Sunday, September 20, 2020

Botswana’s Foreign Reserves decline to P74.3 Billion

Botswana’s foreign reserves have dwindled yet again from P74.7billion in June 2017 to P74.3billion in June 2018.

Bank of Botswana’s Monetary Policy report which is the source of the current statistics attributed this 0.5 percent decrease to foreign exchange outflows.

From the report, “In USD terms, the reserves decreased by 2.7 percent from USD7.3 billion in June 2017 to USD7.1 billion in June 2018. The reserves decreased by 1.9 percent in SDR terms from SDR5.2 billion to SDR5.1 billion in the same period. The import covers for goods and services as at the end of June 2018 was 18.3 months.”

The current account continues to record a surplus, mainly driven by the Southern African Customs Union (SACU) receipts.

However, the surplus in the first quarter of 2018 was lower compared to that recorded in the corresponding quarter in 2017 due to the decrease in the value of diamond exports.

In his budget speech in February this year, Finance Minister Kenneth Matambo, the level of foreign exchange reserves decreased by 4.0 percent from P76.8 billion in December 2016 to P73.7 billion in December 2017. At this level, the foreign exchange reserves were equivalent to 16.1 months of imports of goods and services. Measured in terms of the US dollars and the IMF’s Special Drawing Rights (SDR), the foreign reserves stood at USD7.5 billion or SDR5.3 billion in December 2017.

Commenting on the matter, Barclays Bank Botswana Economist, Naledi Madala, said three months’ import cover is typically seen as the lowest safe level. She adds, “although far below the levels held before the financial crisis (e.g foreign reserves represented 28 months cover for 2007 imports of goods and services) the current levels are adequate to prevent the economy from shocks.”

The foreign reserves diminish is not only immune to Botswana, as we look into South Africa’s gross foreign reserves which has dropped to USD 49.85 billion in August of 2018 from USD 50.51 billion in a month earlier and marking the smallest figure since April. The decline reflected the fall in the US dollar gold price, the appreciation of the US dollar against most currencies and the foreign exchange swaps conducted for liquidity management purpose. Foreign Exchange Reserves in South Africa averaged 29579.14 USD Million from 1998 until 2018, reaching an all time high of 51889 USD Million in February of 2012 and a record low of 5316 USD Million in September of 1998.

On the exchange rates developments, for 2018, the Bank of Botswana’s implementation of the exchange rate policy- the basket weights of the Pula at 45 percent for the South African rand and 55 percent for the SDR and a 0.3 percent downward rate of crawl. A gradual downward adjustment of the annual rate of crawl seeks to minimise the risk of a further appreciation of the real effective exchange rate (REER). Bilaterally, the Pula appreciated by 0.4 percent against the South African rand, but depreciated by 0.5 percent against the SDR over the twelve months to July 2018. Over the same period, it depreciated by 0.8 percent against the British pound, 0.7 percent against the US dollar, 0.6percent against the euro and 0.1 percent against the Japanese yen, while it appreciated by 0.9 percent against the Chinese renminbi.

The movement of the Pula against the constituent SDR currencies largely reflects the performance of the South African rand against the SDR currencies.

In the same review period, the rand depreciated against the SDR (by 0.9 percent) and all its constituent currencies, except the Chinese renminbi. It depreciated by 1.2 percent against both the British pound and the US dollar, 1 percent against the euro and 0.5 percent against the Japanese yen, while it appreciated by 0.4 percent against the Chinese renminbi. The rand depreciated against major currencies due to the global investor risk aversion amidst the emerging trade war between the United States and other countries (such as China, EU countries and Russia). This, in turn, resulted in major financial outflows from emerging markets towards developed economies. South Africa is one of the most vulnerable emerging market economies to market re-adjustments.  Furthermore, the rand weakened as investors continued to reposition long-term investment from risky assets in favour of investments in safe haven currencies such as the US dollar and Swiss franc.

The dramatic sell-off of Emerging Markets  currencies in recent months has been on the back of broad-based USD strength, tightening global monetary conditions, subdued commodity prices and escalating global trade tensions. According to Madala, the ZAR and the TRY (Turkish Lira) in this case have been particularly hard hit, because both currencies have sizeable twin deficits, which become very onerous to fund when there is flight to quality. Indeed, the ZAR is falling victim to both equity and bond portfolio outflows, not to mention that foreign bond holders are not reinvesting their coupons either in SA. She concludes that, “although we believe that the SA market is too hawkish on policy rates and worry that many South African exporters have already repatriated their USD earnings, we believe that a lot of bad news is already priced into the ZAR at current levels. Therefore, we believe that the ZAR will recover from current levels by year end.” Given the link between the Pula and the ZAR the Pula weakness against the USD should also improve.

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