Coping with the Crisis and future Challenges: Economic Performance and Prospects

1. Coping with the Crisis and future Challenges: Economic Performance and Prospects Keith Jefferis 29 June 2010

2. 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

3. Global Economy

4. Global growth slowdown ... and recovery • Depths of recession – 4Q2008 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 2010-11 • Danger of double-dip recession still a concern Source: JP Morgan

5. 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

6. Signs of recovery ... minerals prices Copper Nickel Source: LME

7. Economic Growth

8. 2009 – a year of recession for Botswana • Annual growth in 2009 was minus 6% • Severe recession – first since data series started in 1975

9. 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 non-mining private sector • Much of this driven by government spending

10. 2009 – a year of recession …. but robust recovery forecast • IMF forecasting growth around 6% for 2010 and 2011 • Driven by mining sector recovery

11. Trade & Exchange Rates

12. 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

13. 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

14. 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

15. Exchange rates • Bilateral rates volatile • More volatility against USD • Short-term pula movements against USD and ZAR tend to be in opposite directions

16. 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

17. FX Reserves • 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

18. Import cover • FX reserves well below their peak but still respectable in terms of months of import cover

19. Inflation, Interest rates and Financial Sector

20. Inflation ... should stay low for a while, but how low? • Inflation has recently been 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

21. Monetary policy – easing with large cuts in interest rates • Interest rates sharply lower in 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%

22. 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

23. Bank credit – growth recoveryArrears – a problem to watch

24. Government Budget

25. Fiscal policy – stimulus helped the economy, but at the cost of large deficits • 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

26. Impact of deficits on Govt finances • Net financial position – govt. 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

27. Summary and Outlook

28. 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

29. Prospects International 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 • 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, euro-zone stability

30. Thank You Keith@econsult.co.bw 3900575