Economic pointers do not appear rosy this year. Some of the spikes afflicting the global village this year are high food prices, sky rocketing fuel costs, financial crisis, and all time high inflation. These economic variables saw world economic bodies, such as the International Monetary Fund (IMF) and World Trade Organisation (WTO), reviewing this year’s global economic growth downwards. At least in some parts of the world, rising food prices have already caused social instability. The world’s largest economy ÔÇô United States of America ÔÇô is said to be in a “mild recession”.
In light of the above, analysts were these week cautious on whether the domestic economy would emerge resilient or would equally spiral downwards.
“When you look at it at a macro level, there is correlation between the economy as a whole to the world economy but at micro level (market to market), there is less correlation ÔÇô particularly the domestic stock exchange,” explained the Chief Executive Officer of Motswedi Securities, Martin Makgatlhe. Motswedi Securities is one of the three stock broking firms in the country.
Relating to the domestic capital markets, Makgatlhe noted that if anything, the country would emerge stronger in that particular sector. This is because there are less direct linkages between the world money markets to the domestic markets. For instance, he explained, the majority of money invested in the Botswana Stock Exchange (BSE) is from within the economy. The ratio of foreign participation to local participation in the domestic bourse is low; therefore, things that occur in the foreign markets would have minimal bearing in the domestic market.
Again, he added: “When there is global turmoil, local investors are less likely to domicile their funds offshore and may opt to invest locally.”
Another plus for local stock exchange is that the market is highly illiquid.
“The markets that are usually affected easily by the turmoil are the ones that are highly liquid. This is because you easily go in and out. Our market may not always react fast to such exogenous factors,” he noted. In the local market, the norm is that of buy and hold. The problem is in two fold; low free float and too much money chasing after few products.
At a national level, Makgatlhe is worried that the growth figures may feel the pinch, saying this is the time when the country would regret its laissez-faire attitude towards economic diversification.
“We still depend largely on diamonds and the net result of depressed global economy is that people would be forced to cut down their expenditure on luxury goods. We know diamonds have zero intrinsic value and they are a likely casualty when people cut down on expenses,” he noted.
Makgatlhe fears for the worst in economic diversification.
“I think the real push was left until it was late and now we appear to be in panic. People are now becoming impatient but we should all understand that economic diversification is a process not an event ÔÇô it is not something that you put a time line on. My gripe is that we have long known that diamonds are vulnerable to exogenous shocks and that they are not an infinite resource,” he said.
Senior Macro-Economics lecturer at the University of Botswana, Gaotlhobogwe Motlaleng, is of the view that should the current global economic problems persist, Botswana would obviously be affected.
“In the short-run, it is going to impact negatively on our economy. You should know that we are a small economy and have no say in oil pricing and high fuel costs affect all sectors of the economy. The other problem that we have is that of power shortages, which affect output,” he said.
As a small open economy, Motlaleng noted, we do not have the capacity to consume all locally produced goods and services, hence the dependence on international markets.
“Since ours is an export-led macro economic framework, depressed demand in international market would naturally have an impact in the local economy. For instance, our tourism is largely consumed by foreigners and it means that if they have low disposable income, they would not be able to come into the country in large numbers,” he explained.
The best thing now is to wait and see or pray for a market correction in earnest.