Monday, May 17, 2021

National Budget 2015: A reform window to the domestic economy

Looking back to the future

The 2015/16 national budget to be announced on Monday by Minister Kenneth Matambo is expected make some serious strategic choices. One stratagem to inject conservatism into the national budget would be to project the 2015/16 budget on the growth and revenue numbers which were achieved in 2014/15. At recent financial journalists Press Club hosted by Afena Capital, Botswana Institute of Development Policy Analysis (BIDPA) researcher Grace Tabengwa said forecast show that Matambo will announce a moderate surplus of P1.3 billion when he presents the budget on Monday. “The budget will still be tight,” stated Tabengwa.

While many economic commentators and financial analysts have scolded government for being obsessed with running a surplus or balanced budget, Dr Tabengwa an acting BIDPA Senior Research Fellow and Macroeconomist is of the view that deficit funding is not always a good thing as it can affect Botswana’s credit rating in the long run.

As critics continue to argue government to run a deficit funding in order to keep the economy at par with those of the developed world, Dr Tabengwa maintains that fundamentals do not allow deficit funding for a long time. Botswana ran a fiscal deficit in 2010/11 financial year before it was contained with a balanced budget in 2012/ 13 financial year.

National budget archives figures shows a deficit for a P4.696 billion for 2009/10 financial year while in 2009/10 it stood at P9.321 billion. The budget strategy paper for 2015/16 states that in terms of economic outlook, the domestic economy is expected to grow moderately by 5.2 percent in 2014, and further by 5.0 percent in 2015, underpinned by the expected recovery in diamond production. The main risk to this growth is the poor performance of mineral exports in the event of a slowdown in the global market, particularly in advanced economies

Drastic reform to SACU revenue formula

In 2014, a conference organised by Botswana Institute of Development Policy Analysis (BIDPA), the country’s economic think tank in collaboration with University of Botswana’s Department of Economics and Friedrich-Ebert-Stiftung was told SACU revenue sharing ‘formula need drastic reform’.

As such Matambo will make his sixth budget speech at a time when Botswana has been urged to look at ways to diversify its revenues streams. Current arrangements have been declared risky and present future challenges for the domestic economy which has been driven largely by diamonds for many years.

According to the budget speech of 2014, the projected total revenue and grants for 2014/15 amount to P50.18 billion comprising of Customs and Excise at P15.97 billion or 31.8 percent; Non-Mineral Revenues (Income Tax and VAT) at P15.66 billion or 31.2 percent; and Mineral Revenue at P15.24 billion or 30.4 percent.

The figures indicate that the minerals sector is no longer the largest source of fiscal revenues as it has been replaced by windfall from South African Customs Union (SACU).
“The biggest risk to Botswana is SACU not diamonds as the Ministry of Minerals can project what will happen to diamonds,” a Senior Research Fellow at BIDPA, Professor Roman Grynberg said last year.

The SACU revenue sharing model, which is being renegotiated, has changed three times.
Favourable inflation figures

The 2015/16 budget will be presented at a time when the domestic inflation is at a very low level. The domestic inflation fell to new lows in December and provides impetus to monetary policy easing.

Figures from the government data agency, Statistics Botswana shows that headline inflation was at a record low of 3.8 percent. At the same time stable prices in the major component of the CPI basket including transport, food and non- alcoholic beverages has been recorded. This low inflation environment has led to the Bank of Botswana governor Linah Mohohlo and her Monetary Policy team leaving the benchmark rate at 7.5 percent.

However, the Chief Investment Officer of Afena Capital Botswana, Alphonse Ndzinge suggests that recovery of the South African Rand (ZAR), commodity price shocks and administered prices remain key risks ahead.

“Record low inflation cycle expected to continue with benign demand pressures, and lower oil and commodity prices,” he said recently at a Business Reporters Press Club meeting.

No market ‘excitement’ expected

There is high likelihood that the local capital markets will not be enthused by Matambo’s speech. It has been the same case atleast for the past five years that the market did not react to the budget outcome. Garry Juma, a senior financial analyst at a leading stock broker, Motswedi Securities says the reaction by markets is usually brought upon by the announcement made by the minister.

“If the announcement directly affects the market that is when there could be some sort of reaction. For the past five budgets there have not been any huge changes at the markets which came about as a result of announcements made at the national budget”.
Minister Matambo is likely to mention the transformation of Botswana Stock Exchange into a company which is on the card. It is yet to be seen how such an announcement, which is not new could affect trade at the local bourse.

Motswedi Securities says the trading week of the year, which marked the last but one week before the budget speech was quite an interesting one as all the gainers were trading at 12 month highs while the Domestic Companies Index (DCI) pared gains trading on a negative year to date return for the 1st time. The domestic board lost about P138.54mn (0.1%) of its market capitalization during the week, mainly on some of the profit taking from some of the large caps such as Letshego Holdings.

This week the DCI shed 35 basis points for the week to end with 9463.73 points as profit takers cashed in. However the FCI was relatively flat with only one counter traded during the week.


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