Recent Economic Developments, Outlook and Prospects

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Recent Economic
Developments,
Outlook and
Prospects
KENEWENDO Bogolo J
April 2011
Outline
 Global economy – recent developments
 Botswana economy:







Growth
Inflation
International Trade
Exchange Rates
Financial Sector
Govt Budget
Employment
 International Assessments
 WEF Global Competitiveness Report
 IMF Article IV and World Bank PER
 Economic Outlook
Global growth slowdown ... and
recovery
 Recovery from global recession
has been robust, driven by
emerging markets
 Some slowing now projected,
after initial “bounce” – but
“double dip” recession unlikely
 Global growth projected to
settle in 3% - 3.5% range in 201011
 Uncertainty remains in
developed countries:
 Timing of withdrawl of fiscal




stimulus
Long-term impact of public debt
Bank credit still constrained
High unemployment and weak
consumer confidence
Euro-zone problems
SADC Growth Forecasts to 2014
Source: IMF Regional Economic Outlook for SSA
Botswana: Real Economy
GDP growth - recovering
 9.2% GDP growth in




year to June 2010
Positive yoy growth
since 2010Q1
Driven by mining
recovery
Continued slowdown in
non-mining private
sector growth
Uncertainty over data
quality
qoq GDP growth – volatile
 -8.6% qoq GDP growth
in Q2 2010
 Widely quoted but of
little interest
 Qoq figures too volatile
to be useful
Annual sectoral growth to June 2010
 Most sectors
39%
recorded positive
growth, agric &
mining leading
 Manufacturing,
government and
finanance &
business services
shrinking
 Non-mining
growth gradually
decling
Agriculture – source of growth
remains a puzzle
Business confidence … improving
 Sharp drop in
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
confidence during
recession
 Noticeable
improvement since
2009H2
 Still low by standards
of recent years
2005
2006
Exporters
2007
2008
2009
Non-exporters
2010
All
Inflation & Monetary Policy
Inflation ... modest increases,
driven by cost-push
 Inflation has been above upper
end of BoB’s 3%-6% target
range for several months
 VAT & electricity prices main
culprit
 Recent decline likely to be
reversed in coming months
 Imported inflation low – end
2010 forecasts:
 SA – 4.5%
 Developed countries – 1%
 Inflation regularly coming in
below forecasts – suggesting
domestic inflationary
pressures are weak
Inflation expectations
 BoB MPS 2010 forecasts
inflation in range 4-5% in 2011
 Low international and
domestic inflation pressures
 Well below historical inflation
rates in Botswana
 Market not convinced –
expected inflation well above
BoB forecasts
 Implications for interest rates
and bond issuance
Monetary policy – interest rate
cut likely in 2011Q2
 Interest rates sharply lower in


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

response to declining inflation
combined with recession
Bank rate cut by 5.5% since Nov
2008
Interest rates at lowest levels for
20 years
Real prime rate also relatively
low
BoB focusing on inflation
excluding VAT impact – now less
than 5.5% - hence within range
for monetary policy purposes
Next interest rate move more
likely to be down rather than up
But not until headline inflation
below 6%
International Trade
Exports & imports ... in shock
 Exports fell dramatically, then
recovered, but to lower levels
than in 2007-8
 Imports fell temporarily during
recession, but are also now
rising again.
 Fall in imports much smaller
decline than fall in exports
 Structural shift towards trade
deficit?
DTC Diamond Sales
 DTC diamond sales have




generally been rising since
2009Q2
Improved prices and volumes,
driven by retail market
recovery and re-stocking of
inventory
Supply restrictions also
suporting prices
Debswana recently increased
2010 production / sales
projections
But DTC sales still well below
peaks of 2007 and early 2008
Exports … most categories
showing healthy recovery in 2010
 Total exports up
40% in 2010 H1
over same period in
2009
 Minerals up 51%
 Non-minerals
down 1%
 Of the 3 largest
exports:
 Diamonds up 61%
 Cpr/nickel up 19%
 Textiles down
51%
P million/quarter
Trade balance .. big deficits
5,000
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
 Trade surplus has generally
been strongly positive over
past five years
 Export weakness and rising
imports has led to
unprecedented deficits since
2008Q4
 Large deficits still persisting,
even with the recovery
Foreign exchange reserves .. fell
during the crisis, and still falling
 Reserves have fallen in both





pula and US$ terms
Driven by balance of
payments deficits
Temporarily boosted by
inflows from foreign
borrowing
Import cover now around 17
months
Under threat if public
spending not restrained
Exchange rate policy needs
high reserves
Financial Sector
Banking sector: credit boom and then
bust
 Steady increase in
credit growth until
2009, then sharp drop
 Decline most dramatic
in credit to private
business
 Subsequent recovery –
but much more for
business than
household credit
Banking sector: quarterly data show
recent weakening
 Quarterly figures provide a
more accurate picture than
annual rates in a rapidly
changing environment
 Private business credit growth
picked up in 2009H2, but has
recently dropped sharply.
 HH credit growth recovery
much weaker, and has
fallenback sharply in last 3
months
 Needs to be watched closely
for signs of economic
weakening
Households’ Deposits and Loans
 Household deposits and loans





have grown in parallel in recent
years
Relatively small and constant
gap to late-2008
Deposits declined sharply in
2009
Gap between savings and
borrowing has widened sharply
Net debt burden and
vulnerability of consumers is
increasing
Situation appears to have
stabilised
Banking: rising HH arrears, but
may have peaked
 Sharp increase in arrears since
the beginning of 2009
 Particularly pronounced for
HHs – highest ever level
 Household incomes under
stress:
 No pay rises in public sector
(40% of LF) for 2 years
 VAT increase
 Over-committed
 Signs of stabilisation in 2010
Employment
Employment
350,000
 Data available to
300,000
Sept 2009
 Formal
employment – no
decline during
recession
 Only impact was
on mining
employment –
small proportion of
total
250,000
200,000
150,000
100,000
50,000
-
Private
Parastatal
Government
Unemployment
 Unemployment
30
data poor
 Irregular timing
Census
20
 Inconsistent
HIES
definitions
15
LFS
 Trend appears to be
10
DS
upwards, but not
conclusive
MIS
5
BAIS
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
% of labour force
25
Fiscal Policy
Fiscal position – rapid
deterioration
 Turnaround from surplus to





substantial deficit
Driven by both increased
spending and falling revenues
2009/10 deficit projected at
15% of GDP is unsustainable
2010/11 Budget has a
continuation of revenue
decline and P2bn cut in total
spending
Deficit cut, but still huge
Revenues less than 30% of
GDP – last seen in 1970s
Fiscal sustainability – to be
restored through spending cuts
 2010 Budget provided 3 year
forecasts for the first time
 Some revenue recovery forecast
in 2011/12 and 2012/13
 But only to 32% of GDP, not the
40% historical average
 Spending has to be cut
substantially to balance the
budget – esp. development
spending
 Spending projected to be flat in
nominal terms – significant cut
in real terms and relative to GDP
 Major withdrawal of domestic
demand
Impact of deficits on Govt
finances
 Net financial position – govt.




deposits & reserves at BoB less
public debt (foreign &
domestic)
Peaked at P41bn in 2008
Cumulative deficits in 3 yrs
2008-2011 = P30bn
Continuation of deficits will
lead govt to become net
debtor
Reason for credit rating
downgrade
International Assessments
IMF Article IV report
 Priorities
 Substantial fiscal consolidation, to be achieved by lower




public spending (relative to GDP)
Improved management of public debt, including mediumterm debt strategy
Caution in reducing interest rates further
Policies and reforms to create a leaner and more efficient
public sector
Structural reforms to promote private sector led growth
World Bank Public Expenditure
Reform programme
 Public spending: reduce to sustainable levels, improve
efficiency, reduce public sector wage bill
 Planning and Budgeting: move beyond current NDP
framework to programme-based budgeting and MTEF
 Debt management: integrated framework for managing
public sector assets (inc. FX reserves) and liabilities (debt
and guarantees)
WEF Global Competitiveness
Report
 Botswana’s ranking has slipped from 66 in 2009 to 76 in 2010
(out of 139 countries)
 4th placed in SSA – after Mauritius, South Africa, Namibia
 Main weaknesses relate to:
 quality of infrastructure (84)
 health and primary education (114)
 higher education and training (94)
 technological readiness (99)
 market size (102)
 business sophistication (104)
WEF GCR
 Main problems facing business:
 Poor work ethic
 Inadequately educated workforce
 Inefficient govt bureaucracy
 Access to financing
 Inadequate supply of infrastructure
 Restrictive labour regulations
Economic Outlook
Base Case: International
Economic Prospects
 Global growth declines slightly
but remain positive – no
double dip recession
 Emerging markets continue to
outgrow developed markets –
hence shifting global economic
balance
 Commodity markets stable
(steady real growth in prices)
 Orderly unwinding of
economic problems:
 Reducing government debt
 Withdrawal of fiscal stimulus
 Private sector de-leveraging
 Interest rates and inflation
“low for long” in major
developed economies
 Euro-zone stability
Base Case: Domestic Economy
 Mining:
 Steady recovery in diamond
exports; prices not too volatile
 Similarly with other mineral
exports (copper, nickel)
 New mine development
proceeds (AK6, Boseto,
uranium)
 Non-mining:
 Gradual withdrawal of
government spending
 Household sector stresses
manageable
 Fiscal
 Outturn better than budget
projections
 Depletion of govt reserves is
stemmed
 No govt pay rise in 2011, given
effective (but unintended) rise in
2010
 Serious budget/planning reform
undertaken
 No SACU crisis – just gradual
decline in revenues
 Inflation stays low from 2011
 Interest cuts in 2011 Q2
IMF Growth Forecasts
 Growth forecasts released in
Article IV report
 Projections for reasonably
robust recovery after initial
slowdown in non-mining
growth
 Based on assumption of
appropriate policy measures
 Jump in non-mining growth
based on investment in new
electricity generating capacity,
plus beneficial impact of
reforms
IMF inflation forecasts
 Projected steady decline in
inflation over next five years
 Suggests BoB may be
somewhat optimistic, but not
excessively so
 Private sector expectations
unduly backward looking
 If IMF forecasts are correct, we
are approaching a period of
structural change in inflation
Fiscal sustainability – IMF budget
projections
 Revised budget forecasts
provided by IMF
 Some revenue recovery forecast
in 2011/12 and 2012/13
 But only to 35% of GDP, not the
40% historical average
 Recovery of diamond production
will help revenues in 2010/11 –
reducing budget deficit
 But medium-term budget
prospects still require spending
cuts for sustainability
 e.g. ongoing revisions to SACU
revenue formula
Exchange Rate Forecasts
 Pula weakness vs
rand driven by rand
strength,
compounded by
crawling peg
 ZAR strength now
seen as continuing
into medium term
 If so, BWP will remain
around 1.05 in
medium term
Exchange Rate Forecasts
Other variable forecasts
 Disposable income: follow non-mining GDP growth (avg.
5-6% a year real growth to 2015)
 Private sector credit growth: average 12% a year growth
to 2015
 Interest rates: 50bps cut in 2011, 2012 and 2013 (taking
bank rate to 8.5%);
Downside scenarios international
 Currency wars
 Pursuit of “cheap” currencies
to boost exports
 Possibly leading to
protectionism
 Debt markets
 Lose confidence in
government debt – pushing up
borrowing costs
 Financial/asset markets
 Falling financial asset prices
 Housing prices remain weak
 Consumer confidence
 Fails to recover
 Spending remains weak
 Deflation
 Double dip recession:
 Growth turns negative in
developed econs
 Emerging mkts dragged down
 International trade
 Contraction (as in 2008-9)
 Commodity prices weak
 Export-dependent nations
hard hit
Downside scenarios –
regional/domestic
 Regional
 Zimbabwe impasse continues
(diamond wealth boosts ZANU
PF confidence, no agreement
on
referendum/constitution/electi
on, MDC leaves GNU)
 SA fails to boost growth,
spectre of mines
nationalisation, industrial
unrest, ANC politics
 Domestic
 Policy-making driven by
populist politics not rational
analysis
 Reluctance to undertake public
finance/public sector reform
 Failure to implement policies
to promote private sector
growth and diversification
 Labour unrest
Potential Outcomes - Botswana
Positive
 Mining sector diversifies (coal,
copper, nickel, gas, uranium) as
diamonds decline
 Non-mining private sector
reduces dependence upon govt
and becomes more export
focused
 Government adjusts its size and
spending to reflect lower
medium/long-term revenue
forecasts
 Growth continues around 5-7% supported by job creation,
sufficient to reduce poverty
Negative
 International recession




undermines mineral-led growth
Government fails to implement
policies supportive of
diversification
Pressures to maintain public
sector employment & expensive
spending programmes
undermine fiscal discipline
SACU collapses, protectionist
policies introduced
Growth stagnates, rising budget
deficits, government finances
collapse, reserves depleted, pula
peg unsustainable
Thank You
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