Since rebasing the Consumer Price Index (CPI) to September 2016 in October last year, which most notably saw an increase in the Transport category weighting, annual headline consumer inflation has been on the rise following an initial drop in October. At 3%, the December print was in line with our forecasts, slightly higher than 2.9% registered in November.
Despite the uptick, inflation has only just returned to the lower end of the target band. Weak domestic demand has helped to keep inflation lower. At the same time, government is aiming for some fiscal consolidation and thus keeping a tight rein on the fiscus, which has in turn limited real wage growth – even during periods of low inflation. The numbers published by Statistics Botswana also show that the rate of credit extension growth has slowed to under 10% and seems to be weakening, further dampening the spending power of household and businesses. â€¨
Given the higher weight to the Transport category in the new CPI weights, we expect inflation to continue on an upward trend, albeit at a slow pace. Global oil prices have now become an upside risk following an agreement that was reached by OPEC members to limit production in order to deplete existing inventory. In the short term, we do not expect a significant rally in oil prices as the market is still oversupplied, however given that demand has not disappointed, this could push up oil prices in a few months.
To Botswana consumers, this should not be very worrying news given that the National Petroleum Fund should have been building reserves when oil prices were low. There are also expectations of lower food prices, as the regional drought recedes together with the subdued demand, should help keep inflation in check.
Against this backdrop, we expect the Monetary Policy Committee (MPC) to keep rates on hold as inflation returns into the 3-6% target band. In our view, it should remain comfortably within this range for the rest of the year in the absence of any shocks. While there are risks to higher inflation, especially from increasing global oil prices, we do not expect the MPC to be quick to raise rates given the waning demand in the local economy unless it is warranted.
Changes to the inflation basket
The rebasing in October brought with it some changes to the inflation basket weights as well as more depth to the range of goods included in the basket. These were derived from a 2009/10 consumption pattern survey. The initial drop after the rebasing was initiated as a result of an increase in the Transport category weight, which during the period was still on a deflationary trend. The graph below shows more detail in the weight change of the basket constituents – other categories did not have a strong influence in the direction or pace of inflation but are likely to influence the inflation print going forward.
The decision to rebase and rebalance the CPI was welcome development in our view following a number of concerns from the market on data accuracy. We however highlight that the survey used to try and capture the current consumption patterns is already 6 years old – this might not necessarily be a good indicator of the current consumption patterns as they might have shifted.
Delving into December’s detail
During the period under review, the Miscellaneous Goods & Services category was the biggest contributor towards the headline figure at 0.8%, followed by the Food category at 0.7%, while other groups exerted benign pressure. The Miscellaneous group recorded the highest year-on-year inflation of 7.9%, mainly driven by an increase in insurance costs as a sub category.
The level of imported inflation has been increasing somewhat, as evidenced by imported tradeables inflation quickening to 1.8% with our trading partners. This can be seen in the acceleration in food inflation. The benefit of FX pass-through from a strong pula relative to the rand has started to diminish, as the rand has been clawing back its losses. A weaker Pula will be negative for inflation due to the higher cost of imports.
Tshephang Loeto is an Investment Analyst, Investec Asset Management
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”