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BoB not rocking monetary policy boat


Bank of Botswana (BoB) Governor Moses Pelaelo said there is still a scope for shedding of the Bank Rate or tightening of it. He said this on Thursday after the central bank decided to maintain the Bank Rate from last month’s 4.25 percent, elaborating a continuance with “an accommodative monetary policy stance.”

This is against the expectations of many monetary economists and commercial banks who are of the view that the previous Monetary Policy Committee (MPC) cut was marginal. According to its Botswana MPC review, First National Bank or Rand Merchant Bank researchers anticipate accumulative 75bp cut in the Bank Rate in 2H20, which would take the rate to a historical low of 3.5 percent.

The recent decision of the MPC made on Thursday kick started 2H20. The remaining MPC meetings for 2020 are scheduled as follows: August 20, 2020, October 8, 2020 and December 3, 2020, meaning for the last half of this year there are only three decisions left for the BoB Committee.

Before BoB cut the Bank Rate by 50 basis points (bps), from 4.75 percent to 4.25 percent in April, First National Bank chief economist Moatlhodi Sebabole, who is part of the Rand Merchant Bank team that had made an accurate prediction in an interview with BusinessPost that for April, and the cut would be 50 bps. He further told this publication that he expects the next cut after April to be by at least 25 bps.

As indicated in a previous interview with this publication, Sebabole expected the Bank Rate to be at 4.00 percent in this second half of 2020. But the MPC on Thursday through virtual communication announced that they will maintain the Rate at 4.25 percent.

“While we anticipated rates to go down by between 25bp and 50bp at today’s meeting, the Bank of Botswana’s (BoB) MPC decided to leave rates unchanged at 4.25 percent today (Thursday). BoB reiterated that with the advent of Covid-19, domestic inflation will be restrained due to slow growth in personal incomes as well as low foreign inflation which provides scope for rates to remain accommodative.

The economy will also undergo significant growth pressures due to the anticipated recession and the impact of the pandemic on economic activity,” said Rand Merchant Bank on Thursday afternoon just after the MPC decision.

When doing research, just after the April MPC 50 bps cut, the commercial bank researchers went deep and even expected a 100 bps. They envisaged that a cut to 3.75 percent was much needed going deeper from their initial projected 4.00 percent before April.

However, the Bank this week held a different view, further saying: “The MPC, however, recognized that the short-term adverse developments in the domestic economy occur against a potentially supportive environment including accommodative monetary conditions; improvements in the provision of utilities; reforms to further improve the business environment; concerted efforts by government to mitigate the impact of COVID-19; and a prospective economic recovery programme. These would generally be positive for economic activity in the medium term.”

But this did not satisfy Rand Merchant Bank experts who explained that unlike in the 2009 economic recession when the economy underwent a current and capital account crisis, the effects of Covid-19 are expected to be broad-based. Covid-19 is expected to impact both the supply-push and demand-pull pressures.

According to the researchers, the limited economic activity posits significant downward pressures to headline inflation, which the commercial bank now estimate at an annual average of 2.20% (2.80% in 2019).

“The significant downward pressures to headline inflation will emanate from lower oil prices expected for the rest of the year as there has already been two reductions to fuel prices in the past three months,” said the researchers.

The commercial bank’s researchers also anticipate limited imported inflation from South Africa (which accounts for over 60 percent of imports) due to moderation of inflation in SA as well as a weaker Rand — which will benefit Pula imports.

“Risks to the upside, though minimal, will be due to increases in administered prices, including the recent tariff hikes on electricity. We reiterate that even with low headline inflation, consumers’ purchasing power remains low due to broad-based unemployment challenges and negative medium term real wage adjustments,” said the researchers.

Pelaelo on the other hand read that inflation eased from 2.5 percent in April to 2.4 percent in May 2020, remaining below the lower bound of the Bank’s objective range of 3 – 6 percent. He further said inflation is forecast to revert within the objective range in the third quarter of 2021, which is a significant downward revision from the April 2020 forecast.

The BoB Governor explained to the media that the downward revision from the April forecast should be credited to the decrease in fuel prices. He said this also saw a decrease in food prices, hence the downward revision.

Rand Merchant Bank experts’ outlook which supported deeper cut of the Bank Rate further said lower inflation and growth support the case for a big shed of the Rate in 2020.

Our GDP growth forecast for Botswana remains at -10.5% y/y in 2020 (4.5% in 2021), with risks to the downside due to the uncertain economic environment, said the researchers.

According to the Rand Merchant Bank researchers, if the current economic situation persists, then growth could dip to -16.1% y/y (bear scenario).

The commercial bank researcher said the Ministry of Finance and Economic Development estimates growth at -13.0% y/y, which is an indication that the economy is anticipated to perform worse than during the global financial crises of 2008/9 where it contracted 7.7% y/y.

“In our view, it will take about two to three years for the economy to regain its 2019 value (in Pula terms), unless an extraordinary stimulus package is put forth, prioritising jobs and productivity. These factors, we believe, provide the BoB with room to cut rates further without altering real interest rate differentials from their historic averages.

We anticipate a cumulative 75bp cut in the Bank Rate in 2H20, which would take the rate to a historical low of 3.5%,” said the Rand Merchant Bank research released end of this week.

The commercial bank researchers said the recessionary growth pattern that they anticipate in 2020, coupled with 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.

“We maintain our view that the Bank Rate will trend lower to 3.50% in 2020 – thus the timing for the cut remains a waiting game,” they said.


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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