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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.

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P230 million Phikwe revival project kicks off

19th October 2020
industrial hub

Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status.  The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.

This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago.  In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.

However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced.  Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.

The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.

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IMF projects deeper recession for 2020, slow recovery for 2021

19th October 2020

The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.

On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April.  For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.

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Botswana partly closed economy a further blow of 4.2 fall in revenue

19th October 2020

The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.

Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.

Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).

“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.

Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.

This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.

For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.

Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers.  “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.

‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’

According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.

Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.

“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.

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