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The first rate cut should have been the deepest – economists

Moatlhodi Sebabole

Bank of Botswana(BoB)’s Monetary Policy Committee(MPC) decision to reduce the Bank Rate by 50 basis points (bps), from 4.75 percent to 4.25 percent was met with mixed reactions.

Former deputy governor Dr Keith Jeffries told BusinessPost this week that there is no big problem with the cut as he sees the bank taking a “cautious approach” towards monetary policy in this current situation. He told this publication that the Bank made a substantial cut and believes a deeper cut, another slash in the future, will be made if there is any dramatic inflationary change. To him the small cut was to leave a room for another, soon.

However some economists were last week not satisfied with the 50 bps cut, saying it is marginal and would not reach its intended purpose. Local economist Othata Batsetswe in an interview with this publication sees the 50 bps cut as “too marginal.”

“The impacts of COVID-19 requires a much better adjustment, maybe 100 bps. South Africa has opened up its economy stimulation much wider with cut by 100 bps, for example. The cut should be big enough to trigger borrowing in the economy especially target to sectors that can stimulate growth,” said Batsetwe.

Just before the rate cut last week, commercial banks were modest in their expectations from the central bank with regards to the cut. When they were both interviewed by BusinessPost Absa Botswana and First National Bank Botswana (FNBB) chief economists, respectively Naledi Madala and Moatlhodi Sebabole envisaged a 50 bps cut. And the central bank shed just in that margin last week.

But the reaction to the rate cut has now changed, spelling unsatifaction from some banks and economists like Batsetswe.  In their recently released MPC review FNBB wanted an even deeper cut rate, doubling its expectation, and hoping for 100 bps.

In a research seen by this publication chief economist, Moatlhodi Sebabole and Gomolemo Basele, a quantitative analyst shared that their “view” was that BoB will shed the rate by 100 basis point, meaning that FNBB wanted the cut to go from 4.75 percent to 3.75 percent. Sebabole and Basele also initially envisaged a 75 bps cut.

According to the duo’s analysis, the anchored inflation prospects and growth pressures within Botswana’s trading partners, which include South Africa, Namibia and the US, throughout 2020 have resulted in broad- based easing in these markets in the first quarter of 2020, and this also gives Botswana a knife to trim down on the rate, making a deeper cut.

“These factors provided the BoB with room to cut rates without altering real interest rate differentials from their historic averages. The local inflation profile and growth forecasts lead us to believe that the BoB can cut rates by an additional cumulative 75 bps in 2020 to take it to new historical averages of 3.5 percent for the rest of 2020,” said Sebabole and Basele.

According to the two experts, these rate cuts provide relief to existing debt cost pressures as well as stimulate some asset purchases, but structural limitations to monetary transmission will have to be addressed for a better signaling effect on economic growth indicators. Sebabole and Basele however acknowledges that the interest rate cuts will not be sufficient to address the economic disruption caused by covid-19 but will complement the fiscal efforts aimed at rescuing and stimulating the economy.

According to Basele and Sebabole, the reduction of the bank rate is in part a coordinated fiscal and monetary policy response to covid-19 as GDP estimates are now significantly lower.

“We have revised our economic growth forecast for Botswana to -10.5 percent y/y (previously 3.6percent) in 2020 – with risks to the downside due to the uncertain economic environment, which should it persist – we anticipate that growth will dip as low as -16.1 percent y/y (bear-scenario),” said their research.

FNBB economic brains explains why interest rates will remain at bottoms

According to Sebabole and Basele it should be noted that headline inflation continues to breach the central bank’s lower inflation objective of 3.00 percent, printing at 2.20 percent in March, and it will be remaining at this level for a fourth consecutive month.

Also, personal income and credit growth remained muted in the first quarter of 2020, resulting in restrained domestic inflation as group indices within the national consumer index reflected changes of less than 1.00 percent, according to the two economists.

“Core inflation was also unchanged between January and March, at 2.70% y/y, reflecting muted demand-pull pressures as household spending remains concentrated on necessities such as food, housing and utilities,” said the two.

Furthermore timid demand prospects for household consumption or dwindling consumer confidence will also keep inflation contained in 2020, FNBB said. This means, according to the bank’s experts, coupled with lower fuel prices which will come as a blessing for the transport index in sustaining low inflationary levels.

“The lower South African inflation outlook and a weaker rand also means limited FX inflation pass-through – while risks to the upside remain negligible. These factors inform our view for inflation to average 2.20 percent this year – with a trough anticipated at 1.68 percent by the first quarter of 2020,” according to Sebabole and Basele.

Sebabole and Basele in their research expect credit growth to remain dwarfed, and to remain below 7 percent in the next two year. Mostly household will bear the brunt of this subdued two year credit growth, they said. According to the two, household demand is expected to be low and below 4 percent and this will not be enough to light up demand-push pressures to inflation.

Sebabole and Basele argued that the postponement of the 2020/21 public workers salary wages by government will further affect household growth to consumption and output. According to the two the increment could have relieved some pressure on disposable income levels.

There will also be the slow growth in personal incomes across the employment workforce as well as minimal employment growth and all these will limit the extent of growth to consumption and output.

“The below-trend GDP growth patterns, stubbornly low inflation dynamics and subdued demand and output prospects all point to our fundamental view that the bank rate will trend lower in the short- to medium-term. It is our view that the bank rate will trend lower to 3.50 percent in 2020 (now at 4.25n percent) – with further cuts anticipated in the next few months,” said the FNBB duo.

BoB on downward crawl adjustment of 2.87 %

Another significant decision that BoB took last week would be the reduction of the primary reserve rate from 5.00 percent to 2.50 percent to inject an additional P1.6 billion excess liquidity in to the market, and an adjustment of the Pula crawl further downwards to 2.87 percent.

But FNBB is not that satisfied by those adjustments. The bank’s researchers said while the fundamentals provide an impetus for further rate cuts, they note that those cuts would have little to no impact on the pula outlook. This is because, according to Sebabole and Basele, as the currency regime is a pegged currency with a crawl and thus does not react in a similar way to freely floating currencies.

“The pula is pegged 45 percent to the rand and 55 percent to the IMF SDR and BoB recently indicated that the crawl has been adjusted further to a downward crawl of 2.78 percent p.a. effective May 2020 from a downward crawl of 1.51 percent p.a. which was announced in January 2020.

In our view, this adjustment to the crawl makes little difference to the pula outlook nor does it affect our view on the bank rate – the pula will be 3.17 percent weaker at the end of 2020 (from 1.81 percent weaker, which we estimated at the crawl adjustment in January) than it would have otherwise been –a difference that can be seen in a single day’s trading for volatile and free-floating currencies in the pula peg like the rand,” said the two experts.

The two however acknowledged that the crawl adjustment pushes up our fair-value estimates on yields by around 1.36 percent across the curve and could result in slight increase to inflation. They said that the pula will remain mostly a function of the rand and the US dollar, therefore the pula outlook will not be a main consideration in the decision to cut rates.

“The rand’s weight in the basket has been reducing in the past years – however, it remains the dominant determinant of the pula outlook. This is because the rand accounts for around 80 percent of USD/BWP volatility – evident even in the almost perfectly correlated USD/BWP and USD/ZAR, which shows the extent of the influence of the rand on the pula,” FNBB researchers said.

Business

Inflation will bounce back to objective range in 2022- BoB

25th October 2021
Moses Pelaelo

The Monetary Policy Committee (MPC) of the Bank of Botswana decided to maintain the Bank Rate at 3.75 percent at a meeting held on October 21, 2021.  Briefing members of the media moments after the meeting Bank of Botswana Governor Moses Pelaelo explained that Inflation decreased from 8.8 percent in August to 8.4 percent in September 2021, although remaining above the upper bound of the Bank’s medium-term objective range of 3 – 6 percent.

He said Inflation is projected to revert to within the objective range in the second quarter of 2022, mainly on account of the dissipating impact of the recent upward adjustment in value added tax (VAT) and administered prices from the inflation calculation; which altogether contributed 5.2 percentage points to the current level of inflation.  Overall, risks to the inflation outlook are assessed to be skewed to the upside.

These risks include the potential increase in international commodity prices beyond current forecasts; persistence of supply and logistical constraints due to lags in production; possible maintenance of travel restrictions and lockdowns due to the COVID-19 pandemic; domestic risk factors relating to regular annual price adjustments; as well as second-round effects of the recent increases in administered prices and inflation expectations that could lead to generalised higher price adjustments.

Furthermore, aggressive action by governments (for example, the Economic Recovery and Transformation Plan (ERTP)) and major central banks to bolster aggregate demand, as well as the successful rollout of the COVID-19 vaccination programmes, could add pressure to inflation.  These risks are, however, moderated by the possibility of weak domestic and global economic activity, with a likely further dampening effect on productivity due to periodic lockdowns and other forms of restrictions in response to the emergence of new COVID-19 variants.

A slow rollout of vaccines, resulting in the continuance of weak economic activity and the possible decline in international commodity prices could also result in lower inflation, as would capacity constraints in implementing the ERTP initiatives. Real Gross Domestic Product (GDP) for Botswana grew by 4.9 percent in the twelve months to June 2021, compared to a contraction of 5.1 percent in the corresponding period in 2020.

The increase in output is attributable to the expansion in production of both the mining and non-mining sectors, resulting from an improved performance of the economy from a low base in the corresponding period in the previous year. Mining output increased by 3 percent in the year to June 2021, because of a 3.2 percent increase in diamond mining output, compared to a contraction of 19.3 percent in 2020. Similarly, non-mining GDP grew by 5.4 percent in the twelve-month period ending June 2021, compared to a decrease of 0.7 percent in the corresponding period in 2020.

The increase in non-mining GDP was mainly due to expansion in output for construction, diamond traders, transport and storage, wholesale and retail and real estate.  Projections by the Ministry of Finance and Economic Development and the International Monetary Fund (IMF) suggest a rebound in economic growth for Botswana in 2021. The Ministry projects a growth rate of 9.7 percent in 2021, moderating to a growth of 4.3 percent in 2022.  On the other hand, the IMF forecasts the domestic economy to grow by 9.2 percent in 2021; and this is expected to moderate to a growth of 4.7 percent in 2022. The growth outcome will partly depend on success of the vaccine rollout.

According to the October 2021 World Economic Outlook (WEO), global output growth is forecast at 5.9 percent in 2021, 0.1 percentage point lower than in the July 2021 WEO update.  The downward revision reflects downgrades for advanced economies mainly due to supply disruptions, while the growth forecast for low-income countries was lowered as the slow rollout of COVID-19 vaccines weigh down on economic recovery.  Meanwhile, global output growth is anticipated to moderate to 4.9 percent in 2022, as some economies return to their pre-COVID-19 growth levels.

The South African Reserve Bank, for its part, projects that the South African GDP will grow by 5.3 percent in 2021, and slow to 1.7 percent in 2022.  The MPC notes that the short-term adverse developments in the domestic economy occur against a growth-enhancing environment.  These include accommodative monetary conditions, improvements in water and electricity supply, reforms to further improve the business environment and government interventions against COVID-19, including the vaccination rollout programme.

In addition, the successful implementation of ERTP should anchor the growth of exports and preservation of a sufficient buffer of foreign exchange reserves, which have recently fallen to an estimate of P47.9 billion (9.8 months of import cover) in September 2021.  Overall, it is projected that the economy will operate below full capacity in the short to medium term and, therefore, not creating any demand-driven inflationary pressures, going forward.

The projected increase in inflation in the short term is primarily due to transitory supply-side factors that, except for second-round effects and entrenched expectations (for example, through price adjustments by businesses, contractors, property owners and wage negotiations), do not normally attract monetary policy response. In this context, the MPC decided to continue with the accommodative monetary policy stance and maintain the Bank Rate at 3.75 percent.  Governor Moses Pelaelo noted that the Bank stands ready to respond appropriately as conditions warrant.

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SEZA to boost investment through Mayors forum

25th October 2021
SEZA-CEO-Lonely-Mogara

The Special Economic Zones Authority (SEZA) recently launched the Mayor’s forum. The Authority will engage with local governments to improve ease of doing business, boost investment, and fast track the development of Botswana’s Special Economic Zones (SEZs).

The Mayors Forum was established to recognise the vital role that local authorities play in infrastructure development; as they approve applications for planning, building and occupation permits. Local authorities also grant approvals for industrial licenses for manufacturing companies.
SEZA Chief Executive Officer (CEO) Lonely Mogara explained that the Mayor’s Forum was conceptualised after the Authority identified local authorities as critical partners in achieving its mandate and improving the ease of doing business. SEZA intends to develop legal instructions for different Ministries to align relevant laws with the SEZ Act, which will enable the operationalisation of the SEZ incentives.

“Engaging with local government will bring about the much-needed transformation as our SEZs are located in municipalities. For us, a good working relationship with local authorities is the special ingredient required for the efficient facilitation of SEZ investors, which will lead to their competitiveness and ultimate growth,” Mogara stated.

The Mayors Forum will focus on the referral of investors for establishment in different localities, efficient facilitation of investors, infrastructure and property development, and joint monitoring and evaluation of the SEZ programme at the local level. SEZA believes that collaborating with local authorities will bring about much-needed transformation in the areas where SEZs are located and ultimately within the national economy. Against this background, the concept of hosting a Mayors Forum was birthed to identify and provide solutions to possible barriers inhibiting ease of doing business.

One of the key outcomes of the Mayors Forum is the free flow of information between SEZA and local authorities. Further, the two will work together to change the business environment and achieve efficiency and competitiveness within the SEZs. Francistown Mayor Godisang Rasesigo was elected as the founding Chairman of the Mayors Forum. The forum will also include the executive leadership of all city, town and district councils, among them Mayors, City or Council Chairpersons, Town Clerks and District Commissioners.

Mogara explained that initial efforts would engage the local government in areas that host SEZA’s eight SEZs: Gaborone, Lobatse, Selebi Phikwe, Palapye, Francistown, Pandamatenga and Tuli Block. Meanwhile, Mogara told WeekendPost that they are confident that a modest 150 000 jobs could be unleashed in the next two to five years through a partnership with other government entities. He is adamant that the jobs will come from all the nine designated economic zones.

This publication gathers that the Authority is currently sitting on about P30 billion worth of investment. The investment, it is suggested, could be said to be locked up in government bureaucracy, awaiting the proper signatures for projects to take off. Mogara informed this publication that the Authority onboard investors who are bringing P200 million and above. He pointed out that more are injecting P1 billion investments compared to the lower stratum of their drive.

SEZA’s mandate hinges on the nine Special Economic Zones – being Gaborone (SSKIA), whose focus is of Mixed-use (Diamond Beneficiation, Aviation); Gaborone (Fairgrounds) for Financial services, professional services and corporate HQ village; Lobatse for Beef, leather & biogas park; Pandamatenga designated for Agriculture (cereal production); Selibe Phikwe area which is also of a Mixed-Use (Base metal beneficiation & value addition), Tuli Block Integrated coal value addition, dry port logistics centre, coal power generation and export; Francistown is set aside for International Multimodal logistics hub/ Mixed Use (Mining, logistics and downstream value-adding hub); whilst Palapye is for Horticulture.

The knowledge economy buzz speaks to SEZA’s agenda, according to Mogara. The CEO is determined to ensure that SEZA gets the buy-in from the government, parastatals and the private sector to deliver Botswana to a high economic status. “This will ensure more jobs, less poverty, more investment, and indeed wealth for Batswana,” quipped the enthusiastic Mogara. SEZA was established through the SEZ Act of 2015 and mandated with establishing, developing and managing the country’s SEZs. The Authority was tasked with creating a conducive domestic and foreign direct investment, diversifying the economy and increasing exports to facilitate employment creation.

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De Beers Q3 production up 28 %

25th October 2021
De-Beers

De Beers rough diamond production for the third quarter of 2021 increased by 28% to 9.2 million carats, reflecting planned higher Production to meet more robust demand for rough diamonds. In Botswana, Production increased by 33% to 6.4 million carats, primarily driven by the planned treatment of higher-grade ore at Jwaneng, partly offset by lower Production at Orapa due to the scheduled closure of Plant 1.

Namibia’s Production increased by 65% to 0.4 million carats, reflecting the marine fleet’s suspension during Q3 2020 as part of the response to lower demand at that time. South Africa production increased by 34% to 1.6 million carats due to the planned treatment of higher grade ore from the final cut of the Venetia open pit and an improvement in plant performance. Production in Canada decreased by 13% to 0.8 million carats due to lower grade ore being processed.

Demand for rough diamonds continued to be robust, with positive midstream sentiment reflecting strong demand for polished diamond jewellery, particularly in the key markets of the US and China. Rough diamond sales totalled 7.8 million carats (7.0 million carats on a consolidated basis) from two Sights, compared with 6.6 million carats (6.5 million carats on a consolidated basis) from three Sights in Q3 2020 and 7.3 million carats (6.5 million carats on consolidated basis) from two Sights in Q2 2021.

De Beers tightened Production guidance to 32 million carats (previously 32-33 million carats) due to continuing operational challenges, subject to the extent of any further Covid-19 related disruptions. Commenting on the production figures, Mark Cutifani, Chief Executive of De Beers parent company Anglo American, said: “Production is up 2%(1) compared to Q3 of last year, with our operating levels generally maintained at approximately 95%(2) of normal capacity.

The increase in Production is led by planned higher rough diamond production at De Beers, increased output from our Minas-Rio iron ore operation in Brazil, reflecting the planned pipeline maintenance in Q3 2020, and improved plant performance at our Kumba iron ore operations in South Africa. “We are broadly on track to deliver our full-year production guidance across all products while taking the opportunity to tighten up the guidance for diamonds, copper, and iron ore within our current range as we approach the end of the year.

“Our copper operations in Chile continue to work hard on mitigating the risk of water availability due to the challenges presented by the longest drought on record for the region, including sourcing water that is not suitable for use elsewhere and further increasing water recycling.”
On Wednesday, De Beers announced the value of rough diamond sales (Global Sightholder Sales and Auctions) for the eighth sales cycle of 2021. The company raked in US$ 490 million for the cycle, a slight improvement when compared to US$467 million recorded in 2020 cycle 8.

Owing to the restrictions on the movement of people and products in various jurisdictions around the globe, De Beers Group has continued to implement a more flexible approach to rough diamond sales during the eighth sales cycle of 2021, with the Sight event extended beyond its normal week-long duration.   As a result, the provisional rough diamond sales figure quoted for Cycle 8 represents the expected sales value from 4 October to 19 October. It remains subject to adjustment based on final completed sales.

Commenting on the cycle 8 sales De Beers Group Chief Executive Officer Bruce Cleaver said that: “As the diamond sector prepares for the key holiday season and US consumer demand for diamond jewellery continues to perform strongly, we saw further robust demand for rough diamonds in the eighth sales cycle of the year ahead of the Diwali holiday when demand for rough diamonds is likely to be affected by the closure of polishing factories in India.”

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