Botswana’s current account surplus is expected to continue to narrow over the short term due to declining production of diamonds, the country’s main export. A United Kingdom company research firm, Fitch Solutions has indicated.
Moreover to the surplus narrowing, a sustained domestic demand for imports and muted secondary incomes flows from the Southern African Customs Union (SACU) will further weigh on the surplus.
The research firm revised its 10-year forecasts for Botswana’s current account balance to account for substantial data revisions by Botswana’s authorities. The revisions, implemented in the second quarter of 2019 following technical consultations with the International Monetary Fund in 2018, resulted in significantly worse current account dynamics for recent years than previously recorded. While Fitch Solutions has adjusted its forecasts
Accordingly, it maintains its broad view for the short-term trajectory of the country’s current account surplus, which the forecast will narrow from 1.9 percent of GDP in 2018 to 1.0 percent in 2019 and 0.7 percent in 2020, compared to a respective 8.2 percent and 7.8 percent previously.
“We expect that falling diamond production will weigh on Botswana’s exports over 2019 and 2020. The decline will be driven by structural works at Debswana’s Jwaneng mine, by far Botswana’s largest diamond mine. While the project will extend the lifespan of Jwaneng to 2035, it will reduce output over the short term,” reads the report.
Fitch Solutions’ forecasts Botswana’s diamond production to shrink by 3.0 percent in 2019 and 2.0 percent in 2020, after expanding by an estimated 4.0 percent in 2018.
Gross diamond exports already declined in Q1 of 2019, by 13.1 percent quarter-to-quarter and 69.9 percent year-on-year, according to the Bank of Botswana. Fitch Solutions researchers expect that the commencement of works at Jwaneng in March 2019 will further constrain diamond output and exports over the coming quarters.
As diamond exports accounted for 71.2 percent of Botswana’s total goods exports in 2016-17, the research note expect that these developments will narrow the country’s current account surplus from 1.9 percent of GDP in 2018 to 1.0 percent in 2019 and 0.7 percent in 2020.
Sustained import demand will further cut into the current account surplus. While the research forecast that real GDP growth will slow from 4.5 percent in 2018 to an average of 4.0 percent between 2019 and 2020, this is still above the five-year average of 2.8 percent between 2014 and 2018.
Relatively robust growth, particularly in the services sector which employs 59.0 percent of the total labour force, will buoy household purchasing power and demand for consumer goods over 2019-20.
With the government having pledged to increase input subsidies for farmers struggling to cope with ongoing drought, the Fitch Solutions researchers believe that this will boost imports of cereals and fertilisers over 2019. In 2020, a sustained demand for consumer goods imports is expected, given a likely return to normalised weather conditions strengthening farmers’ purchasing power.
Moreover, moderate growth in public investment in infrastructure as part of the government’s National Development Plan 11 will support demand for capital goods imports around 14.8 percent of total imports in 2018, adding downward pressure on next year’s current account balance.
Furthermore, subdued South African growth will see secondary income flows to Botswana disappoint over the coming quarters.
Botswana’s secondary income flows mainly represent customs and excise collected in the SACU, and thus largely depend on economic growth and import demand in South Africa – the bloc’s largest economy.
“As we forecast South African growth will slow further over 2019, to 0.7 percent from 0.8percent in 2018, we expect this will pose headwinds to current transfers to SACU’s other member states, including Botswana. While we expect South Africa’s growth to pick up to 1.7percent in 2020, this will remain below its 2010-14 average of 2.6percent, failing to offset downward pressures on Botswana’s current account balance next year,” highlight from the research predictions.
Over the long term, the research note forecast that Botswana’s current account balance will remain in surplus, though this will gradually narrow. “We forecast the current account surplus will widen again slightly in the medium term, from 0.7percent of GDP in 2020 to 1.6percent in 2023, before narrowing again thereafter. Despite a setback between 2019 and 2021, we expect diamond production to resume expansion at an average rate of 2.9percent from 2022 onward, buttressed by growing demand from India.” This, along with a ramp up in coal production in the years ahead, will support mining exports and lead to slightly wider current account surpluses in the medium term. Over the long term, however, a continued public investment in infrastructure and growth in household incomes are expected to see capital and consumer goods imports rise steadily, gradually eroding the surplus.