Transcript Slide 1

Coping with the Crisis
and future Challenges:
Economic Performance
and Prospects
Keith Jefferis
29 June 2010
The Botswana economy is …
 Highly dependent on mining for …
 GDP (40%)
 Government revenues (40-50%)
 Exports (75%)
 Highly dependent on government (which is dependent on mining) for
 Employment
 Investment
 Spending
 Very open to international trade (exports + imports > 80% of GDP)
 Hence highly vulnerable to adverse international economic
developments, especially in mining
Global Economy
Global growth slowdown ... and
recovery
 Depths of recession – 4Q2008
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Source: JP Morgan
and 1Q2009
Recession was deep, but
recovery has been robust
Fears of prolonged depression
not realised
Global growth projected to
settle in 3% - 4% range in 201011
Danger of double-dip recession
still a concern
Emerging markets leading the
recovery
 Recovery has been driven by
emerging markets
 Faster emergence from
recession
 Higher growth during recovery
 Less affected by financial crisis
and debt problems – more
resilience
 Developed economies –
sluggish recovery:
 Fiscal/debt problems
 Unemployment
 Euro-zone crisis
Source: JP Morgan
Signs of recovery ... minerals
prices
Copper
Source: LME
Nickel
Economic Growth
2009 – a year of recession for
Botswana
 Annual growth in 2009 was
minus 6%
 Severe recession – first since
data series started in 1975
Annual sectoral growth 2009 – contrasts
between export and domestic sectors
 Overall growth
dragged down by
massive mining
contraction
 Manufacturing &
tourism also weak
 Healthy growth in
parts of the nonmining private
sector
 Much of this
driven by
government
spending
2009 – a year of recession …. but
robust recovery forecast
 IMF forecasting growth around
6% for 2010 and 2011
 Driven by mining sector
recovery
Trade & Exchange Rates
DTC Diamond Sales
 DTC diamond sales reasonably
good in 2010 H1, with
improved prices and volumes
 But well below peaks of 2007
and early 2008
 Driven by retail market
recovery and re-stocking of
inventory
 Supply restrictions also
suporting prices
Exports & imports ... in shock
 Exports have fallen
dramatically .. but now
recovering
 Imports have also dropped off
 Lower oil prices
 Fall in diamond imports
 But much smaller decline than
fall in exports
 Balance of trade still negative
Trade balance .. big deficits
 Trade surplus has
generally been strongly
positive over past five
years
 Collapse of diamond
exports has led to
unprecedented deficits
since 2008Q4
 Large deficits still
persisting into early
2010
Exchange rates
 Bilateral
rates volatile
 More
volatility
against USD
 Short-term
pula
movements
against USD
and ZAR
tend to be in
opposite
directions
Nominal Effective XR (Pula
basket)
 Exchange rate policy
governed by pula
basket composition
and rate of crawl
 Both not disclosed
 Basket is broadly
trade weighted
 Crawl gradually
downward – approx
3% at present – to
maintain
competitiveness
 No change as a result
of global crisis
FX Reserves
14
70
12
60
10
50
8
40
6
30
2006 2007 2008 2009 2010
US dollar
Pula
Pula bn
US$ bn
 FX reserves peaked in
2008 – have since been
depleted by BoP deficits
resulting from global
crisis
 Supplemented by
external borrowing (AfDB
& World Bank) in 2009
Import cover
 FX reserves well below
their peak but still
respectable in terms of
months of import cover
Inflation, Interest rates and
Financial Sector
Inflation ... should stay low for a
while, but how low?
 Inflation has recently been
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around upper end of BoB’s 3%6% target range
VAT and electricity prices
pushed inflation to 7.8% in
May
Underlying inflation remains
low
Upside risk from international
oil prices
BoB MPS 2010 forecasts
inflation in range 4-5% in 2011
 Low international and
domestic inflation pressures
 Well below historical inflation
rates in Botswana
 Market not convinced –
expected inflation well above
BoB forecasts
Monetary policy – easing with
large cuts in interest rates
 Interest rates sharply lower in
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response to declining inflation
Bank rate cut by 5.5% since
Nov 2008
But inflation has fallen faster
than nominal interest rates,
hence real interest rates have
not fallen as much
BoB likley to pause and watch
inflation developments
Further interest rate cuts
justified if inflation stays
below 6%
Financial sector: has remained strong
during global crisis
 Banking sector has remained
profitable, although
profitability has declined
 Slowdown in credit extension,
but now recovering
 Some problems with bad
debts, but concentrated on
households rather than
businesses
Bank credit – growth recovery
Arrears – a problem to watch
Government Budget
Fiscal policy – stimulus helped the
economy, but at the cost of large deficits
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Govt spending rose sharply in 2009 –
helped to maintain non-mining
economy
Turnaround from fiscal surplus to
substantial deficit, driven by both
increased spending and falling
revenues
2009/10 deficit estimated at 15% of
GDP is unsustainable
2010/11 Budget has a continuation
of revenue decline and P2bn cut in
total spending
Deficit cut, but still huge
Revenues less than 30% of GDP –
last seen in 1970s
Fiscal adjustment now needed
Impact of deficits on Govt
finances
 Net financial position – govt.
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deposits & reserves at BoB less
public debt (foreign &
domestic)
Peaked at P41bn in 2008
Cumulative deficits in 3 yrs
2008-2011 = P30bn
Continuation of deficits will
lead govt to become net
debtors
Reason for credit rating
downgrade
Summary and Outlook
Summary
 Headline GDP growth hit hard by recession – but concentrated on
mining/exports
 Non-mining growth steady in 2009 – hence limited impact on employment
 Fiscal stimulus helped – but deficit/debt problems resulted – with the crisis
compounding adverse medium term trends
 External sector: exchange rate steady, BoP deficit, but FX reserves helped
to stabilise, with modest drawdown
 Inflation – substantial decline, monetary easing helped to cushion impact
of crisis
 Financial sector stable, now growing after a pause in 2009H1
Prospects
International
 Improving global growth
prospects – but still volatile
 Shifting of global economic
balance to emerging markets
 Commodity markets strong –
good for mining
 Uncertainties remaining over
govt debt, withdrawl of fiscal
stimulus, de-leveraging, eurozone stability
Domestic
 Growth rotation in place :
 2009 – mining/exports weak,
non-mining/domestic demand
strong
 2010 – opposite
 Weakness in household
consumption and fiscal spending
as export markets recover
 Trade, balance of payments
should continue to improve –
but not back to normal
 Fiscal sustainability the
overriding issue
Thank You
[email protected]
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