The financial system continues to be resilient, despite the adverse effects of COVID-19. However, existing vulnerabilities and policy failures would heighten the risks of a compromised financial system, warned the Financial Stability Committee (FSC) which met recently.
The FSC, comprising of senior officials from the Ministry of Finance and Economic Development, Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, and Financial Intelligence Agency, met on Monday to discuss recent developments in the financial sector, as well as address regulatory and public interest issues relating to the stability, performance, and prospects for the domestic financial system.
The policymakers said the pandemic could worsen the country’ pre-existing financial stability vulnerabilities that include over-reliance of the economy on diamond exports and government expenditure, which has created a narrow economic base that is prone to external shocks.
Other weaknesses that were discussed involved the enduring sectoral interlinkages, marked by reliance of banks on funding by nonbank financial institutions; emergence of innovative market products, payment platforms and services, requiring quick policy and regulatory adaptation; and continuance of the listing of Botswana in the European Union List of high-risk third countries with AML/CFT compliance deficiencies.
The senior officials said the vulnerabilities which could elevate risks to financial stability have thus far been generally contained. Given that, the FSC says the financial system remains in a strong position and could be strengthened further by an economic recovery supported by the marked improvement in global market sentiment, the rollout of the COVID-19 vaccine and the implementation of the Economic Recovery and Transformation Plan (ERTP), as well as accommodative monetary policy.
“Secondly, maintenance of transparent and predicable policies and, therefore, a stable macroeconomic environment, supportive of progressive financial sector activity and stability,” the council said in a statement released on Friday.
With the government officials forecasting the economy to rebound by 8.8 percent in 2021, following the deep contraction of 7.9 percent last year, the recovery of several sectors will be positive for financial sector performance, suggested the policymakers.
“Notwithstanding this positive assessment, the FSC noted the elevated risks associated with the structure and performance of the economy that relies on mining and tourism, as well as a protracted COVID-19 pandemic and any challenges with the vaccine rollout and, therefore, maintenance of movement restrictions,” read part of the statement.
“It was observed that this could have an adverse impact on export receipts, fiscal position, and economic performance broadly that can translate to the weakening of the financial sector.”
The assessment by the FSC echoes similar sentiments raised by Moody’s recently. The credit ratings agency said the latest shock delivered by the pandemic has exposed the structural limitations of Botswana’s growth model, characterized by the large presence of the public sector and exposure to fluctuations in global demand for diamonds, which accounts for 15 percent of gross domestic output and around 90 percent of exports.
Compounding the problem further, the erosion of fiscal buffers has reduced the government’s capacity to absorb future shocks due to relatively weaker economic resilience, mainly reflecting a lower level of income and economic diversification.
Moody’s forecasts Botswana’s economy to recover in 2021, with real GDP expanding by 6.2 percent, lower than the projection put forward by the government officials, with growth mainly driven by the rebound in mining industry and gradual normalization of domestic economic activity.
The agency warned that prolonged containment measures to contain the spread of the virus or a slow vaccine rollout could impede the pace of the recovery, while the evolution of the pandemic will continue to influence the developments in the diamond market.
Moreover, Moody’s said the long-term challenges are likely to become more acute in absence of effective progress on economic diversification and improvement in the business environment, that are key to promoting balanced growth, generating revenue, and rebuilding fiscal and external buffers in the longer term.
While the government has reaffirmed its commitment to economic diversification with the adoption of the ERTP presented in 2020, the mixed track record on implementing structural reforms suggests that progress will likely remain very gradual, said Moody’s.
“Fiscal consolidation challenges persist, suggesting that the erosion of the fiscal strength will be long-lasting. The adjustment envisaged under the 2021 budget relies on a significant increase in revenue rather than on reducing expenditure given limited flexibility,” the ratings agency said.