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The first rate cut should have been the deepest – economists

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.

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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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Business

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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