Experts participating in an Internet seminar this week tackled issues that exposed Botswana’s vulnerability to the vicissitudes of the global economy, reliance on government spending and the country’s mono-culture economy driven by mining but saw hope in the re-opening of developed economies, KITSO DICKSON reports.
The revisions to the national accounts data released in July 2021 show that the economy recorded a larger contraction in 2020 than was originally estimated due to technical adjustments made to the national accounts.
Year-on-year real GDP contracted by 8.5 percent in 2020 rather than the 7.9 percent originally reported. Real GDP contracted by 8.6 percent year-on-year in Q1 2021. E-consult, a private economic think tank, said this week that the decline in real GDP during the year to March 2021 was anticipated as it covers a full 12-month period reflecting the impact of COVID-19.
On a positive note, however, considering just the first quarter of 2021, the encouraging result is that GDP was marginally higher (by 0.7 percent) than it had been in Q1 of 2020, notwithstanding the continuing impact of COVID-19. Sethunya Kegakgametse and Kitso Mokhurutshe the economists who authored the quarterly E-Consult report released this week, are optimistic. They expect economic recovery in 2021, attributable to the improvement in the global demand for diamonds and improvements in the rollout of COVID-19 vaccines locally and globally.
Most financial institutions have revised growth upwards. Razia Khan, the Chief Economist & Head of Research – Africa & Middle East from Standard Chartered Bank, explained that this is very substantially being driven by the recovery, and the reopening of economies in the developed world. Khan was speaking this week during a webinar on “Unlocking Botswana & Africa’s True Potential – Attracting Investment,” hosted by the Botswana Stock Exchange (BSE).
Khan observed that access to vaccines is one single factor that sets apart developed market growth outlooks and that there has not been equal access to vaccines across the board for some economies. “This was a function of having funded the research, having secured supplies a lot sooner, having been able to allow for the vaccine administration to encompass a wider proportion of their populations much earlier on,” she said.
But even though vaccines do seem to play an important role in recovery of economies, in those rich nations that have already been more successful with vaccine rollout economic recovery “is not fully assured”, Naledi Madala, economist at Absa, said in the webinar. “The recovery, even for them, is not fully assured, Madala noted. “For as long as the virus circulates elsewhere, that risk is there and until achieving global herd immunity, it is very necessary to defeat this Covid-19. I think that remains elevated for all of us.”
However, it is important to note that the diamond market, the mainstay of the economy in Botswana, has reflected some recovery of the world’s largest economies. De Beers revealed that in the US, the world’s largest market for diamond jewellery, consumer demand exceeded pre-pandemic levels in the first half of 2021, with retailers in the sector reporting robust double-digit growth on 2019 levels. In China, the second largest market for diamond jewellery, the country’s leading diamond jewellery retailer reported its highest revenue and profit in seven years for the financial year ending 31 March.
Recovery has been supported by implementation of fiscal stimuli across many countries in the world, as well as the rollout of COVID-19 vaccines in some countries, Kegakgametse and Mokhurutshe explained. All industry segments continue to report positive sales while demand has been driven by the two key markets of the United States and China. “The diamond industry has also benefited from the prolonged slowdown of spending on travel and tourism due to movement restrictions, and the diversion of some spending to consumer demand for diamond jewellery,” they said.
De Beers Global Sightholder Sales (DBGSS) increased sales by 178 percent between the two periods, from $906 million in H1 2020 to $2.5 billion in H1 2021. The rebound was chalked up to increased production and sales volumes as well as higher rough diamond prices. During the half year, production across Botswana’s mines increased by 43 percent, from 7.5 million carats to 10.7 million, carats while the average price per carat increased by 13 percent to $135 per carat in H1 2021 from USD119 per carat. “The rebound of the global diamond market from the COVID-19 crisis is important for Botswana and it will provide a boost to export earnings, the external account balance, and government revenues,” Kegakgametse and Mokhurutshe wrote.
There were significant increases in exports to the value of P24.1 billion in Q1 2021, representing an increase of 38.4 percent when compared to Q4 2020. The sharp increase in exports was driven by diamond exports, which rose by 45 percent during the quarter as the global demand for diamonds improved during the period. Imports were valued at P22.8 billion, indicating a marginal decrease of 1.4 percent between Q1 2021 and Q4 2020. This resulted in a trade surplus of P1.3 billion in Q1, the first quarterly surplus since 2018. However, subsequent trade data for April and May 2021 are less positive, and indicate a likely substantial trade deficit in Q2, Kegakgametse and Mokhurutshe noted. They added: “Data on the recent economic developments provide a decidedly mixed picture, with some positive developments with regard to economic growth, trade performance and banking, offset by negative developments with regard to inflation, hopefully temporarily.”
IMF recently published article on Botswana in which it projected strong growth in the mining sector that is essentially the driver of near term headline GDP growth. What is exciting for Madala is the diversification within the mining sector itself. “There is a lot of interest in the copper sector in reviving some of those mines that, as we know, had closed because of depressed copper prices,” she said. “I really think that you know when we talk about coal, Botswana will remain attractive to foreign investment, especially from China, which is really looking to plug its supply deficit on copper and coal.”
But the question everyone should be asking is whether mining-driven growth will be sufficient? “If we take a medium term view, the same IMF article suggests that Botswana’s economy will grow at the rate of around 4 percent a year as a sustainable level in the medium term,” Khan said. “The question we should be asking is that, is this sufficient to deliver on the ambition of fostering development? Is 4 percent growth in real terms really going to be enough for the economy as a whole?”
While recovery of the mining sector is desirable in the short term, it is not so much for the long-term. Observers want to see more diverse export earnings and creation of jobs because mining tends to be quite capital intensive. “If we were going to achieve transformation, especially in the context of achieving the vision, we need to see a lot more of the jobs and export earnings coming from other sectors,” Moatlhodi Sebabole, Chief Economist at FNBB, said in the webinar.
Sebabole argued that Botswana also needs to focus on productivity and competitiveness, especially in key sectors. “We spend a lot of money on key sectors such as agriculture, manufacturing, as an example, but the ROI there really doesn’t speak volumes when you look at the number of sustainable jobs created, not just temporary, as well as looking at their contribution to growth overall,” he said. “We need to step up the ladder in terms of value chain for those so that a lot value add is done locally where we focus on exports and substitutes for imports.”
Where Botswana is focusing on exports, he said, is very important. “We look at several things such as the number of export partners associated with the sectors and products that you’re looking into,” Sebabole said, adding that product range also matters. You’ll notice in the past two or so years, our products were just under 3 000, compared to the likes of Namibia at about 4 109 products that they were looking into,” he said.
There is no doubt that COVID crisis has shone a spotlight on some of the longstanding vulnerabilities of Botswana’s economy, namely dependence on global growth and a very narrow mining base for its exports. The current global downturn illustrates vulnerability. Khan echoed the need now to rebuild the external buffers. “Botswana has taken some initially encouraging steps, the focus on fiscal consolidation, the fact that both the fiscal deficits and the current account deficit should narrow because of the bounce back in commodity prices. That’s the good news,” she said.
As the country tries to attract capital, the question investors will be asking now is what really differentiates economies in terms of their growth profile and immediate bounce back in growth. Is just a base effect going to be sufficient to draw greater levels of investment? Probably not, according to Khan, because of the uncertainty that lies beyond that in the ongoing vulnerability to adverse commodity price trends. Khan highlighted an opportunity for Botswana to really drive a longer term growth agenda.
“Mining growth is good, but we all know that the basic issue with Botswana’s growth model is that all along because of mining, there has been an over-dependence on government spending as a driver of growth,” she argued.
The debate among experts is what Botswana can do to really create resilience and independence in its private sector so that it is not just a function of mining. There are also questions about whether Botswana, with all of its positives and its long track record of credible policy, has done enough to leverage potential investor interest. “We have seen that in the past, strong macroeconomic stability has not necessarily been a great contributor to us attracting FDIs more than our peers in the region,” Sebabole argued. “We have failed to attract as much FDI that has gone into the likes of Congo- Brazzaville and Congo DR, which we do know are met with a lot of controversy in terms of corruption and wars and blood diamonds.”
Could Botswana be doing more to have more impact with global investors and could this in itself lead to greater interest in the local currency debt markets? After a country has issued externally dollar debt, Khan advised that investors do their homework on the country, and “you tend to see a positive effect with greater interest building in the local currency depth”, she noted. “We know that if Botswana is going to create greater resilience around its economic story, it needs to do much more to be able to broaden its investor base to be able to really depend on a much larger pool of investor interest than has been the case today.”
Khan added that there is a multitude of reforms that could be put in place, including looking at SMEs, privatisation, governance rules and creating the conditions for more private sector participation. This, she said, creates the conditions for a revenue base that is perhaps less dependent both on government spending and mining.
When you look at economic growth from an expenditure perspective, it is made up of household consumption. A lot of imminent threats with the ending of the SOE is loss of jobs. Inflation pressures, although transitory in nature, the reality is that it will continue to hit households and disposable income levels.
If almost half of the economy is led by household consumption expenditure, Sebabole argued, it poses significant risks to sustainable growth going forward. This is because unemployment numbers might grow significantly while incomes may not keep pace with changes in base price increases. “That poses a real threat on consumption expansionary levels going forward as well as investment levels to a large extent,” he noted.
Sebabole said they expect inflation to pick up closer to 10 percent and will trend above 6 percent until the second quarter of next year. He argued that inflation will have negative drag on real rates.