- An upward fuel price adjustment likely – FNBB, Stanchart
- Under-recoveries have a cumulative position of over P1 billion – Petroleum companies
- Agricultural commodity prices likely to be higher – Absa
- Cost of external financing may rise
Naledi Madala, an economist at Absa Bank Botswana, has cautioned that Russia’s invasion of Ukraine raises several risks to the global economy. Madala says weaker global growth comes with the possibility of disruption of important supply chains posing downside risks for Botswana’s growth outlook. Nonetheless, she maintains that the bank expects Botswana will grow by 5.2 percent in 2022.
A booming global economy is a place of good fortune for mineral-led Botswana. But Russia’s military action in Ukraine has been sending commodity prices soaring, coupled with recovery from COVID-19 which is threatened by geopolitics. The West has imposed heavy sanctions on Russia, with observers arguing that implications are likely to be huge globally.
The IMF had projected recovery from the pandemic and a 4.4 percent growth this year, moderating from 5.9 percent in 2021. The World Bank, on the other hand, expected global growth to decelerate markedly from 5.5 percent in 2021 to 4.1 percent in 2022 and 3.2 percent in 2023. Economists argue that current geopolitics create a lot of uncertainty regarding the global economic outlook that was set to recover from the COVID-19 pandemic.
The US has banned oil imports from Russia and is now seeking alternative supplies from Venezuela and Saudi Arabia. The conflict has pushed up energy prices, with global oil prices currently above USD120/bbl and the risk of further price rises is high, Madala said. Crude oil prices have been escalating, which observers argue leads to increases in transportation costs, which is Botswana’s main mode of transport. Most economies are likely going to experience high levels of inflation.
First National Bank of Botswana’s (FNBB) current outlook is for oil to average $93.9/bbl in 2022, with the uptick over last year’s average ($70.8/bbl) being driven by supply-demand mismatches owing to the continued recovery from the pandemic, coupled with intensifying geopolitical tensions. “This outlook is based on the assumption that average monthly oil prices will remain elevated above the $100/bbl mark through to July 2022, falling back below this mark in H 2 2022 as the intensity of the conflict recedes – albeit with tensions between the two nations persisting into the foreseeable future,” Gomolemo Basele, a Quant at the bank, said a written reponse to this publication.
At Standard Chartered, the bank has raised its 2022 average Brent crude forecast to USD85/bbl from USD75/bbl mainly reflecting recent geopolitical developments in Europe. Emmanuel Kwapong, the bank’s Economist-Africa Region, says over the past week the security and reliability of energy flows from Russia has become a major market driver, with the assumption that energy flows will remain less tenable.
“High levels of uncertainty around short-term energy flows from Russia, combined with knock-on effects that might restrict flows, and concerns that spare capacity is limited, have created a desire to accelerate deliveries and secure ownership of prompt oil,” Kwapong wrote to The Business Weekly & Review.
StanChart’s oil supply and demand balances show a challenging H1, with an implied stockbuild before a more balanced H2 and 2023, and a mounting supply crunch from 2024 onwards (driven by an exit from the impact of COVID-19 waves and variants, and a growing focus on pricing in the green-energy transition). “Although our supply and demand forecasts remain unchanged, we have adjusted our 2022 price forecasts to reflect firmer downside support,” said Kwapong. “Forecasts for later years remain unchanged.”
He is quick to note that higher international oil prices will put upside pressure on local pump prices, given that this is a major determinant in Botswana Energy Regulatory Authority’s (BERA’s) price-setting framework, along with the exchange rate and average freight rate assessment. While the Botswana Pula (BWP) has appreciated modestly against the USD since BERA’s last upward pump price increase came into effect on 20 December 2021 (c.0.6 percent), Kwapong says this has been more than offset by the significant rise in global oil prices over the same period (up c.48 percent).
“Freight rates have also remained elevated,” he points out. “This suggest the gains from December’s pump price hikes may have been eroded, with further accrual of under recoveries (difference between actual cost of product and pump price) likely.”
Basele supports that the current outlook puts significant pressure on local fuel prices to be adjusted upwards to align with the global oil price trend, especially in the absence of any revisions of the national fuel levy this year and to avert significant increases in the level of under-recoveries. Petroleum companies have told this publication that under-recoveries have a cumulative position of over P1 billion, which will increase significantly due to the steep under-recovery.
Kwapong said an upward fuel price adjustment seems likely in 2022, given the significant gains in oil prices since December’s adjustments and the authorities’ commitment to contain subsidies to ease pressure on the government’s balance sheet. “Multiple pump price hikes in 2021 suggest that the National Petroleum Fund (NPF) might not have been sufficiently replenished to cushion against the rising oil prices,” he points out.
For Botswana, an increase in fuel prices means an increase in transportation costs of goods and raw materials as well as production costs, which is likely to spike inflation that is currently above 10 percent. Botswana’s imports of fuel are around 13 percent of the import bill, which is used in various economic activities. Most of the raw materials and products are transported by road. “Higher fuel and food prices erode consumers’ disposable income, given that they tend to account for a higher share of household spending,” says Madala, adding that agricultural commodity prices are also likely to be higher, given that Russia and Ukraine are both significant grain exporters.
In January, an economist at RMB, Daniel Kavishe warned that higher oil prices could lead to higher-than-anticipated prices of cereals across the continent. This while he noted that last year’s bumper harvest should support supply to meet regional demand and keep severe price inflation at bay.
The general consensus is that commodity prices are likely to be influenced by how the global economy is affected: if there’s a slow economic recovery, there will be less demand for diamonds both industrial and jewellery. But for Madala, even as commodity price surges may hurt consumers and raise input costs of firms and higher commodity prices may benefit Botswana diamond exports, given that Russia is the second biggest rough diamond producer because Botswana is well placed to step into the gap.
President Mokgweetsi Masisi recently told Bloomberg that Botswana was “aiming to further expand its diamond production as Russia faces global sanctions”. De Beers revealed that its production guidance for 2022 is 30–33 million carats (100 percent basis), subject to trading conditions and the extent of further COVID-19 related disruptions. While there continue to be risks relating to the effects of COVID-19 across the pipeline, geopolitical uncertainty and cost inflation pressures, De Beers said sentiment in the midstream is expected to remain positive on the back of anticipated strong US retailer restocking in the first quarter.
Madala has also observed that the conflict is delivering a big stagflationary shock to the global economy, which may generate some repercussions for most economies. “The invasion is complicating the challenge for monetary policy authorities globally who have been grappling with how to withdraw the extraordinary COVID-19 policy accommodation without causing sharp dislocations in financial markets, says Madala. “We believe that global central banks are likely to tread cautiously as they navigate this uncertain and unprecedented policy terrain,” she notes.
She opines that each central bank globally will be facing a slightly different set of considerations that may shift over time as the conflict and its impact on markets evolve. Overall, she believes the conflict will slow the pace of monetary policy tightening but will not derail it completely, notwithstanding the negative growth shock.
Secondly, Madala says the invasion has sparked a rise in global financial market volatility, which could result in risk aversion among international investors. Risk aversion often leads to flight of capital to safety, she observes. This will probably raise the cost of external financing and elevate credit spreads for emerging markets and developing economies in 2022, which we had already expected to increase owing to FED tapering, rate rises and a stronger US dollar.
While Madala notes the risk to cost of external financing, it is important to point out that Botswana is expected to finance the budget deficit through a combination of domestic and external borrowing over the medium term; current estimates point to the deficit narrowing to -3.2 percent of GDP in 2022/23. Government has been borrowing from the local capital markets. Analysts at Ninety One caution government to resist the temptation to issue bonds to finance expenditures. “This is particularly worrisome in the current context where government bond yields are at levels that are close to ‘crowding out’ other market participants,” they wrote in a report released recently.