Recent Recent Economic Economic

DevelopmentDevelopments, Outlook s, Outlook

and and ProspectsProspects

KENEWENDO Bogolo JKENEWENDO Bogolo JApril 2011April 2011

OutlineOutline Global economy – recent developmentsGlobal economy – recent developments Botswana economy:Botswana economy:

GrowthGrowth InflationInflation International TradeInternational Trade Exchange RatesExchange Rates Financial SectorFinancial Sector Govt BudgetGovt Budget EmploymentEmployment

International AssessmentsInternational Assessments WEF Global Competitiveness ReportWEF Global Competitiveness Report IMF Article IV and World Bank PERIMF Article IV and World Bank PER

Economic OutlookEconomic Outlook

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

recoveryrecovery Recovery from global Recovery from global

recession has been recession has been robust, driven by robust, driven by emerging marketsemerging markets

Some slowing now Some slowing now projected, after initial projected, after initial “bounce” – but “double “bounce” – but “double dip” recession unlikelydip” recession unlikely

Global growth projected Global growth projected to settle in 3% - 3.5% to settle in 3% - 3.5% range in 2010-11range in 2010-11

Uncertainty remains in Uncertainty remains in developed countries:developed countries: Timing of withdrawl of Timing of withdrawl of

fiscal stimulusfiscal stimulus Long-term impact of Long-term impact of

public debtpublic debt Bank credit still Bank credit still

constrainedconstrained High unemployment and High unemployment and

weak consumer weak consumer confidenceconfidence

Euro-zone problemsEuro-zone problems

SADC Growth Forecasts SADC Growth Forecasts to 2014to 2014

Source: IMF Regional Economic Outlook for SSA

Botswana: Real Botswana: Real EconomyEconomy

GDP growth - GDP growth - recoveringrecovering

9.2% GDP growth in 9.2% GDP growth in year to June 2010 year to June 2010

Positive yoy growth Positive yoy growth since 2010Q1since 2010Q1

Driven by mining Driven by mining recoveryrecovery

Continued Continued slowdown in non-slowdown in non-mining private mining private sector growthsector growth

Uncertainty over Uncertainty over data qualitydata quality

qoq GDP growth – qoq GDP growth – volatilevolatile

-8.6% qoq GDP -8.6% qoq GDP growth in Q2 growth in Q2 2010 2010

Widely quoted Widely quoted but of little but of little interestinterest

Qoq figures too Qoq figures too volatile to be volatile to be usefuluseful

Annual sectoral growth to June Annual sectoral growth to June 20102010

Most sectors Most sectors recorded recorded positive positive growth, agric & growth, agric & mining leadingmining leading

Manufacturing, Manufacturing, government government and finanance and finanance & business & business services services shrinkingshrinking

Non-mining Non-mining growth growth gradually gradually declingdecling

39%

Agriculture – source of Agriculture – source of growth remains a puzzlegrowth remains a puzzle

Business confidence … Business confidence … improvingimproving

Sharp drop in Sharp drop in confidence confidence during recessionduring recession

Noticeable Noticeable improvement improvement since 2009H2since 2009H2

Still low by Still low by standards of standards of recent yearsrecent years

Inflation & Monetary Inflation & Monetary PolicyPolicy

Inflation ... modest Inflation ... modest increases, driven by cost-increases, driven by cost-

pushpush Inflation has been above Inflation has been above

upper end of BoB’s 3%-6% upper end of BoB’s 3%-6% target range for several target range for several monthsmonths

VAT & electricity prices VAT & electricity prices main culpritmain culprit

Recent decline likely to be Recent decline likely to be reversed in coming reversed in coming monthsmonths

Imported inflation low – Imported inflation low – end 2010 forecasts:end 2010 forecasts: SA – 4.5% SA – 4.5% Developed countries – 1% Developed countries – 1%

Inflation regularly coming Inflation regularly coming in below forecasts – in below forecasts – suggesting domestic suggesting domestic inflationary pressures are inflationary pressures are weakweak

Inflation expectationsInflation expectations

BoB MPS 2010 BoB MPS 2010 forecasts inflation in forecasts inflation in range 4-5% in 2011range 4-5% in 2011 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

Implications for Implications for interest rates and bond interest rates and bond issuanceissuance

Monetary policy – interest Monetary policy – interest rate cut likely in 2011Q2rate cut likely in 2011Q2

Interest rates sharply Interest rates sharply lower in response to lower in response to declining inflation declining inflation combined with recessioncombined with recession

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

Interest rates at lowest Interest rates at lowest levels for 20 yearslevels for 20 years

Real prime rate also Real prime rate also relatively lowrelatively low

BoB focusing on inflation BoB focusing on inflation excluding VAT impact – excluding VAT impact – now less than 5.5% - hence now less than 5.5% - hence within range for monetary within range for monetary policy purposespolicy purposes

Next interest rate move Next interest rate move more likely to be down more likely to be down rather than uprather than up

But not until headline But not until headline inflation below 6%inflation below 6%

International TradeInternational Trade

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

Exports fell Exports fell dramatically, then dramatically, then recovered, but to lower recovered, but to lower levels than in 2007-8levels than in 2007-8

Imports fell Imports fell temporarily during temporarily during recession, but are also recession, but are also now rising again.now rising again.

Fall in imports much Fall in imports much smaller decline than smaller decline than fall in exportsfall in exports

Structural shift Structural shift towards trade deficit?towards trade deficit?

DTC Diamond SalesDTC Diamond Sales

DTC diamond sales have DTC diamond sales have generally been rising generally been rising since 2009Q2since 2009Q2

Improved prices and Improved prices and volumes, driven by retail volumes, driven by retail market recovery and re-market recovery and re-stocking of inventorystocking of inventory

Supply restrictions also Supply restrictions also suporting pricessuporting prices

Debswana recently Debswana recently increased 2010 increased 2010 production / sales production / sales projectionsprojections

But DTC sales still well But DTC sales still well below peaks of 2007 and below peaks of 2007 and early 2008early 2008

Exports … most Exports … most categories showing categories showing

healthy recovery in 2010healthy recovery in 2010 Total exports up Total exports up

40% in 2010 H1 40% in 2010 H1 over same period over same period in 2009in 2009 Minerals up 51%Minerals up 51% Non-minerals Non-minerals

down 1%down 1% Of the 3 largest Of the 3 largest

exports:exports: Diamonds up Diamonds up

61%61% Cpr/nickel up Cpr/nickel up

19%19% Textiles down Textiles down

51%51%

Trade balance .. big Trade balance .. big deficitsdeficits

Trade surplus has Trade surplus has generally been generally been strongly positive over strongly positive over past five yearspast five years

Export weakness and Export weakness and rising imports has led rising imports has led to unprecedented to unprecedented deficits since 2008Q4deficits since 2008Q4

Large deficits still Large deficits still persisting, even with persisting, even with the recoverythe recovery

Foreign exchange Foreign exchange reserves .. fell during the reserves .. fell during the

crisis, and still fallingcrisis, and still falling Reserves have fallen in Reserves have fallen in

both pula and US$ both pula and US$ termsterms

Driven by balance of Driven by balance of payments deficitspayments deficits

Temporarily boosted by Temporarily boosted by inflows from foreign inflows from foreign borrowingborrowing

Import cover now Import cover now around 17 monthsaround 17 months

Under threat if public Under threat if public spending not spending not restrainedrestrained

Exchange rate policy Exchange rate policy needs high reservesneeds high reserves

Financial SectorFinancial Sector

Banking sector: credit boom Banking sector: credit boom and then bustand then bust

Steady increase in Steady increase in credit growth credit growth until 2009, then until 2009, then sharp dropsharp drop

Decline most Decline most dramatic in credit dramatic in credit to private to private businessbusiness

Subsequent Subsequent recovery – but recovery – but much more for much more for business than business than household credithousehold credit

Banking sector: quarterly data Banking sector: quarterly data show recent weakeningshow recent weakening

Quarterly figures provide Quarterly figures provide a more accurate picture a more accurate picture than annual rates in a than annual rates in a rapidly changing rapidly changing environmentenvironment

Private business credit Private business credit growth picked up in growth picked up in 2009H2, but has recently 2009H2, but has recently dropped sharply.dropped sharply.

HH credit growth HH credit growth recovery much weaker, recovery much weaker, and has fallenback and has fallenback sharply in last 3 monthssharply in last 3 months

Needs to be watched Needs to be watched closely for signs of closely for signs of economic weakeningeconomic weakening

Households’ Deposits and Households’ Deposits and LoansLoans

Household deposits and Household deposits and loans have grown in loans have grown in parallel in recent yearsparallel in recent years

Relatively small and Relatively small and constant gap to late-constant gap to late-20082008

Deposits declined Deposits declined sharply in 2009sharply in 2009

Gap between savings Gap between savings and borrowing has and borrowing has widened sharply widened sharply

Net debt burden and Net debt burden and vulnerability of vulnerability of consumers is increasingconsumers is increasing

Situation appears to Situation appears to have stabilisedhave stabilised

Banking: rising HH Banking: rising HH arrears, but may have arrears, but may have

peakedpeaked Sharp increase in arrears Sharp increase in arrears

since the beginning of since the beginning of 20092009

Particularly pronounced for Particularly pronounced for HHs – highest ever levelHHs – highest ever level

Household incomes under Household incomes under stress:stress: No pay rises in public No pay rises in public

sector (40% of LF) for 2 sector (40% of LF) for 2 yearsyears

VAT increaseVAT increase Over-committedOver-committed

Signs of stabilisation in Signs of stabilisation in 20102010

EmploymentEmployment

EmploymentEmployment

Data available Data available to Sept 2009to Sept 2009

Formal Formal employment – employment – no decline no decline during during recessionrecession

Only impact Only impact was on mining was on mining employment – employment – small small proportion of proportion of totaltotal

UnemploymentUnemployment

Unemployment Unemployment data poordata poor Irregular Irregular

timingtiming Inconsistent Inconsistent

definitionsdefinitions Trend appears Trend appears

to be upwards, to be upwards, but not but not conclusiveconclusive

Fiscal PolicyFiscal Policy

Fiscal position – rapid Fiscal position – rapid deteriorationdeterioration

Turnaround from surplus Turnaround from surplus to substantial deficitto substantial deficit

Driven by both increased Driven by both increased spending and falling spending and falling revenuesrevenues

2009/10 deficit projected 2009/10 deficit projected at 15% of GDP is at 15% of GDP is unsustainableunsustainable

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

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 sustainability – to Fiscal sustainability – to be restored through be restored through

spending cutsspending cuts 2010 Budget provided 3 2010 Budget provided 3

year forecasts for the first year forecasts for the first timetime

Some revenue recovery Some revenue recovery forecast in 2011/12 and forecast in 2011/12 and 2012/132012/13 But only to 32% of GDP, not But only to 32% of GDP, not

the 40% historical averagethe 40% historical average Spending has to be cut Spending has to be cut

substantially to balance the substantially to balance the budget – esp. development budget – esp. development spendingspending

Spending projected to be Spending projected to be flat in nominal terms – flat in nominal terms – significant cut in real terms significant cut in real terms and relative to GDPand relative to GDP

Major withdrawal of Major withdrawal of domestic demanddomestic demand

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 debtorbecome net debtor

Reason for credit rating Reason for credit rating downgradedowngrade

International International AssessmentsAssessments

IMF Article IV reportIMF Article IV report

PrioritiesPriorities Substantial fiscal consolidation, to be achieved Substantial fiscal consolidation, to be achieved

by lower public spending (relative to GDP)by lower public spending (relative to GDP) Improved management of public debt, including Improved management of public debt, including

medium-term debt strategymedium-term debt strategy Caution in reducing interest rates furtherCaution in reducing interest rates further Policies and reforms to create a leaner and Policies and reforms to create a leaner and

more efficient public sectormore efficient public sector Structural reforms to promote private sector Structural reforms to promote private sector

led growth led growth

World Bank Public World Bank Public Expenditure Reform Expenditure Reform

programmeprogramme Public spending: reduce to sustainable levels, Public spending: reduce to sustainable levels,

improve efficiency, reduce public sector wage improve efficiency, reduce public sector wage billbill

Planning and Budgeting: move beyond Planning and Budgeting: move beyond current NDP framework to programme-based current NDP framework to programme-based budgeting and MTEFbudgeting and MTEF

Debt management: integrated framework for Debt management: integrated framework for managing public sector assets (inc. FX managing public sector assets (inc. FX reserves) and liabilities (debt and reserves) and liabilities (debt and guarantees)guarantees)

WEF Global WEF Global Competitiveness ReportCompetitiveness Report

Botswana’s ranking has slipped from 66 in 2009 Botswana’s ranking has slipped from 66 in 2009 to 76 in 2010 (out of 139 countries)to 76 in 2010 (out of 139 countries)

44thth placed in SSA – after Mauritius, South Africa, placed in SSA – after Mauritius, South Africa, NamibiaNamibia

Main weaknesses relate to:Main weaknesses relate to: quality of infrastructure (84)quality of infrastructure (84) health and primary education (114)health and primary education (114) higher education and training (94)higher education and training (94) technological readiness (99)technological readiness (99) market size (102)market size (102) business sophistication (104)business sophistication (104)

WEF GCRWEF GCR

Main problems facing business:Main problems facing business: Poor work ethicPoor work ethic Inadequately educated workforceInadequately educated workforce Inefficient govt bureaucracyInefficient govt bureaucracy Access to financingAccess to financing Inadequate supply of infrastructureInadequate supply of infrastructure Restrictive labour regulationsRestrictive labour regulations

Economic OutlookEconomic Outlook

Base Case: International Base Case: International Economic ProspectsEconomic Prospects

Global growth declines Global growth declines slightly but remain slightly but remain positive – no double positive – no double dip recessiondip recession

Emerging markets Emerging markets continue to outgrow continue to outgrow developed markets – developed markets – hence shifting global hence shifting global economic balanceeconomic balance

Commodity markets Commodity markets stable (steady real stable (steady real growth in prices)growth in prices)

Orderly unwinding of Orderly unwinding of economic problems:economic problems: Reducing government Reducing government

debtdebt Withdrawal of fiscal Withdrawal of fiscal

stimulusstimulus Private sector de-Private sector de-

leveraging leveraging Interest rates and Interest rates and

inflation “low for long” inflation “low for long” in major developed in major developed economieseconomies

Euro-zone stabilityEuro-zone stability

Base Case: Domestic Base Case: Domestic EconomyEconomy

Mining:Mining: Steady recovery in Steady recovery in

diamond exports; prices diamond exports; prices not too volatilenot too volatile

Similarly with other Similarly with other mineral exports (copper, mineral exports (copper, nickel)nickel)

New mine development New mine development proceeds (AK6, Boseto, proceeds (AK6, Boseto, uranium) uranium)

Non-mining:Non-mining: Gradual withdrawal of Gradual withdrawal of

government spendinggovernment spending Household sector Household sector

stresses manageablestresses manageable

FiscalFiscal Outturn better than Outturn better than

budget projectionsbudget projections Depletion of govt reserves Depletion of govt reserves

is stemmedis stemmed No govt pay rise in 2011, No govt pay rise in 2011,

given effective (but given effective (but unintended) rise in 2010 unintended) rise in 2010

Serious budget/planning Serious budget/planning reform undertakenreform undertaken

No SACU crisis – just No SACU crisis – just gradual decline in gradual decline in revenuesrevenues

Inflation stays low from Inflation stays low from 2011 2011

Interest cuts in 2011 Q2Interest cuts in 2011 Q2

IMF Growth ForecastsIMF Growth Forecasts

Growth forecasts released Growth forecasts released in Article IV reportin Article IV report

Projections for reasonably Projections for reasonably robust recovery after robust recovery after initial slowdown in non-initial slowdown in non-mining growthmining growth

Based on assumption of Based on assumption of appropriate policy appropriate policy measuresmeasures

Jump in non-mining Jump in non-mining growth based on growth based on investment in new investment in new electricity generating electricity generating capacity, plus beneficial capacity, plus beneficial impact of reformsimpact of reforms

IMF inflation forecastsIMF inflation forecasts

Projected steady decline Projected steady decline in inflation over next five in inflation over next five yearsyears

Suggests BoB may be Suggests BoB may be somewhat optimistic, but somewhat optimistic, but not excessively sonot excessively so

Private sector Private sector expectations unduly expectations unduly backward lookingbackward looking

If IMF forecasts are If IMF forecasts are correct, we are correct, we are approaching a period of approaching a period of structural change in structural change in inflationinflation

Fiscal sustainability – IMF Fiscal sustainability – IMF budget projectionsbudget projections

Revised budget forecasts Revised budget forecasts provided by IMFprovided by IMF

Some revenue recovery Some revenue recovery forecast in 2011/12 and forecast in 2011/12 and 2012/132012/13 But only to 35% of GDP, not But only to 35% of GDP, not

the 40% historical averagethe 40% historical average Recovery of diamond Recovery of diamond

production will help production will help revenues in 2010/11 – revenues in 2010/11 – reducing budget deficitreducing budget deficit

But medium-term budget But medium-term budget prospects still require prospects still require spending cuts for spending cuts for sustainabilitysustainability e.g. ongoing revisions to e.g. ongoing revisions to

SACU revenue formulaSACU revenue formula

Exchange Rate Exchange Rate ForecastsForecasts

Pula weakness vs Pula weakness vs rand driven by rand driven by rand strength, rand strength, compounded by compounded by crawling pegcrawling peg

ZAR strength now ZAR strength now seen as seen as continuing into continuing into medium termmedium term

If so, BWP will If so, BWP will remain around remain around 1.05 in medium 1.05 in medium term term

Exchange Rate Exchange Rate ForecastsForecasts

Other variable Other variable forecastsforecasts

Disposable income: follow non-mining GDP Disposable income: follow non-mining GDP growth (avg. 5-6% a year real growth to growth (avg. 5-6% a year real growth to 2015)2015)

Private sector credit growth: average 12% a Private sector credit growth: average 12% a year growth to 2015year growth to 2015

Interest rates: 50bps cut in 2011, 2012 and Interest rates: 50bps cut in 2011, 2012 and 2013 (taking bank rate to 8.5%);2013 (taking bank rate to 8.5%);

Downside scenarios - Downside scenarios - internationalinternational

Currency wars Currency wars Pursuit of “cheap” Pursuit of “cheap”

currencies to boost currencies to boost exports exports

Possibly leading to Possibly leading to protectionismprotectionism

Debt marketsDebt markets Lose confidence in Lose confidence in

government debt – government debt – pushing up borrowing pushing up borrowing costscosts

Financial/asset marketsFinancial/asset markets Falling financial asset Falling financial asset

pricesprices Housing prices remain Housing prices remain

weakweak

Consumer confidenceConsumer confidence Fails to recoverFails to recover Spending remains weakSpending remains weak

DeflationDeflation Double dip recession:Double dip recession:

Growth turns negative in Growth turns negative in developed econsdeveloped econs

Emerging mkts dragged Emerging mkts dragged downdown

International tradeInternational trade Contraction (as in 2008-9)Contraction (as in 2008-9) Commodity prices weakCommodity prices weak Export-dependent nations Export-dependent nations

hard hithard hit

Downside scenarios – Downside scenarios – regional/domesticregional/domestic

RegionalRegional Zimbabwe impasse Zimbabwe impasse

continues (diamond continues (diamond wealth boosts ZANU PF wealth boosts ZANU PF confidence, no confidence, no agreement on agreement on referendum/constitutioreferendum/constitution/election, MDC leaves n/election, MDC leaves GNU)GNU)

SA fails to boost SA fails to boost growth, spectre of growth, spectre of mines nationalisation, mines nationalisation, industrial unrest, ANC industrial unrest, ANC politicspolitics

DomesticDomestic Policy-making driven Policy-making driven

by populist politics not by populist politics not rational analysisrational analysis

Reluctance to Reluctance to undertake public undertake public finance/public sector finance/public sector reformreform

Failure to implement Failure to implement policies to promote policies to promote private sector growth private sector growth and diversificationand diversification

Labour unrestLabour unrest

Potential Outcomes - Potential Outcomes - BotswanaBotswana

PositivePositive Mining sector diversifies Mining sector diversifies

(coal, copper, nickel, gas, (coal, copper, nickel, gas, uranium) as diamonds uranium) as diamonds declinedecline

Non-mining private sector Non-mining private sector reduces dependence upon reduces dependence upon govt and becomes more govt and becomes more export focusedexport focused

Government adjusts its size Government adjusts its size and spending to reflect and spending to reflect lower medium/long-term lower medium/long-term revenue forecastsrevenue forecasts

Growth continues around 5-Growth continues around 5-7% - supported by job 7% - supported by job creation, sufficient to creation, sufficient to reduce povertyreduce poverty

NegativeNegative International recession International recession

undermines mineral-led undermines mineral-led growthgrowth

Government fails to Government fails to implement policies implement policies supportive of diversificationsupportive of diversification

Pressures to maintain public Pressures to maintain public sector employment & sector employment & expensive spending expensive spending programmes undermine programmes undermine fiscal disciplinefiscal discipline

SACU collapses, SACU collapses, protectionist policies protectionist policies introducedintroduced

Growth stagnates, rising Growth stagnates, rising budget deficits, government budget deficits, government finances collapse, reserves finances collapse, reserves depleted, pula peg depleted, pula peg unsustainable unsustainable

Thank YouThank You