Saturday, May 30, 2020

What does Global Oil prices fall mean for Botswana?

Covid-19 pandemic aside, the plummeting price of oil is the biggest energy story in the world right now. 

Apart from answering the question onwhy price of oil keep falling, analysts throughout the globe are busy explaining how this Oil price fluctuations are affecting economies. The effects, analysts say, is different depending on whether a country is a net oil-importer or net oil-exporter. 

In Botswana local financial analyst – Kwabena Antwi says the drop in prices should be positive for the domestic economy. 

Antwi works as Capital Investment Analyst at local asset management firm – Kgori Capital based in the capital Gaborone. 

He explains that the global oil prices drop will reduce Botswana’s import bill, “which is welcome as exports are also currently under pressure”. 

Officials balance of trade figures as shared by the state-owned statistics agency – Statistics Botswana shows that the country ended 2019 with a cumulative trade balance deficit of P14.3 billion, the second highest since 2012’s trade deficit of P16.3 billion. The country’s huge deficit has put an abrupt end to what has been an impressive recovery, marked by five straight years of trade balance surpluses.

On top of the trade shortfall, Botswana is expected to run budget deficits in the next two financial years, and given the latest developments, experts warn that the deficits will widen in size and affect some of government’s planned interventions to stimulate the economy.

Despite this fear from some sectors, Kitwe says another positive from the oil price fall is low inflation. 

“A drop in oil prices will most likely lead to a drop in local pump prices. Transport is 23% of the inflation basket and hence low or disinflationary pressure within this component will keep overall inflation muted”, says Kitwe. 

The most recently available Consumer Price Index (CPI), which measures the change in prices, shows that inflation rate for March 2020 remained at 2.2 percent, the same rate which has prevailed since December 2019. The 2.2 percent rate has been constant since a slight uptick from November’s 2.1 percent rate – the lowest annual inflation rate since 1975. The highest inflation rate recorded in Botswana was 16.4 percent in 1981.

Meanwhile Kitwe says the third positive outcome of low oil prices for Botswana is that consumers will spend less on fuel, “which will mean they have more money to spend elsewhere. This will positively affect other industries and aggregate demand in general”. 

Global markets figures show that oil sold for over $60 a barrel at the beginning of the year but went as low as $20 by Friday last week. The decline has been attributed mainly to a supply glut caused by OPEC+ after they failed to agree a deal in March 2020, as well as an expected decline in demand as a consequence of social distancing restrictions implemented by many countries across the globe to combat the spread of COVID-19. 

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Sunday Standard May 24 – 30

Digital copy of Sunday Standard issue of May 24 - 30, 2020.