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Botswanas economic set up constrains fiscal flexibility Moodys

Global credit rating agency, Moody’s has affirmed Botswana’s A2 long-term local and foreign currency issuer ratings, with a stable outlook .According to a communiqué from Moody’s the affirmation reflects Botswana’s credit strengths.

The low debt burden, strong debt affordability indicators and a sizeable sovereign wealth fund continue to support fiscal strength, despite the gradual erosion of fiscal buffers, while solid institutions and prudent policymaking support macroeconomic stability. A track record of political stability and modest government liquidity and banking sector risks limit event risk.

Moody’s however says Botswana ‘s small economy  , slow progress towards diversification and long term structural challenges constrain economic strength, while a large public sector, heavy reliance on a single commodity for growth, exports and budget revenues, and an increasingly rigid expenditure structure, constrain fiscal flexibility. The stable outlook reflects Moody’s view that the balance of risks is unlikely to change over the next 12-18 months.

In addition, strong fiscal metrics underpinned by a sizeable sovereign wealth fund more than adequate to cover outstanding debt and prudent policies should help weather near-term uncertainties associated with potential global growth disruptions and any adverse impact on consumer demand for Botswana’s diamond exports.

Moody’s reiterated that the slow progress in terms of fiscal consolidation and economic diversification risks eroding fiscal and external buffers over the longer term. Botswana’s A2 rating balances the relatively solid, albeit volatile, growth performance and its high per capita income with its relatively narrow economic base, heavy reliance on the diamond industry and on a large public sector.

Despite diversification efforts, the mining sector, and in particular the diamond sector, remains a key growth driver and accounts for the vast majority of export proceeds, and more than one third of government revenue. The Global financial think tank says  Botswana’s real GDP  will grow by 3.9% in 2020, after expanding by an estimated 3.6% in 2019, driven mainly by the recovery of mining activity and improvement in the non-mining sectors supported by the accommodative monetary conditions and gradual reform progress to improve the business environment.

However, risks to the growth outlook are tilted to the downside due to the challenging external environment, including sluggish growth in South Africa and risks to global consumer demand for diamonds associated with the increasingly challenging global conditions. Over the longer term, more expensive extraction of diamond resources and potential structural changes in the industry will challenge Botswana’s growth model without material progress in economic diversification.

“The large public sector displays low efficiency levels and creates labour market distortions, while high unemployment and inequality pose additional structural challenges,” reads a statement from Moody’s released recently. Moody’s says its decision to affirm Botswana’s rating also reflects limited susceptibility to event risk due to its stable political system, modest government borrowing requirements, healthy banking system and the country’s strong, albeit weakening, external position.

Government liquidity risk is modest, reflecting low gross borrowing requirements and the government’s reliable access to domestic capital markets to absorb local currency-denominated debt. The assessment by Moody’s noted that Botswana’s banking system’s financial profile is sound. Banks are on average well capitalized and the level of non-performing loans as a percentage of gross loans remains contained, at about 5% at the end of 2019.

However external vulnerability has increased as the current account balance has shifted into deficit in 2019 and Moody’s expects it to remain in negative territory in 2020 and 2021. Reserves position is however projected to remains solid – with foreign-exchange reserves, excluding gold and special drawing rights , which amounts  to $6.4 billion as of November 2019 or an estimated 34% of GDP. Public external debt is low, mitigating risks from external shocks stemming from the high reliance on the diamond industry.

On the more positive fronts Mood’s says Botswana’s fiscal strength assessment reflects the government’s strong fiscal metrics and fiscal resilience, supported by large fiscal buffers and prudent fiscal policy. Government debt affordability metrics, with interest payments accounting for less than 2% of revenue, and the government debt burden, estimated at about 14% of GDP as of 2019, are stronger than the A-rated median (4% of government revenue and 38% of GDP, respectively).

Furthermore, Botswana’s sovereign wealth fund, the Pula Fund, which accounts for an estimated 27% of GDP as of the end of November 2019, remains a key buffer against potential shocks in government revenue. While the availability of large sovereign wealth fund resources has provided the government with flexibility to implement moderately expansionary fiscal policy over the recent years, fiscal space has gradually narrowed and the government is now pursuing a gradual fiscal consolidation targeting a budget surplus in the medium term.

Moody’s expects Botswana’s budget deficit to narrow to 2.8% of GDP in 2020/21 from an estimated 3.9% of GDP in 2019/20 and gradually decline thereafter. The fiscal adjustment will occur through lower development expenditure while recurrent expenditure is expected to continue to increase. Botswana is currently adopting measures to improve the efficiency of development spending by enhancing public investment management. Moody’s however says while the planned reduction in capital spending reflects the government’s efficiency considerations, the resulting increase in budget rigidity reduces fiscal flexibility.

The rating agency underscored the planned reduction in capital spending also poses a risk to the achievement of the envisaged deficit reduction, should mineral revenues underperform due to challenging conditions in the diamond industry and/or if lower than expected Southern African Customs Union (SACU) receipts materialize due to continuing weak economic performance in South Africa.

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China’s GDP expands 3% in 2022 despite various pressures

2nd February 2023
China’s Gross Domestic Product (GDP) expanded by 3% year-on-year to 121.02 trillion yuan ($17.93 trillion) in 2022 despite being mired in various growth pressures, according to data from the National Bureau Statistics.

The annual growth rate beat a median economist forecast of 2.8% as polled by Reuters. The country’s fourth-quarter GDP growth of 2.9% also surpassed expectations for a 1.8% increase.

In 2022, the Chinese economy encountered more difficulties and challenges than was expected amid a complex domestic and international situation. However, NBS said economic growth stabilized after various measures were taken to shore up growth.

Industrial output rose 3.6% in 2022 over the previous year, while retail sales slightly shrank by 0.2% data show that fixed-asset investment increased 5.1% over 2021, with a 9.1% hike in manufacturing investment but a 10% fall in property investment.

China created 12.06 million new jobs in urban regions throughout the year, surpassing its annual target of 11 million, and officials have stressed the importance of continuing an employment-first policy in 2023.

Meanwhile, China tourism market is a step closer to robust recovery. Tourism operators are in high spirits because the market saw a good chance of a robust recovery during the Spring Festival holiday amid relaxed COVID-19 travel policies.

On January 27, the last day of the seven-day break, the Ministry of Culture and Tourism published an encouraging performance report of the tourism market. It said that domestic destinations and attractions received 308 million visits, up 23.1% year-on-year. The number is roughly 88.6% of that in 2019, they year before the pandemic hit.

According to the report, tourism-related revenue generated during the seven-day period was about 375.8 billion yuan ($55.41 billion), a year-on-year rise of 30%. The revenue was about 73% of that in 2019, the Ministry said.

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Jewellery manufacturing plant to create over 100 jobs

30th January 2023

The state of the art jewellery manufacturing plant that has been set up by international diamond and cutting company, KGK Diamonds Botswana will create over 100 jobs, of which 89 percent will be localized.

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Investors inject capital into Tsodilo Resources Company

25th January 2023

Local diamond and metal exploration company Tsodilo Resources Limited has negotiated a non-brokered private placement of 2,200, 914 units of the company at a price per unit of 0.20 US Dollars, which will provide gross proceeds to the company in the amount of C$440, 188. 20.

According to a statement from the group, proceeds from the private placement will be used for the betterment of the Xaudum iron formation project in Botswana and general corporate purposes.

The statement says every unit of the company will consist of a common share in the capital of the company and one Common Share purchase warrant of the company.

Each warrant will enable a holder to make a single purchase for the period of 24 months at an amount of $0.20. As per regularity requirements, the group indicates that the common shares and warrants will be subject to a four month plus a day hold period from date of closure.

Tsodilo is exempt from the formal valuation and minority shareholder approval requirements. This is for the reason that the fair market value of the private placement, insofar as it involves the director, is not more than 25% of the company’s market capitalization.

Tsodilo Resources Limited is an international diamond and metals exploration company engaged in the search for economic diamond and metal deposits at its Bosoto Limited and Gcwihaba Resources projects in Botswana.  The company has a 100% stake in Bosoto which holds the BK16 kimberlite project in the Orapa Kimberlite Field (OKF) in Botswana.

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