Recent Economic Developments & Prospects March 8, 2007 Keith Jefferis Structure of Presentation Botswana Economic Developments Economic Growth Exchange Rates, Trade etc. Inflation and Interest Rates Government Budget 2007 Prospects 1
Economic Growth Growth Developments Economic growth data released just after 2007 Budget For the first time in many years, the real GDP growth figure was not mentioned in the Budget speech Growth in 05/06 was minus 0.8% 2
GDP growth 16 14 12 10 8 6 4 2 0-2 '95/96 '97/98 '99/00 '01/02 '03/04 '05/06 Growth data disappointing, but not all bad: Mainly driven by mineral sector developments volatile due to overlapping calendar and national accounts years Underlying mineral growth performance steady and at a reasonable rate Prospects for improvements in nondiamond mineral sector growth % 25% 20% 15% 10% 5% 0% -5% -10% Growth of Diamond Production 2001 Q2Q3 Q4 2002 Q2Q3 Q4 2003 Q2Q3 Q4 2004 Q2Q3 Q4 2005 Q2Q3 Q4 2006 Q2Q3 Q4 3
Growth Developments Outside of mining sector, growth performance mixed. Strong growth in transport, hotels & restaurants Negative growth in manufacturing, construction, agriculture Year to year volatility Concern over quality of GDP data Growth by Sector Hotels & restr Transport Soc. & Pers. Serv. Government Water & Elec Fin. & Bus. Serv. Trade Manufacturing Construction Agriculture Mining '05/06 '04/05-20 -10 0 10 20 30 40 4
Growth Developments Major revisions to GDP data in some sectors, notably: Agriculture Social & personal services Transport Manufacturing Most recent GDP growth estimates highly provisional Growth by Sector 2004/05: Original & Revised Total Soc & pers serv Government Fin & bus serv Transport Trade, hotels etc Construction Water Manufacturing Mining Agriculture Revised (2007) Original (2006) -20-10 0 10 20 5
Growth Developments GDP data difficult to interpret, due to: Revisions Adjustment items not allocated to sectors Making allowances for these factors, overall growth in non-mining GDP appears to be picking up slowly 10 Growth of Non-Mining Value Added 8 % growth 6 4 2 0 '96/97 '97/98 '98/99 '99/00 '00/01 '01/02 '02/03 '03/04 '04/05 '05/06 Non-min. 5.6 6.9 7.6 4 4.1 5.8 7.9 4.9 2.4 2.7 NMPS 4.7 6.2 7.9 3.4 3.4 5 5.1 4.7 1.2 2.5 NMPS = non-mining private sector (i.e. excludes government 6
GDP Growth 15 GDP Non-min. NMPS 12 % growth 9 6 3 0-3 '96/97 '97/98 '98/99 '99/00 '00/01 '01/02 '02/03 '03/04 '04/05 '05/06 Evidence for Economic Recovery? GDP data (to June 06) Growth indicators in positive territory BoB Business Expectations survey Jump in confidence in 2006H2 compared to 2006H1; Confidence now over 50% for first time Much improved confidence amongst non-exporters 7
BoB Business Confidence Survey 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005H1 2005H2 2006H1 2006H2 Exporters Non-exporters All Growth Indicators Real Private Business Credit Real growth 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Strong signs of business recovery 2000 2001 2002 2003 2004 2005 2006 2007 8
Growth Indicators Non-Mining Electricity Consumption Quarterly consumption, y-o-y growth 20% 15% 10% 5% 0% Signs of recovery, although weaker & later -5% 2000 2001 2002 2003 2004 2005 2006 Exchange Rates 9
Exchange Rates 140 130 120 Index 1996=100 110 100 90 80 70 60 50 2002 2003 2004 2005 2006 2007 NEER BWP/ZAR BWP/USD Crawling peg Exchange Rate Volatility 400% 350% 300% 250% 200% 150% 100% 50% 0% 2004 2005 2006 2007 10
Exchange Rates BWP crawl reduced slightly as forecasts of inflation gap closing and real exchange rate stabilising No transparency yet on rate of crawl or basis for calculation, but would be desirable to make exchange rates and inflation more predictable Crawl may be reviewed around mid-year Real Effective Exchange Rates 1995-2006 Index 1996=100 125 120 115 110 105 100 95 90 85 80 Devaluations and crawling peg have restored competitiveness 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 11
Exchange Rate Forecasts: 2006 Actual, end Dec-06 Forecast, end Dec-07 Change ZAR/USD 6.97 7.80-10.6% ZAR/BWP 1.157 1.167 0.9% USD/BWP 0.166 0.150-9.7% Forecasts 2006-2011 Pula vs. ZAR ZAR per BWP 1.22 1.20 1.18 1.16 1.14 1.12 1.10 1.08 1.06 1.04 1.02 2005 2006 Q2 Q3 Q4 2007 Q2 Q3 Q4 2008 2009 2010 2011 12
Forecasts 2006-2011 Pula vs. USD, EUR USD & EUR per BWP 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11 0.10 2005 2006 Q2 Q3 Q4 2007 Q2 Q3 USD/BWP EUR/BWP Q4 2008 2009 2010 2011 Export Developments Exports have become more diversified (away from diamonds) Wide range of non-diamond exports Modest overall export growth from 2005 to 2005 (3% in USD terms) 13
Diamond Exports as % of Total Exports 90% Rapid diamond export growth 85% 80% 75% 70% 65% 60% 55% 50% Temporary diversification - Hyundai Exports have become more diversified since 2001 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Composition of Non-diamond Exports, 2006 Textiles 13% Other goods 14% Meat etc. 7% Nickel & copper 50% Salt & soda ash 6% Machinery 3% Gold 3% Vehicles & parts 2% Iron & steel prods 2% 14
Change in Exports (US$), 2005-06 Other goods Nickel & copper Salt & soda ash Meat etc. Iron & steel prods Total exports Diamonds Gold Machinery Textiles Vehicles & parts -80% -60% -40% -20% 0% 20% 40% 60% Exports & Imports P'000 per month 3500 3000 2500 2000 1500 1000 500 0 2004 Exports growing much faster than imports as devaluations intended 2005 2006 Exports Imports Import trend Export trend 15
Foreign Exchange Reserves (Pula) 50000 Trade performance resulting in rapid growth of fx reserves more than doubled since late 2003. Import cover approx. 30 months 40000 Pula mn 30000 20000 10000 0 2001 2002 2003 2004 2005 2006 Inflation & Monetary Policy 16
Inflation vs Forecast (as at July 06) 16% 14% 12% 10% 8% 6% 4% 2% 0% BOB target range 2006 FM A M J Actual Forecast J A S O N D 2007 Inflation has declined steadily since peak of 14.2% in April 2006 Down to 7.4% in January 2007 Decline has been faster than expected, due mainly to falling oil prices New CPI index will help more accurate measurement of inflation Crude Oil Prices (Brent) USD/barrel 100 95 90 85 80 75 70 65 60 55 50 Dec 30, 2005 Jan 27, 2006 Feb 24, 2006 Mar 24, 2006 Apr 21, 2006 May 19, 2006 Jun 16, 2006 Jul 14, 2006 USD Aug 11, 2006 Sep 08, 2006 Oct 06, 2006 Nov 03, 2006 Dec 01, 2006 BWP Dec 29, 2006 Jan 26, 2007 Feb 23, 2007 500 450 400 350 300 250 BWP/barrel Crude oil prices have reversed most of 2006 gains By end-feb down 23% in USD terms and 21% in BWP terms from 2006 peak Impact of falling prices reinforced by larger weight for fuel prices in new basket 17
Inflation Forecast (Feb 07) 16% 14% 12% 10% 8% 6% 4% 2% Actual BOB target range F cast 0% 2002 2003 2004 2005 2006 2007 Monetary Policy No interest rate changes since Feb 2006 Declining inflation favours rate reduction, but: inflation still above BoB target range of range of 4%-7%, which is to be maintained in 2007 historically interest rates only reduced when inflation close to target inflation should fall within range in Q2 2007, but only to around 6.5% main concern now is credit growth way above range of 11%-14% may see small reduction in rates (50bps) in next 2-3 months, but not much after that 18
Real Prime Lending Rate 12% 10% 8% 6% Real prime rate reaching recent historical peak Supports case for rate reduction 4% 2% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Government Budget 2007 19
Govt Revenue & Spending % of GDP 50% 45% 40% 35% 30% '95 '96 '97 '98 '99 '00 Expenditure/GDP Budget now sustainable revenue and expenditure in line with long-term trends '01 '02 Revenue/GDP '03 '04 '05 '06 '07 Budget Balance 10% Large surpluses are back! % of GDP 5% 0% -5% -10% '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 20
Budget balance actual vs. forecast 10% 8% actual % of GDP 6% 4% 2% 0% Budget balance more favourable than expected -2% -4% forecast -6% 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Budgeted Expenditure 14,000 12,000 +36% Development expenditure forecasts for 2007/08 unrealistic P mn 10,000 8,000 6,000 4,000 +36% +92% 2005/06 2007/08 2,000 0 Pers emoluments Other recurrent Development 21
Allocation of Expenditure by Function, 2007/08 Education 24% Defence 8% Public order & safety 5% Gen admin 16% Other econ serv 8% Health 13% Social & comm welfare 4% Housing & urban dev. 6% Agric 3% Elec & water Roads 4% RSGs 2% 7% Economic Prospects 2007 22
Botswana Economic Prospects 2007 Slow resumption of growth declining inflation and hopefully interest rates; positive impact of govt. salary increases in 2006 & 2007 impact of higher government spending but slow positive devaluation impact feeding through export-led growth impact of reforms telecomms etc. major projects Major Projects Mining & Related LionOre/Tati Nickel Activox refinery (Cu/Ni/PGMs) (Francistown) Diamondex mine early 2007 (Tuli Block) African Copper 2008 (Dukwe) Diamond aggregation/cutting African Diamonds AK6 2007 (Orapa) Mmamabula coal/power Mount Burgess (zinc/silver); Discovery (nickel/copper/silver) & A-Cap Resources (uranium) 23
Botswana Economic Prospects 2007 Growth inhibited by: Slow disbursement of govt. spending Slow structural reforms, privatisation etc. Skills shortages Capacity constraints in region (e.g. cement) BEAC reforms Focus on openness, competitiveness, policy and mindset change, supported by major projects IMF growth forecasts 2006 4.2%; 2007 4.3% SADC GDP Growth 2007 IMF Forecasts % 15 10 5 0-5 -10 Zim Swaz Lesotho Maur Botswana f cast growth (4.3%) below SADC average (6.0%) SA Botswana Namibia Mad'gscr Malawi Zambia Moz'bq DRC Tanz Angola 24
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