Challenging times as GROWTH IS EXPECTED TO SLOW DOWN IN 2023
The third quarter of 2023 has been characterised by a worsening of global economic conditions, with global growth forecasts revised downwards by the IMF, rising fuel prices, and the expectation that interest rates will remain “high for longer”. This has impacted on the global diamond market, which has experienced a persistent weakening of demand through the year. Domestically, annual GDP growth has fallen, but remains in line with expectations. Inflation has risen, also as expected, and is likely to rise further in the coming months, driven mainly by global factors.
Economic Growth
The IMF released its new World Economic Outlook (WEO) in early October, just after the end of the quarter. The IMF predicts a slowdown in global growth to 3.0% in 2023, down from 3.5% in 2022. Growth is projected to fall slightly further, to 2.9%, in 2024. Current and projected global GDP growth rates remain well below historical averages. The IMF notes that three factors are driving the slowdown in growth.
One is the tailing off of the post-COVID economic recovery, particularly following the very strong 2022 recovery in travel and tourism. The second is the consequence of the tighter monetary policy implemented in most countries to bring inflation down, with tightening of credit conditions impacting on aggregate demand. Third, the impact of the commodity price shock following Russia’s invasion of Ukraine persists, notably through higher energy prices, reducing real incomes in energy importing countries and of consumers generally. To what extent have these factors had an impact on Botswana? Certainly economic growth is tailing off, with annual GDP growth down to 5.0% in Q2 2023, with a projected further decline to 3.8% for the year as a whole.
However, the slowdown appears to be having a greater impact on sectors that have a domestic focus (such as agriculture, food manufacturing, wholesale and retail, and other domestic services). The main outward-facing sector that has experienced a severe slowdown is diamond trading (discussed more below). With regard to monetary policy tightening, Botswana is feeling the impact of global developments, but there has been no real domestic impact given that the Bank of Botswana has hardly tightened monetary policy while many other central banks have raised policy rates significantly. But Botswana has felt the impact of higher energy prices, which remain elevated despite some easing earlier in 2023, and there has been a squeeze on real incomes and living standards as a result.
Diamond Market
The major impact of adverse global conditions has been experienced in the diamond market. This has not yet fed through to diamond mining which, perhaps surprisingly, was up 7.1% in the 12 months to June 2023. This may just be “the calm before the storm”, however. Diamond sales through DBGSS are down 31% over the first eight sales cycles of 2023 compared to the same period last year, and Okavango Diamond Company is experiencing similar pressures. It will not be possible to continue expanding mining with sales contracting, as the required stockpiling becomes increasingly expensive. The global diamond market has been buffeted by multiple adverse factors during the year. Restrained consumer demand in the US, notwithstanding some resilience in the US economy, has been one factor, compounded by weak post-COVID recovery in China. Recent demand may have been impacted by a sharp increase in diamond prices in 2022, when demand was strong, but the industry is now paying the price. Synthetic diamonds are taking increasing market share, at much lower prices than natural diamonds. With slowing demand, downstream participants in the diamond value chain (cutters and polishers, traders, jewellery manufacturers and retailers) have all cut back on purchases as their stocks have risen, impacting rough diamond demand. As a result, De Beers have announced that sightholders would be permitted to defer up to 100% of their contracted purchases for the remainder of 2023 while Okavango Diamond Company cancelled its planned November auction.
Inflation and interest rates
After the sharp drop in inflation from its peak of 14.6% in August 2022 to 1.2% a year later, the increase to 3,2% in September was not unexpected. Fuel prices have been the main driver of changes in inflation over the past two years, in part because international oil prices have been so volatile, combined with their very high weight in the Botswana Consumer Price Index (CPI) basket. After the upsurge in oil prices caused by Russia’s invasion of Ukraine, to over US$110 per barrel in June 2022, prices fell to just over $70 a barrel in March this year. The decline enabled pump prices to be reduced, leading to the dramatic fall inflation as the previous year’s increases dropped out of the annual inflation calculation. In recent months, however, the deliberate actions by OPEC+ member states to restrict production and supply have pushed prices back over $90 per barrel, a selfish move seemingly calculated to put further pressure on households across the world who have already been badly impacted by the cost-of living crisis. In Botswana, regulated pump prices – which are determined under a highly politicised adjustment mechanism – have lagged the increase in global prices. For instance, the price increase in late October came about a month after the relevant increases in global prices. Following this increase, we expect inflation to continue to rise through to the end of 2023 and into 2024, when it is likely to temporarily go above the upper end of the BoB’s 3-6% inflation objective range. This means that there is unlikely to be any reduction in the BoB’s monetary policy rate (MoPR) in the near future.
Fiscal Developments
The Ministry of Finance’s draft Budget Strategy Paper (BSP) was released in September, and provided updated information on the outturn of the 2022-23 budget, revisions to the current year (2023-24) budget, and the medium-term fiscal framework out to 2026-27. The fiscal data shows a continuation of recent trends, with an (unplanned) balanced budget for 2022-23; a (planned) deficit budget for 2023-24 and 2024-25, and a (planned) balanced or surplus budget for the outer years of the projections, which would mark the beginning of the NDP 12 period. There is a consistent story in the BSP which relates to the need for fiscal consolidation (discussed further in our special feature). In a parallel with Saint Augustine’s famous prayer (“Lord, make me chaste, but not yet”), fiscal consolidation – in the form of a balanced or surplus budget – is always a year or two away. For instance, the BSP released in September 2022 projected a balanced budget from 2023/24 onwards. However, the September 2023 BSP now indicates a balanced budget two years later, from 2025/26 onwards. This largely reflects the dramatic increase in development spending first proposed in the 2023 Budget for 2023/24 and set to be continued in subsequent years. That relates to planned budgets. Outturns are quite different. In both 2021/22 and 2022/23 large projected deficits did not materialise, and in both years, budgets were broadly balanced, due mainly to significant underspending on the development budget, along with higher-than-expected mineral revenues. Notwithstanding a large (47%) planned increase in development spending in the current fiscal year, it seems quite possible that, as in the last two years, the development budget will be underspent and the budget will end up being broadly balanced – although there may be risks on the revenue side if the diamond market continues to deteriorate. Even though the outcomes are good (balanced budgets), the fact that these are unplanned reflects negatively on the quality of fiscal planning and budgetary control.
Outlook
The rest of 2023 and early 2024 looks likely to be an uncertain and somewhat challenging time for the economy. The main concern is the depressed state of the global diamond market, and the potential impact on economic growth, exports and government revenues – although it is important to note that no negative impact on these important economic indicators has yet been realised. The likelihood that inflation will rise in the coming months means that domestic interest rates are likely to be maintained – at levels that are low by international standards – for the foreseeable future. Projections of adverse climatic conditions in the coming months – with forecasts of higher temperatures and lower rainfall – are likely to have a negative impact on agriculture, water supplies and tourism, and illustrate the longer-term challenges posed by global climate change. Fortunately, Botswana’s critical financial buffers – in the form of the Government Investment Account at the BoB and the foreign exchange reserves – have been rising, assisting the ability of the economy to withstand possible shocks, at least in the short term.
(Adopted from Econsult Economic Review Q3)
Business
Botswana financial sector safe despite high unsecured household loans – IMF
Botswana’s financial sector has been deemed safe and resilient by the International Monetary Fund (IMF), despite the presence of high levels of unsecured household loans. The IMF’s 2023 report on the country’s financial sector highlights the robustness of Botswana’s banking system and its ability to withstand various shocks.
According to the report, credit risk is the largest risk in Botswana’s banking system, with a significant portion of total assets comprising loans concentrated in the household sector. Specifically, 70 percent of bank loans to households in Botswana are personal loans, primarily in the form of unsecured consumer credit. However, the IMF notes that a large share of lenders collect repayments through direct salary deduction, resulting in a generally low level of non-performing household loans.
The IMF’s assessment confirms that most banking entities in Botswana have strong capital buffers, which would enable them to survive even in the event of an increase in non-performing loans in the household sector. While a 20 percent transition of performing loans into non-performing loans would result in some banks experiencing a significant capital shortfall, the majority of banks possess robust total capital buffers and would remain unaffected by severe shocks to household loans.
Furthermore, the IMF team conducted Bank Solvency Stress Tests, which demonstrated that Botswana’s banking system remains profitable and resilient to severe macro-financial shocks. The stress tests revealed that the aggregate capital depletion in an adverse scenario is relatively small, amounting to less than 0.02 percent of GDP. Although credit risk increases significantly under the adverse scenario, the impact on the capital ratio from rising non-performing loans is outweighed by the increase in net interest income.
The IMF’s assessment also indicates that Botswana’s financial sector weathered the Covid-19 pandemic well. The authorities have made notable progress in strengthening financial supervisory and regulatory frameworks since 2007. The financial sector is deemed stable, sound, and resilient, with risks primarily related to banks’ high concentration of short-term deposits from retirement funds and insurance companies, volatility in diamond prices, geopolitical developments, and tightening global financial conditions. However, the financial system remains resilient to a wide range of shocks associated with these risks, although some vulnerabilities exist.
The Financial Stability Council (FSC), a statutory body led by the Governor of the Bank of Botswana, also recently affirmed the resilience and safety of the domestic financial system. The FSC’s assessment found that the financial sector in Botswana is robust, safe, and unconstrained in providing a range of financial services to support the economy. This resilience is attributed to strong capital and liquidity buffers, profitability, continuous innovation and adaptability, and a robust regulatory environment. The FSC believes that the macroeconomic environment, characterized by positive economic growth, well-managed government fiscal position, and modest inflation, further supports financial stability. Stress tests conducted on banks validate their strong solvency and resilience.
IMF concludes that Botswana’s financial sector remains safe and resilient, despite the presence of high levels of unsecured household loans. The IMF’s assessment highlights the strong capital buffers of banking entities, their ability to withstand shocks, and the overall stability of the financial system. The country’s financial sector has also demonstrated its resilience during the Covid-19 pandemic. The Financial Stability Council further affirms the safety and effectiveness of the financial system in providing financial services to support the economy.
Business
Botala Energy debuts on the BSE
Botala Energy, an Australian energy company, recently made its debut on the Botswana Stock Exchange (BSE), joining a growing number of energy development companies trading on the exchange. The company, established in 2018, is focused on exploring and developing natural gas and renewable energy opportunities in Botswana, particularly in the Serowe Gas Project and Solar Opportunities.
The listing of Botala Energy on the BSE was welcomed by Mr Tsamatse Mamola, the Head of Listings & Tradings at the exchange. He recognized the company as a pioneering force in the field of gas exploration and development. Mamola also highlighted the company’s commitment to clean energy production, which aligns with the global movement towards sustainable practices. By harnessing the potential of coal bed methane in the Serowe Project and integrating it with solar power generation, Botala Energy is not only innovating in the energy sector but also contributing to a greener and more sustainable future.
Mamola emphasized the significance of Botala Energy’s decision to list all of its issued shares on the BSE. This move demonstrates the company’s confidence in the exchange as a strategic partner in its corporate journey. The listing provides Botala Energy with access to diverse sources of capital, which will be instrumental in advancing its exploration and development projects, fostering technological innovation, and achieving its clean energy production goals. The BSE, as a facilitator of capital raising, plays a crucial role in supporting ambitious initiatives and fostering growth.
The listing of Botala Energy also brings benefits to the broader Botswana economy. It increases investor interest, contributing to the liquidity and vibrancy of the market. Botswana, traditionally reliant on diamonds, recognizes the importance of diversifying its economic base. The inclusion of a dynamic and forward-looking company like Botala Energy on the exchange reflects the evolving economic landscape of the nation.
In the pursuit of economic diversification, the Botswana Stock Exchange serves as a bridge connecting visionary companies with investors who share their commitment to progress. By providing a marketplace for a diverse range of industries, from traditional sectors to emerging technologies, the exchange becomes a catalyst for economic resilience and sustainability.
Peter Grant, the Non-Executive Director of Botala Energy, shared some insights into the company’s operations. Since commencing exploration in Botswana, Botala has made significant progress, drilling exploration wells and pilot production wells. The company expects to become a modest producer of commercial gas within 12 months and increase production rapidly. Botala Energy has independently certified gas reserves and prospective resources within its project area, which have the potential to supply significant amounts of gas for power generation.
Grant also mentioned Botala Energy’s focus on delivering Liquefied Natural Gas (LNG) to off-grid communities, providing them with reliable and affordable electricity and gas. The company is exploring the commercial option of establishing an Energy Hub and Industrial Park near Palapye, where it aims to produce energy for Botswana and export it to neighboring South Africa. Additionally, Botala Energy plans to establish a solar/gas hybrid plant in Serowe to feed into the local grid, in collaboration with the Ngwato Development Trust.
Market analysts say the listing of Botala Energy on the Botswana Stock Exchange marks an important milestone for the company and the energy sector in Botswana. It provides the company with access to capital, fosters economic growth and diversification, and contributes to the global movement towards sustainable energy practices. Botala Energy’s innovative approach to gas exploration and development, combined with its commitment to clean energy production, positions it as a key player in shaping a greener and more sustainable future for Botswana.
Business
Beverages dominate Botswana’s food imports
Beverages dominate Botswana’s food imports for August 2023, according to the latest figures released by Statistics Botswana. The country imported beverages, spirits, and vinegar worth approximately P332 million during this month. This is a significant increase from the previous month, where the food import bill slightly rose from P1,063,990,477.2 in July 2023 to P1,233,702,300.4 in August 2023.
The total imports for Botswana in August 2023 were valued at P6,995,115,623.2, compared to P6,897,364,155.2 recorded in July 2023. Food imports accounted for 15.9 percent of this amount, contributing P1,233,702,300.4. Among the food items imported, beverages, spirits, and vinegar accounted for the majority at 26.9 percent. Cereals and sugars followed with 13.4 percent and 8.8 percent, respectively.
Within the category of beverages, spirits, and vinegar, the most imported commodities were mineral waters and aerated waters containing sugar or other sweetening matter or flavored, contributing 47.0 percent. Beer made from malt accounted for 16.7 percent, while fermented beverages and non-alcoholic beverages accounted for 15.9 percent. The import bill for beverages, spirits, and vinegar shows that the country imported mineral waters and aerated waters containing added sugar or other sweetening matter or flavored worth approximately P156 million. Beer made from malt accounted for around P55 million, while fermented beverages and non-alcoholic beverages were valued at around P79.1 million. Wine and liqueurs and cordials were also imported, with values of P12.6 million and P6.4 million, respectively.
In terms of cereals, dried maize excluding seed and other wheat and muslin accounted for 42.3 percent and 27.4 percent, respectively. Rice imports contributed 21.2 percent. The country spent approximately P165 million on cereal imports, with dried maize accounting for around P70 million, wheat around P45 million, and rice around P44.7 million.
Other food imports included preparations of cereals, flour, starch, or milk; pastry cooks’ products, which amounted to around P89 million. Preparations of vegetables, fruit, nuts, or other parts of plants accounted for around P88 million, while sugars and sugar confectionery were valued at around P108 million. Miscellaneous edible preparations, animal or vegetable fats and oils, dairy produce, prepared animal fodder, coffee, tea, and spices, fruits and nuts, meat, vegetables and certain roots and tubers, and products of the milling industry such as malt, starches, and wheat gluten were also imported, with values ranging from P13 million to P74.6 million.
In conclusion, beverages, particularly mineral waters and aerated waters containing sugar or other sweetening matter or flavored, dominate Botswana’s food imports for August 2023. The country also imports a significant amount of cereals, sugars, and other food products. These figures highlight the country’s reliance on imported food items and the need for strategies to promote domestic production and reduce dependence on imports.