Coping with the Coping with the Crisis and future Crisis and future

Challenges: Challenges: Economic Economic

Performance and Performance and ProspectsProspects

Keith JefferisKeith Jefferis29 June 201029 June 2010

The Botswana The Botswana economy is …economy is …

Highly dependent on mining for …Highly dependent on mining for … GDP (40%)GDP (40%) Government revenues (40-50%)Government revenues (40-50%) Exports (75%)Exports (75%)

Highly dependent on government (which is dependent on Highly dependent on government (which is dependent on mining) formining) for EmploymentEmployment InvestmentInvestment Spending Spending

Very open to international trade (exports + imports > Very open to international trade (exports + imports > 80% of GDP)80% of GDP)

Hence highly vulnerable to adverse international Hence highly vulnerable to adverse international economic developments, especially in miningeconomic developments, especially in mining

Global EconomyGlobal Economy

Global growth Global growth slowdown ... and slowdown ... and

recoveryrecovery Depths of recession – Depths of recession –

4Q2008 and 1Q20094Q2008 and 1Q2009 Recession was deep, Recession was deep,

but recovery has been but recovery has been robustrobust

Fears of prolonged Fears of prolonged depression not realiseddepression not realised

Global growth Global growth projected to settle in projected to settle in 3% - 4% range in 2010-3% - 4% range in 2010-1111

Danger of double-dip Danger of double-dip recession still a recession still a concernconcern

Source: JP Morgan

Emerging markets Emerging markets leading the recoveryleading the recovery

Recovery has been Recovery has been driven by emerging driven by emerging marketsmarkets Faster emergence from Faster emergence from

recessionrecession Higher growth during Higher growth during

recoveryrecovery Less affected by Less affected by

financial crisis and debt financial crisis and debt problems – more problems – more resilienceresilience

Developed economies – Developed economies – sluggish recovery:sluggish recovery: Fiscal/debt problemsFiscal/debt problems UnemploymentUnemployment Euro-zone crisisEuro-zone crisis

Source: JP Morgan

Signs of recovery ... Signs of recovery ... minerals pricesminerals prices

CopperCopper NickelNickel

Source: LME

Economic GrowthEconomic Growth

2009 – a year of 2009 – a year of recession for Botswanarecession for Botswana

Annual growth in 2009 Annual growth in 2009 was minus 6%was minus 6%

Severe recession – first Severe recession – first since data series since data series started in 1975started in 1975

Annual sectoral growth 2009 – Annual sectoral growth 2009 – contrasts between export and contrasts between export and

domestic sectorsdomestic sectors Overall growth Overall growth

dragged down dragged down by massive by massive mining mining contractioncontraction

Manufacturing Manufacturing & tourism also & tourism also weakweak

Healthy growth Healthy growth in parts of the in parts of the non-mining non-mining private sectorprivate sector

Much of this Much of this driven by driven by government government spendingspending

2009 – a year of 2009 – a year of recession …. but robust recession …. but robust

recovery forecastrecovery forecast IMF forecasting growth IMF forecasting growth

around 6% for 2010 around 6% for 2010 and 2011 and 2011

Driven by mining Driven by mining sector recoverysector recovery

Trade & Exchange Trade & Exchange RatesRates

DTC Diamond SalesDTC Diamond Sales

DTC diamond sales DTC diamond sales reasonably good in reasonably good in 2010 H1, with 2010 H1, with improved prices and improved prices and volumesvolumes

But well below peaks But well below peaks of 2007 and early 2008of 2007 and early 2008

Driven by retail market Driven by retail market recovery and re-recovery and re-stocking of inventorystocking of inventory

Supply restrictions also Supply restrictions also suporting pricessuporting prices

Exports & imports ... in Exports & imports ... in shockshock

Exports have fallen Exports have fallen dramatically .. but now dramatically .. but now recoveringrecovering

Imports have also Imports have also dropped offdropped off Lower oil pricesLower oil prices Fall in diamond importsFall in diamond imports

But much smaller But much smaller decline than fall in decline than fall in exportsexports

Balance of trade still Balance of trade still negativenegative

Trade balance .. big Trade balance .. big deficitsdeficits

Trade surplus has Trade surplus has generally been generally been strongly positive strongly positive over past five over past five yearsyears

Collapse of Collapse of diamond exports diamond exports has led to has led to unprecedented unprecedented deficits since deficits since 2008Q42008Q4

Large deficits still Large deficits still persisting into persisting into early 2010early 2010

Exchange ratesExchange rates

Bilateral Bilateral rates rates volatilevolatile

More More volatility volatility against USDagainst USD

Short-term Short-term pula pula movements movements against USD against USD and ZAR and ZAR tend to be tend to be in opposite in opposite directionsdirections

Nominal Effective XR Nominal Effective XR (Pula basket)(Pula basket)

Exchange rate Exchange rate policy governed by policy governed by pula basket pula basket composition and composition and rate of crawlrate of crawl Both not disclosedBoth not disclosed Basket is broadly Basket is broadly

trade weightedtrade weighted Crawl gradually Crawl gradually

downward – downward – approx 3% at approx 3% at present – to present – to maintain maintain competitivenesscompetitiveness

No change as a No change as a result of global result of global crisiscrisis

FX ReservesFX Reserves

FX reserves peaked FX reserves peaked in 2008 – have in 2008 – have since been since been depleted by BoP depleted by BoP deficits resulting deficits resulting from global crisisfrom global crisis

Supplemented by Supplemented by external borrowing external borrowing (AfDB & World (AfDB & World Bank) in 2009 Bank) in 2009

Import coverImport cover

FX reserves well FX reserves well below their peak below their peak but still but still respectable in respectable in terms of months of terms of months of import coverimport cover

Inflation, Interest rates Inflation, Interest rates and Financial Sectorand Financial Sector

Inflation ... should stay Inflation ... should stay low for a while, but how low for a while, but how

low?low? Inflation has recently Inflation has recently

been around upper end of been around upper end of BoB’s 3%-6% target rangeBoB’s 3%-6% target range

VAT and electricity prices VAT and electricity prices pushed inflation to 7.8% pushed inflation to 7.8% in Mayin May

Underlying inflation Underlying inflation remains lowremains low

Upside risk from Upside risk from international oil pricesinternational oil prices

BoB MPS 2010 forecasts BoB MPS 2010 forecasts inflation in range 4-5% in inflation in range 4-5% in 20112011 Low international and Low international and

domestic inflation domestic inflation pressurespressures

Well below historical Well below historical inflation rates in inflation rates in BotswanaBotswana

Market not convinced – Market not convinced – expected inflation well expected inflation well above BoB forecasts above BoB forecasts

Monetary policy – easing Monetary policy – easing with large cuts in interest with large cuts in interest

ratesrates Interest rates sharply Interest rates sharply

lower in response to lower in response to declining inflationdeclining inflation

Bank rate cut by 5.5% since Bank rate cut by 5.5% since Nov 2008Nov 2008

But inflation has fallen But inflation has fallen faster than nominal faster than nominal interest rates, hence real interest rates, hence real interest rates have not interest rates have not fallen as muchfallen as much

BoB likley to pause and BoB likley to pause and watch inflation watch inflation developments developments

Further interest rate cuts Further interest rate cuts justified if inflation stays justified if inflation stays below 6%below 6%

Financial sector: has remained Financial sector: has remained strong during global crisisstrong during global crisis

Banking sector has Banking sector has remained profitable, remained profitable, although profitability although profitability has declinedhas declined

Slowdown in credit Slowdown in credit extension, but now extension, but now recoveringrecovering

Some problems with Some problems with bad debts, but bad debts, but concentrated on concentrated on households rather than households rather than businesses businesses

Bank credit – growth recoveryBank credit – growth recoveryArrears – a problem to watchArrears – a problem to watch

Government BudgetGovernment Budget

Fiscal policy – stimulus helped Fiscal policy – stimulus helped the economy, but at the cost the economy, but at the cost

of large deficitsof large deficits Govt spending rose sharply Govt spending rose sharply

in 2009 – helped to maintain in 2009 – helped to maintain non-mining economynon-mining economy

Turnaround from fiscal Turnaround from fiscal surplus to substantial deficit, surplus to substantial deficit, driven by both increased driven by both increased spending and falling spending and falling revenuesrevenues

2009/10 deficit estimated at 2009/10 deficit estimated at 15% of GDP is unsustainable15% of GDP is unsustainable

2010/11 Budget has a 2010/11 Budget has a continuation of revenue continuation of revenue decline and P2bn cut in total decline and P2bn cut in total spendingspending

Deficit cut, but still hugeDeficit cut, but still huge Revenues less than 30% of Revenues less than 30% of

GDP – last seen in 1970sGDP – last seen in 1970s Fiscal adjustment now Fiscal adjustment now

neededneeded

Impact of deficits on Govt Impact of deficits on Govt financesfinances

Net financial position – Net financial position – govt. deposits & govt. deposits & reserves at BoB less reserves at BoB less public debt (foreign & public debt (foreign & domestic)domestic)

Peaked at P41bn in Peaked at P41bn in 20082008

Cumulative deficits in 3 Cumulative deficits in 3 yrs 2008-2011 = P30bn yrs 2008-2011 = P30bn

Continuation of deficits Continuation of deficits will lead govt to will lead govt to become net debtorsbecome net debtors

Reason for credit rating Reason for credit rating downgradedowngrade

Summary and OutlookSummary and Outlook

SummarySummary

Headline GDP growth hit hard by recession – but Headline GDP growth hit hard by recession – but concentrated on mining/exportsconcentrated on mining/exports

Non-mining growth steady in 2009 – hence limited impact Non-mining growth steady in 2009 – hence limited impact on employmenton employment

Fiscal stimulus helped – but deficit/debt problems resulted Fiscal stimulus helped – but deficit/debt problems resulted – with the crisis compounding adverse medium term trends– with the crisis compounding adverse medium term trends

External sector: exchange rate steady, BoP deficit, but FX External sector: exchange rate steady, BoP deficit, but FX reserves helped to stabilise, with modest drawdown reserves helped to stabilise, with modest drawdown

Inflation – substantial decline, monetary easing helped to Inflation – substantial decline, monetary easing helped to cushion impact of crisiscushion impact of crisis

Financial sector stable, now growing after a pause in Financial sector stable, now growing after a pause in 2009H12009H1

ProspectsProspects

InternationalInternational Improving global growth Improving global growth

prospects – but still volatileprospects – but still volatile Shifting of global economic Shifting of global economic

balance to emerging balance to emerging marketsmarkets

Commodity markets strong Commodity markets strong – good for mining– good for mining

Uncertainties remaining Uncertainties remaining over govt debt, withdrawl over govt debt, withdrawl of fiscal stimulus, de-of fiscal stimulus, de-leveraging, euro-zone leveraging, euro-zone stabilitystability

DomesticDomestic Growth rotation in place :Growth rotation in place :

2009 – mining/exports 2009 – mining/exports weak, weak, non-mining/domestic non-mining/domestic demand strongdemand strong

2010 – opposite2010 – opposite Weakness in household Weakness in household

consumption and fiscal consumption and fiscal spending as export spending as export markets recovermarkets recover

Trade, balance of Trade, balance of payments should continue payments should continue to improve – but not back to improve – but not back to normalto normal

Fiscal sustainability the Fiscal sustainability the overriding issueoverriding issue

Thank YouThank YouKeith@econsult.co.bw

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