E-CONSULT forecasts more drawdowns of forex and savings

• GDP likely to decline 50 percent in the short term • Lost GDP to be P250 – P300 million a day • Diamond industry will take 12-18 months to recover

E-CONSULT forecasts more drawdowns of forex and savings

According to a newly released quarterly report by local economic think tank E-consult, there are fairly consistent estimates of economic activity being reduced by 30-60 percent in the short-term during periods of strict lockdowns imposed by governments to curb the spread

of the novel coronavirus pandemic (COVID-19) which burst on to the global scene in March 2020. 

In line with this trend, E-consult forecasts that decline in Botswana’s GDP during April 2020 is likely to be around 50 percent. The authors of the report, Keith Jefferis, Sethunya Sejoe and Kitso Mokhurutshe, point out that this is only the short-term impact. The trio argue that the longer-term impact over 2020 as a whole (and even into 2021) depends on a wide range of factors. “These include developments in the global economy, recovery in the diamond industry, the length of time it takes for international travel to resume, and the duration of the domestic lockdown and the restrictions imposed under the SoPE, including the ban on entry by non-residents,” they say.

E-consult notes that the impact at country level depends on the structure of individual economies, with those dependent on primary commodity exports (like diamonds) and tourism being particularly badly hit. Despite its subdued performances over the years, the diamond industry remains the most important to the Botswana economy. The authors note that the year 2019 was generally a poor one for diamonds. Signs of recovery were observed in December 2019 and January 2020 before the deadly COVID-19 swept through the globe. As the pandemic brought the world to a complete halt, retail stores closed in most countries, meaning that few sales of diamond jewellery are taking place (there are some online sales). Travel restrictions mean that buyers cannot travel to physical sales events such as those held 10 times a year in Botswana. De Beers was forced to postpone one of its sightholder sales as a result. The group actually is projecting a 20 percent reduction in output below previously planned levels in 2020, seeking to balance off this with demand levels.

“There are excess levels of inventory at all levels of the diamond value chain – retailers, jewellery manufacturers, cutters and polishers, traders and mining companies,” E-consult economists argue, adding that even when retail sales do re-start, it will take some time for the demand to flow through the value chain down to the level of diamond mining companies. “There are also concerns that the impact of COVID-19 has been so traumatic that it will take time for spending on high-value luxuries to resume,” they write.

The expectation is that lack of sales means that export earnings and government revenues are impacted until sales recover. E-consult’s current expectation is that it will take 12-18 months for the global diamond industry to fully recover from COVID-19.

“The impact of COVID-19 on the Botswana economy is almost certain to be substantially negative, with a large drop in GDP in 2020. Our current estimate is that this drop will be in the range of 10-15 percent,” the firm says, adding that the impact is likely to be prolonged, especially if restrictions on economic activity and population movement are maintained for a lengthy period. The economists warn that some of the damage may well be irreversible – for instance, with firms that do not survive, jobs that are lost and government savings that are depleted to fund larger budget deficits. “Total economic losses are likely to be in the region of P250 – P300 million a day in terms lost GDP, and therefore lost income for households, businesses and government,” the three write.

The World Economic Outlook (WEO), released by the International Monetary Fund (IMF) in the April 2020, predicted a contraction of 3.0 percent in global GDP in 2020 and a contraction of 6.1 percent in the GDP of advanced economies. For Botswana, the IMF’s WEO projects a GDP contraction of 5.4 percent in 2020. 

E-consult observes that estimates that GDP that would follow a “V-shaped” pattern, with a fairly strong recovery, are now being replaced by that projections of a “U-shaped” recovery, with a long base of contraction (recession) before an eventual recovery, or even an “L-shaped” outturn. The economic pundits worry that the longer the recession lasts, the fewer the businesses that will survive the downturn, and the slower the recovery will be and the greater the likelihood of a prolonged depression.

“Travel restrictions also impact on the country’s ability to hold diamond sight sales,” says Econsult. Restrictions on international travel were imposed early on as COVID-19 spread from China to other countries, as it was seen as the main channel for the international transmission of the virus. The domestic lockdown started at midnight on April 2 with an initial duration of 28 days. It has since been extended to May 21with a progressive relaxation of restrictions from May 8. Econsult warns that the costs of not re-opening also need to be taken into account. “The inability of many households to earn an income during the lockdown - particularly those in the informal sector and engaged in other forms of self-employment - will become more problematic as the lockdown continues,” says the firm, adding that analysis elsewhere in Africa indicates that the negative impact of lockdowns is non-linear, i.e. that a doubling of the length of a lockdown more than doubles the negative social and economic impact, given the limited resilience of households and firms in many countries to withstand prolonged periods with no income.

The government has announced a range of support measures to cushion the impact on household incomes and also to mitigate the adverse impact on firms so as to support their survival and ability to take advantage of the eventual recovery and ensure long-term preservation of jobs. These include a wage subsidy covering 50 percent of basic salaries for citizen employees in activities affected by COVID-19, with a minimum monthly subsidy of P1,000 and a maximum of P2,500 payable for three months. Further, there is provision of food baskets for eligible low-income households.

“It appears that at least 40 percent of households will receive food baskets, and 80 percent of eligible workers are covered by the wage subsidy. Therefore, this should go some way in mitigating part of the adverse economic effects,” Econsult says. The estimated cost of these fiscal measures is around P4 billion, or approximately 2 percent of GDP. According to Econsult, this is a relatively small fiscal injection by international standards, and may need to be extended or topped up in due course.

To avoid a recession, Kgori Capital’s Tshegofatso Tlhong says households will have to boost spending post the lifting of the State of Emergency and that this can only be achieved with an interest rate cut which increases disposable incomes in the economy.

On Thursday, the Monetary Policy Committee (MPC) of the Bank of Botswana decided to reduce the Bank Rate by 50 basis points from 4.75 percent to 4.25 percent. Commercial banks are required to make the necessary interest rate adjustments with immediate effect to reflect this policy decision. 

Unlike in the 2008/9 Global Financial Crisis, the exogenous shock to the economy occurs amid weakening of the country’s fiscal and external buffers, characterised by government fiscal deficits for three consecutive financial years and a gradual decline in foreign exchange reserves from 18.3 months of import cover in 2015 (P84.9 billion) to the current level of P68.9 billion as at end of January 2020 (or 13.3 months of import cover), Bank of Botswana governor Moses Pelaelo noted this week.

Experts argue that managing the adverse economic effects of COVID-19 and supporting economic recovery in due course will place great demands on government. They say the impact on government revenues arising from the reduction in diamond sales and other economic sectors, as well as additional expenditures required in the COVID-19 support packages, will place government finances under stress, requiring both a drawdown of accumulated savings and increased debt issuance. Similarly, the reduction in export revenues will require a drawdown of the foreign exchange reserves.