There is much pomp around the recovery of Botswana’s economy. Government, banks, and international institutions including rating agencies are quite bullish about the economic outlook. The growth is expected to be largely by the expansionary budget and the recovery of the diamond market, they gleefully say.
The national budget for the fiscal year 2024/2025 underscores significant growth prospects within the construction sector, particularly in projects involving road, rail, water, and electricity infrastructure. Moreover, the proposed business reforms show promising potential for fostering the growth of local small and medium enterprises (SMEs) in 2024. However, despite the budget’s anticipated support for growth, it is unlikely to match the significance of diamonds’ contribution, highlighting the extent of over-reliance on this commodity.
Given its optimism about improved prospects in the global diamond industry this year, and with diamond production remaining relatively robust in 2023, Oxford Economics, a global economic think-tank, expects local GDP growth to accelerate slightly to around 3 percent in 2024—marginally higher than previous estimates of 2.9 percent. However, while the economy is expected to benefit from growth-oriented spending following the P102 billion budget allocation, Oxford argues that the economy’s recovery heavily relies on conditions in the global market.
Fitch Solutions, an economic research intelligence firm, stands out for its bullish and aggressive metrics, consistently positioned at the top end. Much of its projections are influenced by base effects stemming from a recovery in diamond sales. The firm anticipates a substantial acceleration in real Gross Domestic Product (GDP) to 5.0 percent in 2024 from 2.7 percent in 2023. This expectation is based on the projected recovery in global diamond prices, which Fitch Solutions argues will prompt diamond traders to resume sales in 2024, thereby providing tailwinds to exports.
“We expect that diamond prices will normalise upwards in 2024, after a global oversupply in 2024 caused by falling demand in key markets such as India and Mainland China resulted in a sharp drop in prices,” Fitch said adding that it expects that mounting sanctions on the Russian diamond market will continue to constrain supply from the world’s largest source of rough stones, supporting its view that diamond prices are likely to recover in 2024. Oxford views that a rebound in diamond prices is still somewhat uncertain. If diamond prices fail to rally in 2024 due to weak demand (possibly due to a worse-than-expected recovery in Mainland China), Fitch said “we could experience a weaker export performance than we currently expect”. Diamonds account for the majority of total exports.
Fitch, however, remains optimistic that the recovery in diamonds will lead to a rebound in diamond trading, the sector hardest hit by low diamond prices. After pausing in the second half of 2023 to wait out the lull in prices, Fitch expects diamond trading to resume in 2024.
Accordingly, Fitch said it expects that resuming sales of Botswana’s top export (diamonds represented 82.2 percent of commodity exports in 2023), as well as favourable statistical base effects, will see exports grow in 2024.
“Overall, we anticipate that net exports will subtract 0.2 pp from overall growth, compared to a drag of 1.0 pp in 2023.”
GDP grows by 1.9%
Data released by Statistics Botswana indicates that the economy grew by 1.9 percent year-on-year in the fourth quarter of 2023. This growth was primarily driven by faster expansion in the mining and quarrying sector, which saw a growth rate of 6.4 percent. This acceleration can be attributed to the operational restart of the Orapa diamond mine following planned maintenance in the third quarter of 2023. However, diamond trading activity experienced a significant contraction of 85.4 percent, reflecting continued hesitation among traders to sell stones amid the downturn in global diamond prices. Fitch noted that the fourth-quarter performance brings the overall real GDP growth for 2023 to an estimated 2.7 percent, surpassing its previous expectations of 2.2 percent growth but falling below the 2013-2022 average of 3.9 percent.
In total 12 out of 18 sectors recorded lower annual growth rates in Q4, which Oxford said suggests that conditions across the economy are strained.
Oxford indicated that the improved mining performance outweighed the growth drawdown in non-mining industries.
Possible rate cut
Oxford forecasts that the Bank of Botswana will likely take note of the strain across most of the economy when its Monetary Policy Committee meets in April and will likely cut its key policy rate.
Stanbic Bank Botswana had also previously indicated that it foresees a potential policy rate cut by the Bank of Botswana (BoB). However, the bank expects this in August, leading up to the October general elections. Onalethata Letlole, the Global Markets Corporate Dealer at Stanbic Bank, shared this perspective during the bank’s Structured Solutions Seminar recently arguing that the bank’s expectation is a 0.25 percent reduction in the policy rate.
New diamond deal
Fitch anticipates that the agreement reached in June 2023 between De Beers and the Botswana government will bolster fixed investment in 2024. This agreement involves a USD73 million investment in Botswana’s value-added diamond sectors, such as cutting and polishing. It is expected to sustain inward investment into the country’s largest industry while also contributing to diversifying the economy away from rough stone extraction.
Moreover, it ensures more advantageous conditions for the state-owned Okavango Diamond Company, whereby a greater proportion of stones mined in Botswana will be allocated to domestic processing and trading firms. Fitch anticipates that this will augment the amount of revenue retained domestically. Coupled with its forecast that the Bank of Botswana will maintain the policy rate at a near-historic low of 2.40 percent in 2024, this informs its expectation of robust fixed investment growth, projected at 6.5 percent in 2024, up from 4.6 percent in 2023.
“Overall, we expect fixed investment to contribute 1.6 percent to growth, up from 1.1 percent in 2023.”
Inflation
Fitch expects that falling inflationary pressures will boost private consumption this year. With relatively stable energy prices—its Oil & Gas team forecasts average Brent prices to rise by just 3.4 percent in 2024—imported price pressures will be contained (transport inflation makes up 23.4 percent of Botswana’s consumer price index basket). Fitch also anticipates the Botswana pula to trade sideways against the South African rand in 2024, helping to keep imported inflation low (South Africa accounted for 62.6 percent of Botswana’s imports in 2022).
“Consequently, we forecast that inflation will fall to an average of 3.8 percent in 2024, from 5.3 percent in 2023 and below the 2014-2023 average of 4.6 percent, boosting household purchasing power and stimulating consumer expenditure,” said the think tank.
Consumption
In all, Fitch expects private consumption to grow by 4.7 percent in 2024, contributing 1.9 percent points to overall growth, from 1.8 percent in 2023. Household final consumption remains the dominant contributor to Botswana’s overall GDP, comprising 42.9 percent of the total, according to available information. In 2023, household consumption experienced a growth of 5.6 percent, a notable increase from the 3.1 percent recorded in 2022. This uptick can be attributed to the favourable conditions of decreasing inflation and steady interest rates that prevailed throughout the year. In contrast, government final consumption saw a rise of 4.0 percent in 2023, compared to 2.5 percent in 2022. This increase was fuelled by heightened government expenditure associated with the implementation of the nation’s two-year Transitional National Development Plan. Consequently, government consumption edged up to 28.9 percent of GDP in 2023, up from 27.9 percent in 2022.
