The Rand Merchant Bank (RMB) Global Markets Research for Sub-Saharan Africa latest edition on Botswana’s macroeconomics developments and implications expects the consumer demand to decelerate this year.
RMB research has shown that the slowdown will be driven primarily by the tightening of credit standards.
“In contrast, we expect diamond demand to start recovering in 2014, as a result of stronger global growth, thereby leading to an expansion in mining production.”
The February edition of RMB research has indicated that inflation appears to have bottomed adding that after a 4.1percent rate at the end of 2013, inflation of 4.4 percent was recorded in January. It stated that it is expected that to stabilise around 4 percent.
Also in the research is that risks to the outlook come from South Africa where inflation has been contained by weak economic growth thus far, preventing a spill over into Botswana.
Administered price increases are said to remain a possible threat. It is also expected that inflation to average 4 percent over the medium term, the level that would be consistent with 2 percent inflation in the developed world, 5.5 percent in South Africa, and the current minimal rate of crawl on the pula.
“The biggest medium-term threat is that the Bank of Botswana increases the rate of crawl on the pula once again,” the research stated.
Regarding the monitory policy, RMB is of the view that it believes that interest rates have reached their floor adding that the turn in inflation, the rate hike in South Africa, tightening global monetary conditions and the BoB’s unwillingness to cut deposit rates prohibits a further cut and implies the next rate move will be upwards.
“The timing will primarily be determined by rate moves in South Africa. Based on our assumption that the SARB will hike another 100bp in 1H14, we expect Botswana to hike 50bp by the end of the year. In 2013, we worried that the aggressive rate cuts were fuelling a consumer credit binge and property bubble,” reads the research.
Recent data suggests the tightening of bank lending standards is slowing the very rapid pace of credit expansion. “We do, nevertheless, remain concerned by the property market”.
On the fiscal policy, RMB said that Botswana’s 2014/15 budget predicted a 1 percent budget surplus, up from 0.4 percent in 2013/14 adding that often they overshoot budget.
The research indicated that however, this year, there should be careful of such a prediction given the changing growth environment and pressure for wage increases.
It added that in the medium term, concerns remain about a possible slowdown in CMA receipts, given both the cyclical slowdown in South African imports, and the possibility of a structural change in the revenue-sharing formula.
“On fixed income, we believe that the yield reduction throughout 2012 and 2013 has taken the yield curve close to fair value. Some slight undervaluation exists in the short to medium portion of the curve, while the long end, as represented by the BW011, remains overvalued. After two years of yield compression, pressures will be to the topside as global interest rates rise,” reads the RMB research.