BOTSWANA – RECENT ECONOMIC DEVELOPMENTS

FEBRUARY, 2008

Keith Jefferis

Structure of Presentation

� Botswana Economic Developments

� Growth

� Exchange Rates

� Inflation and Interest Rates� Inflation and Interest Rates

� Government Budget

� Economic scenario 2008

Economic Growth

Recent Economic Growth Experience

� Long term decline in economic growth rates

� Overall growth rate volatile due to mining

� Diversification has been slow - mining and government still account for over 50% of GDP

� Non-mining private sector growth has been weak� Non-mining private sector growth has been weak

� But, signs of significant improvement in past 18 months

� Good export performance, including reduced dependence upon diamonds

� Non-mining private sector growth has picked up, although still dependent upon government

Growth Developments - Mining

� Good conditions in mining sector

� world commodity markets tight, although for metals less so than in 2006;

� copper & nickel prices at high levels by historical standards, but off their peak in 2007H2; but off their peak in 2007H2;

� widespread prospecting taking place in Botswana, (copper, nickel, zinc, diamonds, gold, PGMs, uranium, coal, gas)

� Market for diamonds weak in short-term� US slowdown & dollar weakness will hurt in 2008

� but long-term supply-demand imbalance will support prices, with long-term real price rise forecast

Mining-related Developments

� Ongoing and Forthcoming Projects� Diamonex, 2008 (Tuli Block – licensed, funded and under construction)

� African Diamonds AK6, 2008/9 (Orapa) – mining licence applied for

� African Copper 2008, (Dukwe – licensed, funded and under construction)

� Norilsk Nickel/Tati Nickel Activox refinery (Cu/Ni/PGMs), 2007-9 (Francistown) – under construction

� CIC coal/power, 2008-12 (Mmamabula) – moving closer to conclusion of negotiations

� BPC expansion (coal, power) (2008-11)� BPC expansion (coal, power) (2008-11)

� Diamond aggregation/cutting, 2008 onwards

� Discovery (nickel, zinc) and A-Cap (uranium) – very good prospecting results & favourable price developments

� Longer-term possibilities: gas, trans-Kalahari coal

� Huge investments in processing as well as mining

� Positive impact on exports, jobs, spin-offs

� Very active prospecting continuing

� Not yet impacting on economic growth data, although signs of capex feeding through to trade data

Economic Growth

8%

10%

12%

14%

16%� Headline GDP growth has

recovered from (a revised ) 0.6% in 2005/06 to 6.2% in 2006/07

0%

2%

4%

6%

8%

GDP NMPS

2006/07

� Confirms earlier signs of recovery from other indicators

� Growth in NMPS even more buoyant – up from a revised 5.3% (previously 2.5%) to 9.7%

Economic Structure (GDP, 2006/07)

Trade, hotels etc.

11%

Govt16%

Soc. & Per. Serv4%

� Mining still dominates GDP

� Mining & government contribute 58% of GDP, so non-mining private

Mining42%

Manuf4%

Water & elec2%

Constr.4%

Trade11%

Transp. & comms

4%

Fin. & bus. Serv11%

so non-mining private sector well under half of the economy

Growth by Sector, 2005/6 & 2006/7

Total GDP

Construction

Manuf'g

Trade

Transp & comms � Transport & communications, trade, manufacturing and construction fastest growing sectors

-5 0 5 10 15 20

Soc/pers. serv.

Government

Agriculture

Mining

Water & elec

Fin/bus. serv.

% growth

'06/07

'05/06

sectors

� All showing improved performance over the previous year

� However, growth figures are preliminary and are subject to revisions

Growth by Sector 2005/06: Original & Revised

Fin/bus. serv.

Water & elec

Government

Soc/pers. serv.

Transport � Previous year’s growth performance revised upwards for several sectors

� Notably, finance/business, trade and manufacturing,

-10 -5 0 5 10 15 20

Mining

Agriculture

Construction

Manuf'g

Trade

Fin/bus. serv.

Revised (2008) Original (2007)

trade and manufacturing, which all had appeared to do badly

BoB Business Confidence Survey

40%

50%

60%

70%

80%

90%

% rating conditions sa

tisfactory

� Clear upturn in confidence shown in BoB survey

� Striking recovery amongst firms serving the domestic market

0%

10%

20%

30%

40%

% rating conditions sa

tisfactory

Exporters Non-exporters All

market

� Surprising decline in confidence amongst exports, but BoB caution about small sample

Growth Indicators - 1

12%

14%

16%

Non-mining electricity consumption (y-o-y growth)

20%

25%

30%

Real business credit (y-o-y growth)

0%

2%

4%

6%

8%

10%

Source: BPC

-10%

-5%

0%

5%

10%

15%

Source: BoB

Growth Indicators - 2

10%

15%

20%

Real Government Spending

10%

12%

14%

16%

15%

20%

25%

30%

Multiple Indicators

-15%

-10%

-5%

0%

5%

0%

2%

4%

6%

8%

10%

-15%

-10%

-5%

0%

5%

10%

Govt. Exp RBC NMEC

Investment (GFCF) & Savings

30%

40%

50%

60%

% of GDP

� Declining rate of investment (% GDP) does not augur well for future growth

� Not due to shortage of

-10%

0%

10%

20%

% of GDP

GFCF Savings

� Not due to shortage of savings, which remain very high

� Reinforces need to improve investment climate, encourage FDI

World Bank “Doing Business” 2007

0 50 100 150

Paying Taxes

Getting Credit

Closing a Business

Ranking (178 countries) � Botswana amongst the top performers in African on the WBDB survey, but slow slipping

� Regulatory reform can Registering Property

Doing Business

Employing Workers

Enforcing Contracts

Starting a Business

Protecting Investors

Dealing with Licenses

Trading Across Borders

� Regulatory reform can address some of the weaknesses

External Sector

Exchange Rates

� Rate of crawl reduced from 4% to 2% in July -reflecting smaller inflation gap between Botswana and trading partners

� Basket weights adjusted –ZAR reduced - presumably

100

110

120

130

Index

1996=100

ZAR reduced - presumably reflecting growth of non-diamond exports outside of the region

� Will make BWP slightly more volatile against ZAR

� Basket parameters still not disclosed (against advice of IMF, credit rating agencies & BoB)

50

60

70

80

90

2003 2004 2005 2006 2007

Index

1996=100

NEER BWP/ZAR BWP/USD

Exchange Rate Forecasts to 2012

1.15

1.16

1.17

1.18

ZAR per BWP

8

9

10

BWP per USD & EUR

USD

1.10

1.11

1.12

1.13

1.14

5

6

7

8 USD

EUR

Real Effective Exchange Rate (REER)

� Long period of REER appreciation (declining competitiveness) through to 2004

� Devaluations and crawling 110

115

120

125

Index

1996=100

� Devaluations and crawling peg have achieved REER depreciation and restored competitiveness

90

95

100

105

110

Index

1996=100

Exports & Imports

2000

2500

3000

3500

Monthly (Pmn)

� Much faster export growth than imports – as intended by exchange rate policy

� Healthy balance of trade surpluses & accumulation of

0

500

1000

1500

2003 2004 2005 2006 2007

Monthly (

Exports Imports

Exp trend Imp trend

surpluses & accumulation of fx reserves

� Recent pick up in imports driven by capital goods –suggesting investment may be recovering

Export growth, Jan-Sep 2006-7

100%

150%

200% � Strong export growth in 2007, driven by non-diamond exports

� Textiles, Cu-Ni & Meat the best performers

-50%

0%

50%best performers

� Diversification of exports taking place

Non-diamond Exports, Jan-Sep 2007

Meat

Soda ash4%

Textiles17% Other

17%

� Nickel & copper dominate non-diamond exports, but the rest is quite diversified

Nickel/copper51%

Gold2%

Machinery2%

Meat7%

Foreign Exchange Reserves (Pula)

� Trade performance resulting in rapid growth of fx reserves – more than doubled since late 2003. 40

50

60

70

Pula m

illion

2003.

� Import cover approx. 30 months

0

10

20

30

Pula m

illion

Inflation & Monetary Policy

Inflation

� Inflation fell sharply early in 2007, as expected, from 14.2% in April 06 to a low of 6.3% in April 07� falling away of one-off impacts (devaluation, school

fees)fees)

� lower world fuel prices in late 06/early 07

� Subsequent increase (to 8.1% in December) due to:� Higher fuel prices

� Higher food prices (esp. cereals and dairy)

� Rising domestic demand

Inflation

� Inflation likely to continue rising, should end year around 8%;

� Main risks:� world fuel and food prices� further BTC telecomms rebalancing� further BTC telecomms rebalancing� administered prices (health costs, housing, water, electricity)� rising world and SA inflation

Inflation & Forecast

10%

12%

14%

16% � Inflation likely to continue rising in 1st half of 2008, due to� world fuel and food

prices� administered prices

(housing, water)

0%

2%

4%

6%

8% (housing, water)� rising power costs� rising world and SA

inflation� But should peak and fall in

H2

� Forecast of inflation around 8% by year-end

Fuel Prices

600

700

800

400

450

500

550

600

Brent crude (pula/barrel

Petrol (Thebe/litre)

� Close relationship between local fuel prices and world crude prices, with a 4 month lag

� Still may be further rises

200

300

400

500

150

200

250

300

350

400

2005 2006 2007

Brent crude (pula/barrel

Petrol (Thebe/litre)

Crude Oil Petrol (lagged 4 months)

� Still may be further rises if international fuel prices do not fall

Monetary Policy

� Interest rates cut by 0.5% in June 2007, but no more rate cuts likely in the short term:� Inflation now above BoB target range

� High credit growth pushing up demand pressures

� Increasing government spending also contributing to inflationary pressurespressures

� Next move likely to be upwards

� 2008 Monetary Policy Statement� Due late February

� Likely to have less positive outlook than 2007 MPS

� MPC meetings slightly more transparent

Credit growth (yoy)

15%

20%

25%

30% � Credit growth has risen sharply

� Now well above BoB target range (11%-14%)

0%

5%

10%

15%

2005 2006 2007

14%)

� Driven by improving economic sentiment, inflow of funds from non-bank BoBCs in 2006

Inflation and Interest Rates

10

12

14

16

18

%

Prime Rate & Inflation

8%

10%

12%

Real Prime Rate

0

2

4

6

8

10%

Inflation Prime Rate

0%

2%

4%

6%

Government Budget

Govt Revenue & Spending - actual

35%

40%

45%

% of GDP

� After deficits in the late 1990s and early 2000s, spending is now well below revenues

� Decline in spending (as

25%

30%

35%

% of GDP

Expenditure Revenue

� Decline in spending (as % of GDP) has led to major reduction in demand

Budget Balance

5%

10%

15%

% of GDP

� Budget situation has turned around significantly in last two years

-10%

-5%

0%

5%

% of GDP

� 2006/07 surplus over 11% of GDP – largest since late 1980s

Budget balance – actual vs. forecast

4%

6%

8%

10%

12%

% of GDP

actual

� Quality of budget forecasts seems to have declined

� Mainly due to

-6%

-4%

-2%

0%

2%

% of GDP

forecast

� Mainly due to shortfalls on expenditure

Budgeted Expenditure

8,000

10,000

12,000

14,000

16,000

P m

n

+36%

+37%

+110%

� 2008/09 Budget entails major increase in spending compared to last year of actual data (2006/07)

� Total +53%

0

2,000

4,000

6,000P m

n

2006/07 2007/08 2008/09

� Total +53%

� Recurrent +36% (without public sector pay rise)

� Development +110%

� Demands much improved implementation capacity

Expenditure Budget Efficiency

90%

95%

100%

105%

110%

% of budget actually spent

� Progressive decline in proportion of budget actually spent

� Particularly a problem with development

70%

75%

80%

85%

90%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

% of budget actually spent

with development budget – only 67% spent in 2006/07

Government Spending Cycle

� Long-term decline in growth rate of government spending –which is appropriate

� Budgeted figures for 2007/08 suggest much 20%

25%

30%

35%

40%

Spending Growth (%)

2007/08 suggest much larger increase in spending than has been achieved in recent history – and are therefore unlikely to be realised

� Likely to be destabilising

0%

5%

10%

15%

20%

1995/96

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

2007/08

2008/09

Long-term Mineral Revenues

5000

6000

7000

Source: IMF

0

1000

2000

3000

4000

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Diamond revenue

in millions of

dollars

Recycling of existing waste

(higher production of lower-

quality diamonds as

underlined by a lower price

trend)

Mining goes

underground before

resources are

totally depleted

Economic Prospects

Botswana Economic Prospects 2008-9

� 2008: improved growth to continue, driven by� Rising government spending

� Mining projects

� Export uncertainty, due to US recession and international economic slowdown, but impact will be confined and not economic slowdown, but impact will be confined and not widespread through the economy, as long as growth slowdown is not long-term

� Main threats to domestic growth:

� Volatility in government spending, and hence uncertainty

� Power constraints

� Sharply higher inflation, and rising interest rates

Power Supply Issues

200

250

300

/month

Sources of Supply

200

250

300

Sources of Demand

0

50

100

150

‘000 M

Wh/m

onth

Morupule Imports - Eskom Imports - other

0

50

100

150

Mines Non-mining

Power Supply Issues

500

600

700

800

Peak demand (MW)

Emerging Supply Deficit � Peak demand increasing at around 8% p.a.

� Tati, other new mines excluded

� Eskom firm supply reducing

0

100

200

300

400

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Peak demand (MW)

Morupule Eskom Deficit

� Eskom firm supply reducing from 2008-2011

� Gap emerging – around 80MW in 2008

� 60MW from HCB in 2008, but then what?

� Major shortfalls from 2010

Thank You