Tuesday, September 22, 2020

Budget to take off on fragile ground but opportunities abound

While speculation and anxiety continues to take upward peak regarding the content and effect of the fiscal budget that is expected to be presented before parliament tomorrow, analysts predict that Government is likely to cut down on developmental budget, and move on with implementation of projects that have been started.

The altercation on whether Government should make provision for some stimulus packages for companies that have been hit hard by the recession, seems to be a predominant feature of the debate regarding the ideal picture of the speech to be given by the Minister of Finance and Development Planning, Kenneth Matambo.

Dr Oupa Tsheko, an Economist at University of Botswana (UB), said, that before everything else, it should be noted that Government last year had to take a deliberate decision to run on a budget deficit in order to cushion the effects of a worldwide phenomenon that was the worst to hit the world since the twenties.

“Thus, it was only proper that she had to borrow from outside and also needed to tap on the country’s foreign reserves in furtherance of the decided stimulus initiatives, and in my opinion these were commendable measures by any definition,” posited Tsheko, adding that its worth acknowledging that the impact of the crisis was huge enough.

But now, given the reported 10 percent growth of China’s economy and that Japan registered substantial economic growth for the first time in more than twenty years, as well as indicators of recovery or positive growth in European countries, Tsheko made the point that the trend in most of these countries is to scale down on stimulus packages.
On that basis, it was therefore argued that it should be surprising when Government decides to adopt a similar approach.

Pressed to explain the relevance of figures pertaining to Europe, the UB academic highlighted the fact that the recovery of those countries is critical in that the change for best or worst in Botswana and other African economies generally, of exports demand is largely dependent on what happens in those countries.

Another theory that according to Tsheko seems to be making rounds had to do with the notion that Government might have to suspend some ongoing projects, and that prompted this response “It amazes me where such a line of thinking originates.”

He argued that, like Government did in the past to defer some of the developmental projects, which he maintains was the right thing to do, it is also likely there will a cut down on expenditure but certainly Government cannot afford suspend recurrent budget.
Notwithstanding the UB academic’s postulations, the Botswana Confederation of Commerce and Industry Manpower(BOCCIM) and local Fund managers hold that it is within the realm of reason to expect Government to make certain drastic interventions to stimulate the economy.

“Botswana should continue to invest in the development of infrastructure, however these should be done where a positive impact is visible and there would be value added to GDP, especially on Small Micro and Medium Enterprises (SMMEs),” said BOCCIM Executive Director Maria Machailo-Ellis.
Currently, SMMEs which make up the majority of business operations in Botswana have no stimulus recovery packages geared towards them, except the recent bailout of the textile industry.

Machailo-Ellis pointed out that, on account of the fact that the funding from Southern African Customs Union (SACU) is far from enough to compensate for the gap resulting from loss of revenue from diamonds, BOCCIM expects another deficit this financial year.
According to BOCCIM, the extent of the impact is still such that, there will once again be a need to cut down on both development and recurrent expenditure.

“However, at BOCCIM we feel that previous interventions in the form of increasing expenditure in public works to mitigate for employment creation, was unsustainable,” Machailo-Ellis added.

She said that the best thing would be to divert from the present approach where people cut grass and gather stones, into value adding projects such as Dam construction and development of infrastructure which would easily be unbundled into sustainable income generating projects for both unemployed people and SMMEs.

Yet another striking perspective, in the ‘financial prudence” discourse, came from the investment experts.
Bakang Seretse, Fund Manager, at Investec Asset Management Botswana, concurred with others on the inevitability of the budget running on a deficit again.

“While diamond exports are now in better shape, there are still worries about a second-round collapse in commodity prices and demand if the recovery in major markets is short lived,” argued Seretse.

According to Seretse, it is highly critical that Government considers alternative means of stimulating local capital markets by borrowing from the funds, rather than just depend on external borrowing which carries minimal benefits for the Botswana’s economy.

On the issue of borrowing, although Tsheko countered that it should be noted that Government also has business to consider more than just the need to stimulate local capital and look at the benefits, while at the same time mindful the local market is very small.
“Look, Government has a duty to develop the economy, and a number of feasible ways of doing that in spite of the size of the economy, can be explored”, said Seretse.

For instance, in the advent of the impending privatization initiative, one option may be, to consider the fact that the local market is highly liquid and therefore, should favour using local capital markets in disposing of government agencies targeted. This would mean listing the targeted organisations in the Botswana Stock Exchange (BSE) rather than out rightly selling the assets in the common way, thus the public can buy shares, at the BSE, and Funds Managers would also buy on behalf of their clients.

The effect of this would be multi-angled in that, while on the one hand it stimulates local capital, it also empowers citizens. To show what he meant, Seretse pointed out that currently 50% of the pension funds is invested offshore, while the remainder lies idle locally without productive activity.

To qualify the case for local borrowing, it has been argued by a number of protagonists that, while it might seem sensible to say that its cheaper borrowing from outside, there is ample evidence that some of the loans, come with conditions such as the money being used to finance projects awarded to contractors and sometimes employees from the involved countries.

On what to expect, Seretse expressed the view that currently, it is rather difficult to make any informed predictions on the possible state of the budget, because there is a alarmingly poor release of economic data to really help economic participants to know what to expect.

Moreover, a suggestion was made that, to improve on feasible solutions in moments of challenges such as is presented by the recession and given the delicate balance that Government now has to wrestle with, it would make better sense to consult more with the private sector and other stake holders, to ensure satisfactory uptake and diligent delivery during the current national development plans.

How effective is the current fiscal stimulus program and will the local economy suffer as stimulus spending is reduced? And what about other external shocks that may present them if South Africa goes ahead with its threat to stop passing SACU revenue receipts to other member countries?

Analysts maintain that whatever the outcome, these questions are very important in predicting the economic direction in the next couple of months, if not years.


Read this week's paper

The Telegraph September 23

Digital edition of The Telegraph, September 23, 2020.