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BoB inflation forecast deemed myopic

BoB Governor: Moses Pelaelo

A research paper released on Monday has exposed Bank of Botswana(BoB)’s inflation forecast model as not having far reaching predictions and its accuracy only relevant for a short time.

The research titled “Evaluation of the Performance of the Bank of Botswana’s Inflation Forecasting Model” was conducted by central bank’s Research & Financial Stability Department
It was authored by Deputy Director, Innocent Molalapata and economists Lesego Molefhe, Lizzy Sediakgotla and Daniel Balondi.

According to the quartet, to support its forward-looking monetary policy framework, BoB produces inflation forecasts using a quarterly projection model, known as the “Core-Model.” The inflation forecast provides guidance on the appropriate monetary policy interventions necessary to achieve and maintain the Bank’s primary objective of price stability, they wrote.

The economists further said it is critical to have a model that produces inflation forecasts that do not deviate significantly from the actual data, without justifiable accounting, as it can misinform policymaking.

“According to the results, on average, the Bank’s Model has a good forecasting accuracy in the short term, however the model has a low predictive power of medium-term inflation movements, reflecting higher uncertainty associated with economic events in the distant future. Regarding prediction bias, the Model tends to under-predict inflation, which is a result of changing economic conditions domestically and externally,” said the quartet.

The four brains merged to produce a paper titled “Evaluation of the Performance of the Bank of Botswana’s Inflation Forecasting Model” which sought to evaluate the performance of the central bank’s inflation forecasting model over a 10-year period, from December 2008, a period of the Great Recession, to December 2018.

While they were putting the central bank policy practice under the knife, the objectives of the study are to assess the Model’s forecast bias by employing the Mean Forecast Error and determination of the size of the forecast error using the Mean Absolute Forecast Error (MAFE).

The researchers explained that BoB uses a forward-looking monetary policy framework that is guided by a forecasting and policy analysis system (FPAS). According to them, the FPAS is the Bank’s main policy analysis and forecasting framework while the Core-Model, which forms part of the FPAS, is used to produce medium-term forecasts for macroeconomic variables, such as inflation and the output gap.

“The CoreModel is based on Botswana’s monetary policy transmission mechanism. It captures the essential macroeconomic relationships, primarily the impact of monetary policy on output and inflation. The model provides a comprehensive view on future economic developments and possible policy actions necessary to achieve the Bank’s inflation objective.

It also explores possible alternative scenarios to the baseline forecast. Given the Bank’s forward looking monetary policy framework, forecasts from the Core-Model are used as input into deliberations of monetary policy formulation and direction by the Monetary Policy Committee (MPC),” further explained the economists.

Going sharp in their analysis knife, the economists said the Core-Model is calibrated in accordance with the behaviour of key relationships in the monetary policy transmission process, therefore the model output is expected to be a close match to actual data, assuming an adequately functioning transmission mechanism, ceteris paribus.

However, according to the four experts, it is not easy to have a model that is able to produce forecasts that accurately fit actual or realised data due to, among others, future unanticipated changes in the structure of the economy; model misspecification; historical data measurement errors; inaccurate parameter estimation or calibration; volatility in the analysed variables; inappropriate policy design and decision; as well as domestic and external shocks in the economy.

As the quartet’s thesis was reminiscent of the monetary policy practice dating back to the Great Recession, they said some of the shocks are generated by financial imbalances, as was evident during the 2008/9 global financial crisis, as well as lack of congruence of monetary, financial stability and fiscal policies towards achieving macroeconomic stability.

“Meanwhile, a model that produces an inflation forecast path that deviates significantly from the actual data, without justifiable accounting, is not desirable as it can misinform policy making. In practice, it is essential for forecasts to be approximate to observe values as that provides reliable information that can be useful in guiding policy formulation and implementation.

In this context, it is important to assess the forecasting ability of the Core-Model regularly in order to identify and attend to discrepancies, if any, and where necessary, enhance its forecasting ability,” said the four researchers.

When delving into the ‘Forecast Errors for Headline Inflation’ the four brains said statistically, on average, with the exception of the first two periods, BoB has consistently under predicted both short-term and medium-term headline inflation for the period December 2008 to December 2018.

The economists further elaborated that the bias is more pronounced in the medium-term forecasts, precisely from the 5th quarter to the 8th quarter. Under-prediction of short-term inflation (for four quarters) is, however, relatively small at around 0.05 percentage points on average, while medium term inflation forecasts have on average been 0.69 percentage points lower than actual inflation, they said.

Last week, after maintaining the Bank Rate at 3.75 percent, BoB changed its inflation forecast of October which projected inflation to revert back to the objective range in the third quarter of 2021. The fresh inflation forecast which was done last week during an MPC meeting is that inflation will revert to the objective range of 3-6 percent sooner, in the second quarter of next year.

According to Head of Research & Financial Stability Department, Tshokologo Kganetsano, the quick reversion of inflation is due to the increase in transport fares, adjustment in fuel prices and postal office tariffs. However RMB Botswana researchers who use a model different than that of BoB, said the effect of Kganetsano’s stated price movements is unlikely to see inflation average beyond 3 percent in 2021. They expect price growth to register an average of 1.9 percent in 2020 and 2.5 percent in 2021.

The demand side is expected to act as a drag on inflation in 2021 as the bulk of Botswana’s work force will be faced with unemployment challenges as businesses continue to reel from the effects of the pandemic, said the researchers. The RMB Botswana researchers said they expect the effect of upside pressures on the headline figure to remain limited, coupled with an uncertain economic outlook as a result of the disruption caused by covid-19.

RMB Botswana explained that the model they use is a “bottom-up approach” which is based on the baskets and data from Statistics Botswana. “We track each basket and stress it according to any recent or upcoming developments-so in the case of transport, we observe international prices and the likelihood of BERA will adjust local prices. If the likelihood is high enough, then we factor into the model.

Basically we do this for all the baskets and since they are weighing according to what Stats Bots provides, we are then able to provide an annual forecast. This is then done according to different scenarios-in the case some of our expectations don’t happen or we have surprise announcements. As the year goes along, we keep amending to incorporate any changes. For longer term forecasts, beyond two years, we use a regression and make adjustments to the outcome based on our research houses expectations as well as regional outlooks,” explained a researcher at RMB Botswana after their inflation forecast.

The other side of the coin

The four researchers who studied Botswana’s Performance of BoB’s inflation forecasting model have reached to a conclusion that, according to the results from a rolling four-year sample of forecast errors using MAFE, the forecasting performance of the model used by BoB has improved with time.

According to the research quartet, the innovations in the model structure, constant engagements between the Modelling Team and Monetary Policy Technical Committee members and Sector Specialists, as well as capacity building programmes on modelling and forecasting which the Bank continues to invest heavily in.

In the conclusion paragraph, the four economists said BoB’s forecasting framework has a high level of precision, particularly in the short term. However precision of the inflation forecasts in the medium term is limited by increased uncertainty associated with the longer horizon, they further stated in the report.

The researchers said BoB is not addressing the issue of the forecasts being less far reaching, but this is partly addressed by updates of forecasts for successive MPC meetings and Monetary Policy Reports (MPRs). They said continual efforts are being made to improve the inflation forecast performance in both the short- and medium-term.

“As part of ongoing improvements to the forecasting ability, since the last half of 2017, an assumption on the rate of crawl for the ensuing year is made, compared to the earlier approach in which the rate of crawl was assumed to be constant,” said the researchers.

The four researcher further advised that going forward it is crucial for BoB to continue to invest in capacity improvements to facilitate updating of the model (and its calibration) to reflect the evolving structure of the economy through infusion of relevant methods and skills inputs.

Another advice was in recognition of the influence of administered prices on inflation, the four saying it is important for BoB to broaden relations with all stakeholders in order to be informed of impending changes in administrative prices, to inform both forecasts and policy posture.

“Engagement of the MPC by the forecasting team in the formulation of initial conditions, external assumptions and alternative scenarios must be strengthened further and should include a discussion of the policy rate.

Finally, where possible, BoB should strive to address impediments to monetary policy transmission, particularly the credit channel, to enhance the effectiveness of the transmission of monetary policy. High precision and reliable forecasts are important for the transparency and predictability of monetary policy, which enhances policy credibility,” said the researchers.

Business

Slight growth in GDP as economy battles return

28th July 2021
Peggy-Serame

Botswana’s economy showed slight growth signs in the first quarter of 2021, following a devastating year in 2020.

During 2020, the entire second quarter was on zero economic activity as the country went on total lockdown in an effort to curb the spread of the virus.

Diamond trade plummeted to record low levels as global travel restrictions halted movement of both goods and people and muted trade.

The end result was a significant decline for the local economy, at an estimated 7 percent contraction, just marginally below the 2008/09 global financial crises.

According to figures released by Statics Botswana this week, the country’s nominal Gross Domestic Product for the first quarter of 2021 was P47.739 billion compared to a revised P45.630 billion registered during the previous quarter.

This represents a quarterly increase of 4.6 percent in nominal terms between the two periods.

During the quarter, Public Administration and Defence became the major contributor to GDP by 18.4 percent, followed by Wholesale & Retail by 11.4 percent. The contribution of other sectors was below 6.0 percent, with Water and Electricity Supply being the lowest at 1.6 percent.

Real GDP for the first quarter of 2021 increased by 0.7 percent compared to a contraction of 4.6 percent registered in the previous quarter.

The improvement in the first quarter 2021 GDP reflected continued efforts to reopen businesses and resume activities that were postponed or restricted due to the COVID-19 pandemic.

The real GDP increased by 0.7 percent during the period under review, compared to an increase of 1.2 percent in the same quarter of 2020.

The recovery in the domestic economy was observed across majority of industries except Accommodation & Food Services, Mining & Quarrying, Manufacturing, Construction, Other Services and Agriculture, Forestry & Fishing.

The overall slow performance of the economy was mainly due to the impact of measures that were put in place to combat the spread of the COVID-19 pandemic.

The Non-mining GDP increased by 4.1 percent in the first quarter of 2021 compared to 4.0 percent increase registered in the same quarter of the previous year.

Agriculture, Forestry and Fishing industry decreased by 2.0 percent in real value added during the first quarter of 2021, relative to a contraction of 5.2 percent registered during the same quarter of 2020.

The main driver of the unfavorable performance stems from a decrease in real value added of Livestock farming by 3.0 percent.

Mining and Quarrying registered a decrease 11.4 percent in the real value added, this was mainly influenced by the drop in the Gold and Diamond real value added by 17.5 and 12.5 percent respectively.

Diamond production in carats went down by 12.1 percent while the tonnage of Gold produced went down by 17.5 percent.

The poor performance of the diamond sub-industry is attributed to the reduction in production due to a lower grade feed to the plant at Orapa in response to heavy rainfall and operational issues, including continued power supply disruptions.

With regard to Gold is due to diminishing resource base which affect production.

The Manufacturing industry recorded a decline of 7.4 percent in real value added during the first quarter of 2021, compared to a decrease of 2.3 percent registered in the corresponding quarter of 2020.

The deep low performance in the industry is observed in the two major sub-industries of Beverages & tobacco and Diamond cutting, polishing and setting by 57.0 and 38.5 percent respectively.

The reduction in Beverages is attributed to alcohol sale ban imposed during the quarter under review in order to reduce the spread of the COVID-19 virus. On the other hand, exports of polished diamonds went down by 24.9 percent compared to a decrease of 11.5 percent registered in the same quarter of the previous year.

The construction industry recorded a decline of 4.8 percent compared to an increase of 4.3 percent realized in the corresponding quarter in 2020.

This industry comprises of buildings construction, civil engineering and specialized construction activities. The industry is still showing signs of the consequences of COVID-19 pandemic. The industry recorded a negative growth of 7.4 percent in the previous quarter.

Water and Electricity Water and Electricity value added at constant 2016 prices for the first quarter of 2021 was P506.2 million compared to P378.2 million registered in the same quarter of 2020, recording a growth of 33.8 percent.

In the first quarter of 2021, Electricity recorded a significant growth of 62.4 percent compared to a decrease of 67.6 percent recorded in the corresponding quarter of 2020.

The local electricity production increased by 22.4 percent while Electricity imports decreased by 33.3 percent during quarter under review. The water industry recorded a value added of P231.3 million compared to P209.0 million registered in the same quarter of the previous year, registering an increase of 10.7 percent.

Wholesale and Retail Trade real value added increased by 11.4 percent in the first quarter of 2021 compared to an increase of 5.5 percent registered in the same quarter of the previous year. The industry deals with sales of fast moving consumer goods.

Diamond Traders recorded a significant growth of 112.7 percent as opposed to a decline of 22.7 percent recorded in the corresponding quarter last year. The positive growth is due to improved demand of diamonds from the global market.

The Transport and Storage value added increased by 0.6 percent in the first quarter of 2021, compared to a 2.4 percent increase recorded in the same quarter of the previous year.

The slight improved performance of the industry was mainly attributed to the increase in real value added of Road Transport and Post & Courier Services by 4.3 and 2.1 percent respectively.

The slow growth was influenced by a significant reduction in Air Transport services of 69.7 percent due to reduced number of passengers carried. Rail goods traffic in tonnes went down by 6.4 percent and passenger rail transport was not operating during the quarter under review.

Accommodation and Food Services Accommodation and Food Services real value added declined by 31.7 percent in the first quarter of 2021 compared to a decrease of 4.4 percent registered in the same quarter of the previous year. The reduction is largely attributed to a decrease of 42.1 percent in real value added of the Accommodation activities subindustry.

The suspension of air travel occasioned by Covid-19 containment measures impacted on the number of tourists entering the borders of the country and hence affecting the output of Hotels and Restaurants industry. COVID-19 restriction measures resulted in reduced demand for leisure and conferencing activities, as conferences are largely held through virtual platforms.

Finance, Insurance and Pension Funding industry registered a positive growth of 8.3 percent due to the favorable performance from monetary intermediation and Central Banking Services by 16.4 and 5.4 percent respectively during quarter under review.

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Business

Chobe Holdings secures P16 million for dark days

28th July 2021
Chobe Holdings

It is still tough in the tourism industry — big players in this sleeping giant are not having it easy, but options are being explored to keep the once vibrant multibillion Pula sector alive until the world gets back to normalcy.

One of the primary measures against the spread of Covid-19 is to stay home; this widely pronounced precaution against the global contagion that has claimed over 4 million lives across the world is however a thorn in the flesh of one of the major industries in the global economy — the tourism sector .

This sector is underpinned by travel – an act which is the virus‘ number one mode of spread, especially across borders.

Chobe Holdings Limited, one of Botswana’s leading high end eco-tourism giants said its survival strategies are underpinned by well-crafted stakeholder engagements in the mist of these unprecedented times of muted trading activity.

“Throughout the COVID-19 pandemic, Chobe continued to invest in and strengthen its relationships with key stakeholders in both its traditional markets and the SADC region,” the company directors updated shareholders this week.

To keep the business afloat, the company which owns and operates some of the exquisite tourism destinations along the banks of the mighty Chobe said it has triggered its existing available debt financing avenues.

Chobe revealed that its current overdraft of BWP 25 million has been extended on favourable terms.

The company shared that it has negotiated a further USD 1.5 million (over P16 million) standby loan with a flexible settlement terms and preferable cost implications to the bottom line.

“We are confident that the Group has sufficient cash inflows, cash reserves and un-utilized prearranged borrowing in place to settle any liabilities falling due and support the smooth recovery of operations in the short and medium term,” the company directors said, noting that they will retain the flexibility to vary operations should market conditions change.

Early this year, Chobe announced that the ongoing crisis in the tourism industry forced the company to draw from its prearranged overdraft facility of P25 million to the extent of P11.6 million.

Last year Chobe’s occupancy levels around its lodges and hotels went down 89 percent. This resulted in unprecedented revenue decline of 93% to P27.78 million from the P373.94 million in the previous year ended February 2020.

Operating profits went down 159% with profit after tax down 170%, mirroring a loss of over P67 million.

Chobe management said during the last half of the financial year they have done all they could to contain costs across the company’s operations.

During the last half of the year Chobe’s marketing and reservations teams continued to pursue the “don’t cancel but defer policy”.

“We thus continue to hold advance travel receipts, to the value of about P34 million at the financial year end,” the company revealed early this year.

Chobe said it continues to engage Government, through HATAB and BTO to prioritize the vaccination of workers in the tourism sector.

“Throughout the pandemic we have ensured that employees are trained in and comply with COVID-19 infection mitigation protocols as well as ensuring that all visitors to our remote camps and lodges as well as our staff and contractors are tested for COVID-19 before reaching the camp or lodges,” the company said.

However, the company said vaccinating the tourism staff will provide the best way to ensure that both employees and guests are protected from the virus.

“We continue to manage our cashflow through stringent cost control measures, balanced against the protection of the Group’s physical assets and the wellbeing and retention of its people,” the company said.

Chobe has successfully retained its top management through the pandemic.  To this end the company directors continue to closely monitor the Group’s recovery from COVID-19 and adjust salary reductions to support operations and aid retention.

Domestic and regional travel resumed during the second quarter of the 2020/21 financial year with the Group opening a strategic mix of camps and lodges.

A comprehensive domestic, regional and international marketing plan was put in place to support these openings.

International travel resumed in the first quarter of the 2021/22 financial year with occupancies forecast to steadily increase, albeit from a low base, through the second quarter.

The company is optimistic that forward bookings are strong for the 2022/23 financial year.

“There is pent-up demand from our traditional source markets to travel now, but this is tempered by uncertainty and access constraints,” the company stated.

“Both the domestic and international markets are sensitive to such uncertainty, and it is critical that both the private and public sector work together to develop and publish clear, authoritative and consistent travel information in order to build confidence”

Chobe entered the pandemic with the Shinde camp rebuild in progress — one of its high end camps and this was completed in the first half of the 2020/21 financial year accounting for the majority of the Group’s capital expenditure for that period.

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Business

De Beers Q2 production jumps in response to strong rough diamond demand

28th July 2021
De-Beers -jwaneng-mine

De Beers Group, the world’s leading rough diamonds producer by value and Botswana’s partner in the diamond business, ramped up its production in the second quarter of 2021, in response to stronger demand for rough diamonds in the global markets.

The London headquartered diamond mining giant revealed in its production report this week that rough diamonds output  increased by 134% to 8.2 million carats in the three(3) months  of quarter 2 2021, “reflecting planned higher production to meet stronger demand for rough diamonds”.

This was against the backdrop of curtailed demand in the same quarter last year, mirroring the impact of Covid-19 lockdowns across southern Africa during that period.

In Botswana, where De Beers sources majority of its rough diamonds through partly government owned Debswana, production increased by 214% to 5.7 million carats. The percentage jump mirrored planned low production in the second quarter of 2020 where output was adjusted to market demands and implemented Covid-19 protocols.

Debswana operates four (4) Mines: Jwaneng Mine- being its flagship producer and largest revenue contributor. Jwaneng Mine which is the wealthiest diamond mine in the world by value is envisaged for multi-billion expansion to an underground operation in future to stretch its existence by few more decades.

The underground project which is anticipated to cost a whooping P65 billion will be the world‘s largest underground diamond mine.

The company which accounts for over 65 % of De Beers’s global production also operates Orapa Mine- one of the world’s largest by area, Letlhakane Mine currently a tailings treatment operation and Damtshaa Mine which is under care and maintenance following market shrink in 2020.

Namibia production decreased by 6% to 0.3 million carats, primarily due to planned maintenance of the Mafuta vessel which was completed in the quarter and another vessel remaining demobilized.  In Namibia De Beers sources diamonds both in land and marine through Namdeb and Debmarine respectfully.

In South Africa-the spiritual home ground of De Beers Group, production increased by 130% to 1.3 million carats, due to planned treatment of higher grade ore from the final cut of the Venetia open pit, as well as the impact of the Covid-19 lockdown in Q2 2020.

Production in Canada increased by 14% to 0.9 million carats, primarily reflecting the impact of the Covid-19 measures implemented in Q2 2020.

De Beers said consumer demand for polished diamonds continued to recover, leading to strong demand for rough diamonds from midstream cutting and polishing centers, despite the impact on capacity from the severe Covid-19 wave in India during April and May.

Rough diamond sales totaled 7.3 million carats (6.5 million carats on a consolidated basis), from two Sights, reflecting the impact of the reduced Indian midstream capacity on Sight 4, compared with 0.3 million carats (0.2 million carats on a consolidated basis) from two Sights in Q2 2020, and 13.5 million carats (12.7 million carats on a consolidated basis) from three Sights in Q1 2021.

The H1 2021 consolidated average realized price increased by 13% to $135/ct (H1 2020: $119/ct), driven by an increased proportion of higher value rough diamonds sold.

While the average price index remained broadly flat, the closing index increased by 14% compared to the start of 2021, reflecting tightness in inventories across the diamond value chain as well as positive consumer demand for polished diamonds.

Full Year Guidance Production guidance is tightened to 32–33 million carats (previously 32-34 million carats (100% bases)), subject to trading conditions and the extent of any further Covid-19 related disruptions.

When commenting to 2021 quarter 2 production figures, Mark Cutifani, Chief Executive of Anglo American- De Beers parent, said the entire Anglo American Group delivered a solid operational performance supported by comprehensive Covid-19 measures to help safeguard the lives and livelihoods of its workforce and host communities.

“We have generally maintained operating levels at approximately 95% of normal capacity and, as a consequence, production increased by 20% compared to Q2 of last year, with planned higher rough diamond production at De Beers” he said.

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