A local research house, Econsult has suggested that there is no current crisis in the short term despite a projected budget deficit on the back of dwindling minerals revenues. The researchers at the firm pointed out that while developments in commodities markets are negativeÔÇô for Botswana’s copper and nickel producers as well as diamonds ÔÇô the short-term impact should not be overstated.
The researchers wrote in the Economic Review for the third quarter July – September 2015 that the mining sector is not closely integrated with the rest of the economy, and the mining slowdown does not immediately cause other economic activities to contract across the country, although there may of course be a direct effect in towns that are dependent upon mining.
“GDP data to the middle of 2015 indicates that growth in the non-mining private sector has continued at a robust rate of nearly 5%. Although there may be fiscal and balance of payments problems coming up, there is no immediate crisis,” said the team headed by economist Keith Jefferies.
They argued that budgeted government spending continues, even with revenue shortfalls, financed from accumulated savings. “Imports can continue even with a decline in exports, financed by the foreign exchange reserves. And the Pula has been much more stable than most other emerging market currencies, with the exchange rate peg not under threat, and the currency’s overall value (against the basket) preserved, in contrast to the sharp depreciation of some other regional currencies.”
“The immediate impact of the global slowdown on the economy is therefore limited. But there is nevertheless an increasingly negative mood with regard to economic prospects, and a lack of confidence in the business community, which goes deeper than the current malaise in commodity markets.”
Regarding the Economic Stimulus Package (ESP) announced recently by President Ian Khama, Econsult said the analysis of the likely impact of the stimulus package is difficult in the absence of information regarding its content, timing, magnitude and funding.
“However, indications are that it will be large, and will be implemented as soon as possible. Fiscally, the impact will almost certainly be a move to larger budget deficits, over and above those that would be likely to result from the impact of the global slowdown and reduced mineral revenues. The stimulus will no doubt result in a short-term boost to economic activity and some job creation, particularly in construction and related activities such as building materials supplies, architects, surveyors and engineers.”
“How the larger budget deficit will be funded has not yet been announced, although the government will have a choice between drawing down its savings at the Bank of Botswana (in the Government Investment Account, or GIA), or borrowing through bond issuance, or some combination of the two.”
Econsult noted that both funding approaches have advantages and disadvantages, and of course the Government’s net financial assets will decline regardless of which method is used.
“However, it is worth noting that government can currently borrow very cheaply ÔÇô the 25-year government bond is currently trading below 6% – and further bond issuance would be well-received by pension funds and asset managers.”