Recently released quarter-on-quarter (qoq) Gross Domestic Product (GDP) data suggests the economy has slipped into a technical recession. Although economists usually shun using the ‘prejudicial’ qoq indicators, as they can be heavily influenced by short-term volatility and therefore fail to capture seasonal factors, it is irrefutable that the economy is caught up in global headwinds and the probability of skidding into a real recession when annualised year-on-year (yoy) figures are unveiled end of March is high. In this broad interview, BusinessWeek’s BRIAN BENZA prods First National Bank of Botswana (FNBB) Research Manager, Moatlhodi Sebabole for his views on the current state of the economy, the likelihood of the Economic Stimulus Programme (ESP) saving the day and the potential key drivers of growth.
BusinessWeek: Quarter on quarter GDP figures show that the economy is in a technical recession. Do these figures portray the true state of the Botswana economy?
Sebabole: The technical recession is a true reflection of the economy which remains under stress and undiversified.
The downturn in growth is primarily a reflection of lower diamond sales as the export concentration of diamonds is at 80 percent - a reflection of lack of diversification.
The other economic stressor emanates from the supply side shocks of limited supply of water and electricity, which is negating growth for non-mining private sector. The drought effects are also resulting in negative growth in the agricultural sector. Some healthy performances are however still recorded on the services sectors.
BusinessWeek: Where do you see Botswana’s economic growth at in 2016 and what could be the drivers of growth?
Sebabole: Growth is likely to be services-led as the primary sectors of mining, agriculture and manufacturing continue to be under pressure of low commodity prices, drought and lack of competitive advantage.
The transport and communications as well as hospitality sectors are likely to lead the growth while the financial services sector will undergo some marginal growth as volumes and liquidity pressures could limit aggressive expansions in the insurance and banking industry.
Construction might undergo some growth expansion as construction projects expand to meet NDP10 targets, however these growth rates are not expected to be as significant as the 2011/2012 growth rates when the sector was the fastest growing in the country.
Mining is expected to slightly recover, but not reach 2013/2014 growth levels, while lack of water and electricity will likely continue to hamper significant improvement in non-mining private sector.
BusinessWeek: Do you see the budget estimates presented by Matambo supporting growth of 4.2 percent as forecast by government?
Sebabole: The estimated consecutive budget deficits, whose cumulative amount to just over P10 billion, indicate that the fiscus is undergoing counter-cyclical cycle where fiscal consolidation will be necessary. That essentially means government spending in nominal terms will reduce and thus affect robust expansion of projects. Additionally, should global volatility increase, the forecasted deficits might widen which could result in austerities on the side of government – which will reduce expansionary role of government to stimulate economic growth.
Additionally, the under-utilisation of funds and implementation issues might be a limiting factor to significant recovery in economic growth.
BusinessWeek: With the background of the headwinds facing the economy, how realistic are government’s estimates that growth will rebound to over four percent this year?
Sebabole: At FNBB, the expectation is for Real GDP to grow below trend in the short-term and thus we expect mild recoveries to fewer than three percent levels. This view is primarily driven by effects of supply side shocks of water and electricity, agricultural growth that will likely remain negative and mining recovery which is not robust enough.
BusinessWeek: Is the level of the budget deficit anything to worry about?
Sebabole: The widening deficit is on the backfoot of declining mineral revenues and SACU receipts while expenditure is rising to meet backlog of projects, supplementary financing and some drought relief measures.
It brings some level of comfort that government will cap deficits at four percent of GDP and the two expected deficits will remain within the cap. However, in terms of fiscal control of these deficits, it is not clear how that will be achieved especially if global recoveries are not realised in the medium term.
The low debt-to-GDP ratios provide an opportunity for government to issue more bonds to finance the deficit as well as engage private sector institutions to finance and act as advisory for some of the mega projects.
BusinessWeek: Do you see the amounts dedicated towards ESP meaningfully stimulating the economy?
Sebabole: In terms of ESP, the estimated value of over P3 billion towards ESP over a two-year period is not broken down into new money and existing money within the budgetary process and thus it is difficult to estimate the value add of ESP over and above the projects which will have been budgeted for in anyway.
The likelihood of job creation exists, however, more temporal as opposed to sustainable in nature. This is primarily due to the nature of most of the established ESP jobs, which will involve construction and maintenance contracts both of which are finite in nature.
BusinessWeek: Government has said it will dedicate some of the ESP funds towards the manufacturing sector. What do you think has contributed to the poor performance of this sector and what needs to be done for the sector to grow?
Sebabole: Manufacturing has underperformed over the years and in the past decade the sector’s contribution to GDP was a peak of 6.4 percent in 2010. In the past decade again, manufacturing sector recorded fastest growth in 2007 at 25.7 percent but has since recorded a growth of fewer than five percent on average in the past three years. The manufacturing sector is primarily intertwined with the overall performance of other sectors and therefore an underperformance of the primary sectors will translate to much lower performance of the manufacturing sector. As an example, diseases and drought might affect manufacturing of meat products.
The manufacturing sector is primarily driven by meat and meat products, beverages, textiles, tanning and leathery products as well as other manufacturing components.
These sub-sectors have been affected by structural issues such as suspension of beef exports into the EU market; the beverages industry has been affected by levies whereas other regional tensions for competitiveness (resulting in higher tariffs) has made imports of some raw materials expensive and thus some manufacturing operations rendered less competitive. An overhaul for manufacturing sector is necessary in terms of incentives around land allocation, less stringent tax regimes, well developed and accessible infrastructure, duty and VAT exemptions on raw materials, machinery and equipment, allowing intra zone subcontracting inter zone export. The primary focus will be to iron out the issue of tariffs within the region, which will make local manufacturing non-competitive
BusinessWeek: Do you see the financial sector rebounding this year and what could drive the recovery?
Sebabole: On the general, the banking industry has undergone what could be a counter-cyclical phase from an excess liquidity regime to a regime with liquidity challenges. The slower growth in the banking sector reflects both declining fixed investments by businesses as well as eroded purchasing power of households which makes credit qualification more stringent.
I do see a possibility of a rebound in the banking sector, in line with the recovery of the general economy (businesses confidence restoration and thus more investments and expansion projects, coupled with normalisation to an extent, of the property sector and affordability of credit by households in a low interest rate environment).
However, the growth of the sector is positively correlated to economic growth and as long as overall economy health remains fragile, the sector will continue to undergo some turbulence. This will therefore increase the need for banks to get more innovative in product offering, do more structuring and off-balance sheet activities so as to diversify their income streams on the non-interest income.
BusinessWeek: What is the current state of liquidity in the market at the moment?
Sebabole: The liquidity situation has significantly improved post the five percent reduction in primary reserve requirements in the second quarter of 2015. Slower credit extension also meant the advances did not grow as aggressively as the prior years.
The economic pressures have affected liquidity negatively as deposits have not necessarily undergone significant growth and savings and investments continue to grow at a declining rate.
Although the liquidity situation has improved, it remains fragile and thus there will be need for structural reforms to avert any volatile effects on excess liquidity.
Banks have also become more prudent in contingency plans for liquidity management, and that should add confidence to the ability of the sector to withstand further pressures on liquidity.