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1
Recent Economic Developments & Prospects
March 8, 2007
Keith Jefferis
Structure of Presentation
Botswana Economic DevelopmentsEconomic GrowthExchange Rates, Trade etc.Inflation and Interest RatesGovernment Budget2007 Prospects
2
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 speechGrowth in 05/06 was minus 0.8%
3
GDP growth
-202468
10121416
'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 yearsUnderlying mineral growth performance steady and at a reasonable rateProspects for improvements in non-diamond mineral sector growth
Growth of Diamond Production
-10%
-5%
0%
5%
10%
15%
20%
25%
2001
Q2
Q3
Q42002
Q2
Q3
Q42003
Q2
Q3
Q42004
Q2
Q3
Q42005
Q2
Q3
Q42006
Q2
Q3Q4
%
4
Growth Developments
Outside of mining sector, growth performance mixed.Strong growth in transport, hotels & restaurantsNegative growth in manufacturing, construction, agricultureYear to year volatilityConcern over quality of GDP data
Growth by Sector
-20 -10 0 10 20 30 40
MiningAgriculture
ConstructionManufacturing
TradeFin. & Bus. Serv.
Water & ElecGovernment
Soc. & Pers. Serv.Transport
Hotels & restr
'05/06'04/05
5
Growth Developments
Major revisions to GDP data in some sectors, notably:
AgricultureSocial & personal servicesTransportManufacturing
Most recent GDP growth estimates highly provisional
Growth by Sector 2004/05: Original & Revised
-20 -10 0 10 20
AgricultureMining
ManufacturingWater
ConstructionTrade, hotels etc
TransportFin & bus serv
GovernmentSoc & pers serv
Total
Revised(2007)Original(2006)
6
Growth Developments
GDP data difficult to interpret, due to:
RevisionsAdjustment items not allocated to sectors
Making allowances for these factors, overall growth in non-mining GDP appears to be picking up slowly
Growth of Non-Mining Value Added
0
2
4
6
8
10
% g
row
th
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
'96/97 '97/98 '98/99 '99/00 '00/01 '01/02 '02/03 '03/04 '04/05 '05/06
NMPS = non-mining private sector (i.e. excludes government
7
GDP Growth
-3
0
3
6
9
12
15
'96/97
'97/98
'98/99
'99/00
'00/01
'01/02
'02/03
'03/04
'04/05
'05/06
% g
row
thGDP Non-min. NMPS
Evidence for Economic Recovery?
GDP data (to June 06)Growth indicators in positive territoryBoB Business Expectations survey
Jump in confidence in 2006H2 compared to 2006H1; Confidence now over 50% for first timeMuch improved confidence amongst non-exporters
8
BoB Business Confidence Survey
0%
10%
20%
30%
40%
50%
60%
70%
80%
2005H1 2005H2 2006H1 2006H2
Exporters Non-exporters All
Growth Indicators – Real Private Business Credit
-15%-10%
-5%0%5%
10%15%20%25%30%35%
20002001
20022003
20042005
20062007
Rea
l gro
wth
Strong signs of business recovery
9
Growth Indicators – Non-Mining Electricity Consumption
-5%
0%
5%
10%
15%
20%
2000 2001 2002 2003 2004 2005 2006
Qu
arte
rly
con
sum
pti
on, y
-o-y
g
row
thSigns of recovery, although weaker
& later
Exchange Rates
10
Exchange Rates
50
60
70
80
90
100
110
120
130
140
2002 2003 2004 2005 2006 2007
Inde
x 19
96=1
00
NEERBWP/ZARBWP/USD
Crawling peg
Exchange Rate Volatility
0%50%
100%
150%200%250%300%
350%400%
2004 2005 2006 2007
11
Exchange Rates
BWP crawl reduced slightly as forecasts of inflation gap closing and real exchange rate stabilisingNo transparency yet on rate of crawl or basis for calculation, but would be desirable to make exchange rates and inflation more predictableCrawl may be reviewed around mid-year
Real Effective Exchange Rates 1995-2006
80859095
100105110115120125
19951996
19971998
199920
002001
2002
20032004
200520
06
Inde
x 19
96=
100
Devaluations and crawling peg have restored competitiveness
12
Exchange Rate Forecasts: 2006
-9.7%0.1500.166USD/BWP
0.9%1.1671.157ZAR/BWP
-10.6%7.806.97ZAR/USD
ChangeForecast,
end Dec-07Actual,
end Dec-06
Forecasts 2006-2011 Pula vs. ZAR
1.021.041.061.081.101.121.141.161.181.201.22
20052006 Q2 Q3 Q4
2007 Q2 Q3 Q42008
20092010
2011
ZA
R p
er B
WP
13
Forecasts 2006-2011 Pula vs. USD, EUR
0.100.110.120.130.140.150.160.170.180.19
20052006 Q2 Q3 Q4
2007 Q2 Q3 Q42008
20092010
2011
US
D &
EU
R p
er B
WP
USD/BWP EUR/BWP
Export Developments
Exports have become more diversified (away from diamonds)Wide range of non-diamond exportsModest overall export growth from 2005 to 2005 (3% in USD terms)
14
Diamond Exports as % of Total Exports
50%55%
60%65%
70%75%
80%85%
90%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Rapid diamond export growth
Exports have become more
diversified since 2001Temporary
diversification -Hyundai
Composition of Non-diamond Exports, 2006
Nickel & copper50%
Textiles13% Other goods
14%
Meat etc.7%
Salt & soda ash6%
Machinery3%
Gold3%
Vehicles & parts2%
Iron & steel prods2%
15
Change in Exports (US$), 2005-06
-80% -60% -40% -20% 0% 20% 40% 60%
Vehicles & partsTextiles
MachineryGold
DiamondsTotal exports
Iron & steel prodsMeat etc.
Salt & soda ashNickel & copper
Other goods
Exports & Imports
0
500
1000
1500
2000
2500
3000
3500
2004
2005
2006
P'0
00
per
mon
th
Exports Imports Import trend Export trend
Exports growing much faster than imports – as devaluations
intended
16
Foreign Exchange Reserves (Pula)
0
10000
20000
30000
40000
50000
2001
2002
2003
2004
2005
2006
Pula
mn
Trade performance resulting in rapid growth of fx reserves – more than doubled since late 2003.
Import cover approx. 30 months
Inflation & Monetary Policy
17
Inflation vs Forecast (as at July 06)
0%
2%
4%
6%
8%
10%
12%
14%
16%
2006 F M A M J J A S O N D20
07
BOB target range
Forecast
Actual
Inflation has declined steadily since peak of 14.2% in April 2006Down to 7.4% in January 2007Decline has been faster than expected, due mainly to falling oil pricesNew CPI index will help more accurate measurement of inflation
Crude Oil Prices (Brent)
50
55
60
65
70
75
80
85
90
95
100
Dec 3
0, 2005
Jan 2
7, 2
006
Feb 2
4, 2006
Mar 24, 2
006
Apr 21, 2
006
May 19, 2
006
Jun 1
6, 2006
Jul 1
4, 2006
Aug 11, 2
006
Sep 0
8, 200
6
Oct 0
6, 2006
Nov 0
3, 2006
Dec 0
1, 2006
Dec 2
9, 2006
Jan 2
6, 200
7
Feb 2
3, 200
7
US
D/b
arre
l
250
300
350
400
450
500
BW
P/b
arre
l
USD BWP
Crude oil prices have reversed most of 2006 gainsBy end-Feb down 23% in USD terms and 21% in BWP terms from 2006 peakImpact of falling prices reinforced by larger weight for fuel prices in new basket
18
Inflation Forecast (Feb 07)
0%
2%
4%
6%
8%
10%
12%
14%
16%
2002 2003 2004 2005 2006 2007
BOB target range
Actual F’cast
Monetary Policy
No interest rate changes since Feb 2006Declining inflation favours rate reduction, but:
inflation still above BoB target range of range of 4%-7%, which is to be maintained in 2007historically interest rates only reduced when inflation close to targetinflation 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
19
Real Prime Lending Rate
0%
2%
4%
6%
8%
10%
12%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Real prime rate reaching recent historical peakSupports case for rate reduction
Government Budget 2007
20
Govt Revenue & Spending
30%
35%
40%
45%
50%
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
% o
f G
DP
Expenditure/GDP Revenue/GDP
Budget now sustainable –revenue and expenditure in line with long-term trends
Budget Balance
-10%
-5%
0%
5%
10%
'93
'94
'95
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
% o
f G
DP
Large surpluses are back!
21
Budget balance – actual vs. forecast
-6%-4%-2%
0%2%4%6%
8%10%
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
% o
f GD
P
forecast
actual
Budget balance more favourable than expected
Budgeted Expenditure
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
P m
n
Persemoluments
Otherrecurrent
Development
2005/062007/08
+36%
+36%
+92%
Development expenditure forecasts for 2007/08 unrealistic
22
Allocation of Expenditure by Function, 2007/08
Public order & safety
5%
Defence8%
Education24%
Health13%
Social & comm welfare
4%
Housing & urban dev.6%
Agric3%
Elec & water4%Roads
2%RSGs7%
Other econ serv8%
Gen admin16%
Economic Prospects 2007
23
Botswana Economic Prospects 2007
Slow resumption of growthdeclining inflation and – hopefully –interest rates;positive impact of govt. salary increases in 2006 & 2007impact of higher government spending –but slowpositive devaluation impact feeding through – export-led growthimpact 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/cuttingAfrican Diamonds AK6 2007 (Orapa)Mmamabula coal/powerMount Burgess (zinc/silver); Discovery (nickel/copper/silver) & A-Cap Resources (uranium)
24
Botswana Economic Prospects 2007
Growth inhibited by:Slow disbursement of govt. spendingSlow structural reforms, privatisation etc.Skills shortagesCapacity constraints in region (e.g. cement)
BEAC reformsFocus on openness, competitiveness, policy and mindset change, supported by major projects
IMF growth forecasts2006 4.2%; 2007 4.3%
SADC GDP Growth 2007IMF Forecasts
-10
-5
0
5
10
15
ZimSwaz
Lesotho
Maur
SA
Botswan
a
Namibia
Mad'gsc
r
Malawi
Zambia
Moz'bq
DRCTan
z
Angola
%
Botswana f’cast growth (4.3%) below SADC average (6.0%)