GDP growth faces downward revision

16 Sep 2019

BY BONNIE MODIAKGOTLA

The Botswana economy which was expected to pick up pace this year might slow down following several developments, which might even cause the growth projections to be revised downwards.

Bank of Botswana's recently released monetary policy report says while there are expectations of continued positive gross domestic product (GDP) growth in the short to the medium term, this growth is projected to remain below its potential. The country's ministry of Finance and Economic Development had projected GDP growth at 4.2 percent this year, before picking up to 4.8 percent in 2020.

But following the US-China trade wars, and the distress in the diamond industry, Botswana's economic expansion remains at risk, and experts have now warned that GDP growth will be slower than initially thought. Already, diamond production in the second quarter dropped by 8.9 percent. Furthermore, the country's revenue will be affected by the falling diamond prices.

The global rough diamond prices slowed down in the second quarter, falling by 0.4 percent. This has been blamed on higher than expected polished diamond inventories, which is holding diamond buyers from replenishing their stocks. In addition, the polished diamond market is also under pressure, with prices dropping by 0.6 percent on the back of weaker demand for diamond jewellery and liquidity constraints forcing retailers to sell at a discount, in order to raise funds for bank loans repayments. The recent street protests in Hong Kong have also been blamed for dented sales of luxury goods, including diamond jewellery, suggests the report.

De Beers, which holds ten Global Sightholder Sales and Auction Sales every year in Gaborone, is having a challenging year with its rough diamond sales declining with every passing sales cycle. The mining company this year after seventh sights has sold rough diamonds valued at $2.9 billion, a decrease of of 26 percent from 2018' s corresponding period that fetched $3.9 billion.

However, the impact of the downturn in diamond trade will be softened by improvement in the non-mining sectors, which is expected to grow on the back of the prevailing accommodative monetary policy, and increased government expenditure. The central bank's recent decision to slash the back rate down from 5 percent to 4.75 percent is expected to stimulate investments in the economy.

Other drivers of the economy include improvements in electricity and water supply, as well as the reforms to further improve the business environment, which would generally be positive for economic activity. In addition, prospective recovery of commodity prices and global market for exports should also support performance of the domestic economy, the report says.

Still, despite the optimism on the non-mining sectors propping up the economic growth, industry players remain sceptical. Barclays Bank of Botswana in their commentary accompanying their latest interim results has flagged some risks that could affect even the non-mining sectors.

“The local economy remained resilient in the first few months of the year, rising by 4.3 percent year-on-year in the first quarter of 2019. Despite the promising start to the year we expect real GDP growth to slow down to 3.9 percent this year from 4.5 percent in 2018 as both the mining and non-mining sectors experience a more challenging environment,” the bank said.

The second biggest commercial bank in the country further warned that Southern African Customs Union (SACU) revenue pool projections are likely to disappoint over the medium term due to the fiscal risks facing the South African economy and continued weak GDP growth performance.

“The outlook for the non-mining sector is also uncertain. The current drought is likely to negatively impact the agricultural sector where conditions are expected to deteriorate further looking at the prevailing grazing and water situation. The drought also poses a threat to water-dependent manufacturing industries.”