following a sharp downturn in the previous cycles, significant jump was realized during the seventh cycle, registering $320 million, an over 175 % upswing when gauged against the proceeding cycle.

De Beers noted that diamond markets showed some continued improvement throughout August and into September as Covid-19 restrictions continued to ease in various locations.

“Manufacturers focused on meeting retail demand for polished diamonds, particularly in certain product areas, accordingly, we saw a recovery in rough diamond demand in the seventh sales cycle of the year, reflecting these retail trends, following several months of minimal manufacturing activity and disrupted demand patterns in all major markets,” said De Beers Chief Executive, Bruce Cleaver in September last year.

The diamond mining behemoth continued to register impressive sales in the eighth and ninth cycle signaling the industry could end the year on a positive note.

The momentum was indeed carried into the last cycle of the year. The value of rough diamond sales (Global Sightholder Sales and Auctions) for De Beers’ tenth sales cycle of 2020 amounted to $440 million, a significant increase from the 2019 tenth sales cycle value.

Against what seemed like a positive year end that would split into the New Year Bruce Cleaver, CEO, De Beers Group, however warned the industry not to count eggs before they hatch.

“Positive consumer demand for diamond jewellery resulting from the holiday season is supporting the continuation of retail orders for polished diamonds from the diamond industry’s midstream sector. This in turn supported steady demand for De Beers’s rough diamonds at our final sales cycle of 2020,” Cleaver had said in December.

In caution the De Beers Chief noted that “While the diamond industry ends the year on a positive note, we must recognise the risks that the ongoing Covid-19 pandemic presents to sector recovery both for the rest of this year and as we head into 2021.”

All segments of the supply chain were severely impacted by the global lockdown measures introduced in response to the Covid-19 pandemic in the first half of 2020.

After a strong US holiday season at the end of 2019, the rough diamond industry started 2020 positively as the midstream restocked and sentiment improved.

However, from February 2020, the Covid-19 outbreak began to have a significant impact on diamond jewellery retail sales and supply chain, with many jewelers suspending all polished purchases and/or delaying payments to their suppliers.

Rough diamond sales were materially affected by lockdowns and travel restrictions, delaying the shipping of rough diamonds into cutting and trading centers and preventing buyers from attending sales events.

These resulted in significant decline in total revenue for the business in the first six months of 2020. Total revenue decreased by 54% to $1.2 billion from $2.6 billion registered in the prior half year period ended 30 June 2019.

For the entire first six (6) months of the year 2020 De Beers Rough diamonds sales fell drastically to $1.0 billion from $2.3 billion in the prior H1 period ended 30 June 2019. Sales volumes decreased by 45% to 8.5 million carats compared to 15.5 million carats registered in the prior period.

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Gov’t coffers depleting to record low levels 

13th January 2021
Dr Matsheka

Next month Minister of Finance & Economic Development, Dr Thapelo Matsheka will face the nation to deliver Botswana‘s first budget speech since COVID-19 pandemic put the world on devastating economic trajectory.

The pandemic that broke out in late 2019 in China has put the entire world on unprecedented chaos ,killing over P1 million people across the globe , shattering economies and almost rendering  the year 2020 – a 12 months stretch of complete setback.

The 2021/22 budget speech will come at time when Botswana’s economy is still trying to emerge out of this.

National lockdowns and local travel restrictions have hit small medium enterprises hard, while international travel restrictions halted movement of both good and people, delivering by far some of the heaviest and worst catastrophic blows on the diamond industry and tourism sector, the likes of which this country has never seen before on its largest economic sectors.

As Minister Matsheka faces parliament next month, the reality on the ground is that Botswana’s national current cash resource, the Government Investment Account (GIA) is depleting at lightning speed.

On the other hand the COVID-19 economic mess is  prevailing,  the virus is reported to have taken a new dangerous shape of a deadly variant, spreading like fueled veld fire and causing some of the world’s super powers back to tough restrictions of lockdown.

According official figures released by Bank of Botswana, in October 2020 the GIA was running at P6 billion compared to the P18.3 billion held in the account in October 2019.

However reports indicate that the account could be currently holding just about P3 billion.  The draw down from the GIA has been by exacerbated by declining diamond revenue, the country‘s largest cash cow. The sector was experiencing significant revenue decline even before COVID-19 struck.

 

When the National Development Plan (NDP) 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at a 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.

Taking into account the COVID-19 economic mess in 2020/21 financial year, the budget deficit could add up to P20 billion after revised figures.

Drawing down from government cash balances to finance these budget deficits meant significant withdrawals from the Government Investment Account, hence the near depletion of this buffer.

Meanwhile  should Botswana’s revenue streams completely dry up to zero levels; the country would only have 11 months, before calling out for humanitarian  aids and international donors, because  foreign reserves are also on slow down.

During 2019, the foreign exchange reserves declined by 8.7 percent, from Seventy One Billion, Four Hundred Million Pula (P71.4 billion) in December 2018 to Sixty Five Billion, Three Hundred Million Pula (P65.3 billion) in December 2019.

The reserves declined further in 2020, falling by 2.3 percent to Sixty Three Billion, Seven Hundred Million Pula (P63.7 billion) in July 2020.  This was revealed by President Masisi during State of the Nation Address in November last year.

The decrease was mainly due to foreign exchange outflows associated with Government obligations and economy-wide import requirements.

However latest statistics(October 2020)  from Bank of Botswana reveal that Botswana’s foreign reserves are estimated at P58.4 billion, with  government’s share of these funds significantly low.

Government has since introduced several measures to contain costs and control expenditure with the most recent intervention being the halting of recruitment in government departments and parastatals.

Furthermore, Value Added Tax has been signaled to go up  from 12% to 14% in April this year with more hikes and service fees anticipated as government embarks on unprecedented domestic revenue mobilization.

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Cresta signs lease agreement for Phakalane golf estate hotel. continues with growth agenda despite covid-19 impact

13th January 2021

Botswana Stock Exchange listed hotel group Cresta Marakanelo Limited (“CML” or “the Company”) announced the signing of a lease agreement for Phakalane Golf Estate Hotel & Convention Centre, which will see CML extend its footprint by adding the 4 star Gaborone property to its already impressive portfolio.  The agreement is subject to regulatory approvals therefore the effective date of the transaction is expected to be 1 February 2021.

 

CML brings a wealth of expertise to the lease and despite the difficult year for the tourism and hospitality industry, due to the impact of the COVID-19 pandemic, CML remains confident in the recovery of the sector and the need to invest in expanding the Company’s footprint.

CML Managing Director, Mr Mokwena Morulane commented: “Our continued efforts to improve our offerings, understand the market dynamics and modern day trends in the face of global challenges, means we are ready for the changing face of tourism and international travel, and this addition to the Cresta portfolio signals our confidence in the future.  

 

“Despite the headwinds faced in 2020, Management has continued to focus on projects that enhance CML’s product offering such as the refurbishments at Cresta Mowana Safari Resort & Spa in the tourism capital Kasane and the ongoing refurbishment of Cresta Marang Residency in Francistown. The signing of the lease for the 4 star Phakalane Golf Estate Hotel & Conference Centre is a great addition to the Cresta portfolio and will unlock shareholder value in the future.

 

“We remain vigilant to value-enhancing opportunities including acquisitions or leases, after having reconsidered our pipeline against current and expected market conditions.”  

 

Commenting on the lease agreement, the Chief Executive Officer, Mr S Parthiban, speaking on behalf of Phakalane  noted; “No hotel chain holds as much expertise in the region, understands our local culture and tastes and what hospitality is about better than Cresta Marakanelo Limited. We believe that the renovations done to the property has made Phakalane Hotel and Convention Centre a unique product in Botswana and at par with international facilities.  We believe that this lease will benefit not only us as Phakalane , but the market in general as Cresta has run hotels successfully in Botswana for over 30 years and is therefore expected to bring new offerings that appeal to the local and international markets as well as the residents and visitors to the Golf Estate. We look forward to a long mutually beneficial relationship with Cresta.” 

 

CML like the rest of the tourism and hospitality industry and the entire value chain was hard hit by lockdowns  with the surge of COVID-19. By investing during the low period, the company hopes to realise the future value of spending time in preparing for the new consumer dynamics and behaviour.  Despite business interruptions as a result of a six-month long state of emergency and several lock-down periods declared by the Government of Botswana to limit the spread of COVID-19, the Company is starting to record an increase in occupancies, which bodes well for the recovery of the industry and the Company’s future prospects.

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