- But adequate water, electricity supply, favourable political climate, effective regulatory framework, and efficient govt spending may provide a counterbalance
The newly introduced Citizen Economic Empowerment Policy (CEEP), which has set in place various programmes and initiatives to encourage citizens and citizen companies to participate in the mainstream of the economy, can prove to be a discouragement to foreign direct investment (FDI).
This is according to some firms interviewed in the quarterly Business Expectations Survey (BES) conducted by the Bank of Botswana, which have raised concerns about CEEP initiatives.
Additionally, the BES report, which presented business expectations for the second quarter of 2023, noted that firms, specifically those in the agriculture, construction, real estate, retail, accommodation, transport, and communications sectors, cited high input costs and aviation fuel prices as major impediments to doing business in Botswana.
“Weak domestic demand was also considered to be a drag on business operations mainly by firms in Retail, Accommodation, Transport, and Communications; Manufacturing; Construction and Real Estate; and Agriculture sectors,” says the report. On the positive side, adequate water and electricity supply, favourable political climate, effective regulatory framework, and efficient government spending continued to be considered supportive of doing business in Botswana in the second quarter of 2023.
Price Developments and Inflation
The BES report states that firms expect cost pressures to be subdued in the second quarter of 2023, attributable to the relatively lower fuel prices, and expect inflation to decline though remaining above the Bank of Botswana’s 3 – 6 percent objective range in 2023 and 2024.
“Firms’ expectations about domestic inflation decreased, compared to the previous survey, but still surpassed the Bank’s 3 – 6 percent objective range in both 2023 and 2024, averaging 7.4 percent for 2023 (9.1 percent in the previous survey) and 6.5 percent for 2024 (7.7 percent in the previous survey),” it notes. “The downward revision of inflation expectations is in line with the Bank’s downward revision of the inflation outlook in June 2023.”
An expected increase in lending rates and borrowing volumes
Consistent with the expected rise in investment, production capacity, sales volume, and profitability, supported by the anticipated improvement in domestic economic performance during the period, firms told BoB that they expected lending rates and the volume of borrowing from all markets (domestically, in South Africa and elsewhere) to increase in the 12-month period to June 2024. Tighter access to credit is anticipated by both domestic and export-oriented in the firms second quarter of 2023, reflecting the increase in interest rates by most central banks across the world, to combat high inflation.
“Nonetheless, domestic market-oriented firms mainly prefer to borrow from the domestic market compared to other markets, perhaps due to accessibility considerations, while export-oriented firms prefer to borrow from the domestic market and South Africa, and are indifferent about borrowing elsewhere,” the BES report says. Queried by BoB on sources of financing, approximately 36 percent of the surveyed firms indicated that their choice of credit market was predicated on accessibility, while 31 percent indicated that their borrowing decisions were influenced by the availability of appropriate credit facilities.
Meanwhile, 27 percent of firms cited the affordability of suitable loan products, while 5 percent cited both availability and affordability of the required loan products as determinants of their preferred credit market. Retained earnings maintained their position as the preferred source of funding business operations by most firms as was the case in the previous survey, followed by loans, equity, and composite (a combination of financing).
Overall, firms were less optimistic about business conditions in the second quarter of 2023 compared to the first quarter of 2023. “Going forward, business conditions are expected to improve in the third quarter of 2023 and in the 12 months to June 2024, supported by the anticipated improvement in sales volume, production capacity, and business profitability in the third quarter of 2023,” says the report.
“These improvements mainly reflect the continued domestic economic recovery, following the relaxation of COVID-19 restrictions, as well as the implementation of expansionary fiscal policy, among others. “Firms expect the economy to expand by 4.2 percent in 2023, and inflation to decline but remain above the Bank’s objective range of 3 – 6 percent in 2023 and 2024.”