ECONOMIC REVIEW Third Quarter July-September 2018 in This Issue

www.econsult.co.bw compiled by KEITH JEFFERIS SETHUNYA SEJOE KITSO MOKHURUTSHE ECONOMIC REVIEW third quarter july-september 2018 in this issue ...

COMMENTARY KEY NEWS MACRO- SPECIAL ECONOMIC HIGHLIGHTS ECONOMIC FEATURE 1 VARIABLES 4 7 DATA 11 12

COMMENTARY

Recovery continues with a broad-based increase in growth

The economic highlight of the third quarter of 2018 was the release of GDP data showing that the economy grew by 4.4% in the year to June. This was the highest annual economic growth rate for nearly four years, since the third quarter of 2014. This was partly due to the impact of the closure of the BCL copper-nickel mine in October 2016 gradually falling out of the annual growth calculations. However, the recovery went far beyond the BCL effect, and growth was broad-based, with all sectors except for water and electricity experiencing the same or higher annual growth than in Q1. The data suggests that growth for 2018 as a whole is on course to reach 4.5%-5.0%, which would be the highest annual rate for five years.

Other positive economic news in the third just below the lower end of the Bank of Bo- quarter of 2018 included an upturn in bank tswana’s objective range, and as a result, credit growth to a respectable 7.3% in the policy interest rates were maintained at year to July, and a continued (small) de- historically low levels. The global diamond cline in the proportion of bank loans in ar- market has been stable, rather than grow- rears. Inflation fell to 2.9% in September, ing, with sales at similar levels to 2017.

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Our ability to monitor and analyse economic developments are increased further. Implicitly, this is money owed by the is, however, hindered by something of a data drought. Sta- Government (via the NPF) to the oil companies, but there tistics Botswana and other agencies have been unable to appears to be no strategy in place for paying off this debt. provide recent data on international trade, employment, Similar inconsistencies are apparent in the pricing of water company formation, and mineral production. The long- and electricity, both of which are below economic cost. awaited report from Statistics Botswana on the 2015/16 Botswana Multi-Topic Household Survey (BMTHS) is still Besides creating economic distortions and undermining the not available, more than two years after the survey was new regulator, another result of the fuel price policy is to completed. take liquidity out of the banking sector, due to the need for oil importers to borrow heavily. This will be compounded There are a few economic issues that have become more by another government decision, to remove monies held pressing during the quarter. Government seems unable to in the banks by off-budget Special Funds, which will take come up with a coherent strategy regarding fuel prices. a further P1.8 billion of liquidity from the banks. Although Officially, retail prices of petrol, diesel and paraffin are regu- there is currently not a liquidity shortage – we estimate lated, but not subsidised, with the National Petroleum Fund that there is around P4 billion of liquidity in the banking sys- (NPF) providing a stabilisation mechanism. In principle, tem over and above the banks’ statutory and operational pricing decisions are taken by the newly-established regu- requirements - removing the Special Funds could lead to a lator, the Botswana Energy Regulatory Authority (BERA). tightening of liquidity, and should therefore be done slow- But with oil prices rising on international markets, domes- ly. Liquidity tightening may lead to a slowdown in credit tic prices have not been increased sufficiently to cover the growth and more competition for deposits. This is already cost of oil imports. A problematic clause in the BERA Act, apparent, with deposit interest rates rising; however, fur- inserted late in the drafting process, requires all of BERA’s ther increases will be necessary if funds are to be attracted pricing/tariff decisions to have Ministerial approval. In prac- from balances held outside of the country or domestically tice this means Cabinet approval, so even with an “inde- in foreign currency deposits. This would in due course lead pendent” regulator, fuel price regulation is still politicised. to higher lending rates, even if monetary policy remains loose. Sub-economic pricing reduces (or postpones) the impact of higher fuel import costs on inflation, but there is no clear 2019 Budget Strategy Paper mechanism for making up the shortfall when there is un- One of the most significant developments of the quarter der-recovery of fuel import costs through retail prices. Even was the release of the 2019 Budget Strategy Paper by with the modest fuel price increase announced in October the Ministry of Finance and Economic Development. This 2018, retail prices are still at least P1 per litre below cost. included updated fiscal figures for the 2017/18 financial The deficit is financed by fuel importing companies, who year, based on actual revenue and expenditure data. This have substantial overdrafts – believed to total around P1 showed that revenue came in well ahead of budget, due billion currently, and this will steadily increase unless prices to the good performance of mineral revenues, although

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this was offset to some extent by a worrying under-per- IMF Article IV Report formance of domestic revenues for non-mineral income tax The 2018 IMF Report on the Botswana economy was pub- and VAT. Government expenditure came in just below bud- lished in August, with its usual thorough review of eco- get, mainly due to a 14% underspend on the development nomic issues and policies, and provision of medium-term budget. As a result, the budget was broadly balanced, as forecasts. The GDP growth forecasts are reasonably posi- compared to the earlier projection of a P2.4 billion deficit. tive, averaging around 4% a year from 2019-2022. Bud- get forecasts are slightly less positive, with budget deficits Revised data for the current (2018/19) fiscal year shows a projected throughout this period, with revenues somewhat downward revision of both revenues and expenditures as lower than government’s figures. compared to the February 2018 Budget figures, with an increased deficit of P4.5 billion projected. A similar deficit is However, the IMF emphasises that “economic outlook is projected for the coming (2019/20) fiscal year as spending positive assuming key structural reforms are implement- continues to rise even with revenues somewhat stagnant. ed”. Key economic objectives are to “improve public sec- This reinforces the need for improved domestic revenue tor efficiency, boost non-mining growth, diversify exports, mobilisation, which is quite low. With constrained revenue, and lower unemployment, all of which will hinge on the this emphasises the importance of proper prioritisation of successful implementation of critical structural reforms”. spending based on proper assessment and appraisal of These cover a wide range of public sector, business envi- competing spending demands, and improving efficiency in ronment and financial sector reforms. Highlights include: key areas of government spending where costs (relative to • improve domestic revenue mobilisation, through extend- output/delivery) are very high. ing the coverage of property taxes and reducing VAT exemptions; Figure 1: Government Budget, 2017/18 – 2019/20 • stop the proliferation of parastatals and restructure or

2017/18 2018/19 2019/20 privatize existing ones;

70 • formulate a civil service reform to reallocate resources 60 and reduce bureaucracy; 50 40 • use the opportunity of the political transition to once and 30

P billion for all move ahead with reforms to reduce red tape and 20

10 the costs of doing business

0 • swiftly liberalize the granting of visas and work permits; -10 Revenue Spending Balance

Source: MFED, Draft 2019/20 Budget Strategy Paper • improve information on the labour market; Source: MFED, Draft 2019/20 Budget Strategy Paper IMF Article IV Report • increase the volume and frequency of issuance of gov- The 2018 IMF Report on the Botswana economy was published in August, with its usual ernment bonds; thorough review of economic issues and policies, and provision of medium-term forecasts. The GDP growth forecasts are reasonably positive, averaging around 4% a year from 2019• adopt -measures to increase the breadth and depth of 2022. Budget forecasts are slightly less positive, with budget deficits projected throughout this period, with revenues somewhat lower than government’s figures. mobile money payments. However, the IMF emphasises that “economic outlook is positive assuming key structural reforms are implemented”. Key economic objectives are to “improve public sector The IMF notes that without these key reforms, growth is efficiency, boost non-mining growth, diversify exports, and lower unemployment, all of likely to decline. which will hinge on the successful implementation of critical structural reforms”. These cover a wide range of public sector, business environment and financial sector reforms. Highlights include: • improve domestic revenue mobilisation, through extending the coverage of property taxes and reducing VAT exemptions; • stop the proliferation of parastatals and restructure or privatize existing ones; • formulate a civil service reform to reallocate resources and reduce bureaucracy; page 3 • use the opportunity of the political transition to once and for all move ahead with reforms to reduce red tape and the costs of doing business • swiftly liberalize the granting of visas and work permits; • improve information on the labour market; • increase the volume and frequency of issuance of government bonds; • adopt measures to increase the breadth and depth of mobile money payments. The IMF notes that without these key reforms, growth is likely to decline.

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KEY ECONOMIC VARIABLES

AnnualAnnual GDP Growth GDP Growth Sectoral GDP Growth Sectoral GDP Growth 30% Annual GDP Growth Sectoral GDP Growth 30% 20% Mining Mining 20% Fin. & Bus. Service 10% Fin. & Bus. Service 10% Trans. & Comm. 0% Trans. & Comm. 0% Total VA Total VA -10% Trade -10% Trade -20% Manuf -20% Manuf Construction Construction -30% -30% Soc. & Pers. ServicesSoc. & Pers. Services -40% -40% Government Government

-50% -50% Water & Elec. Water & Elec. 2007 20082007 2009 2008 2010 2009 2011 2010 2012 2011 2013 2012 2014 20132015 20142016 20172015 20182016 2017 2018 Agriculture Agriculture

0% 1% 2% 3% 4% 5% 6% NMPS NMPSMining MiningGDP GDP 0% 1% 2% 3% 4% 5% 6%

Real GDP growth has continued its resurgence during the Real GDP growth has continued its resurgence during the In line with the improveIn line with the improved economic performance, all sectors d economic performance, all sectors second quarter of 2018, registering year-on-year growth of except for Water & Electricity recorded either the same or Real GDPsecond quarter of 2018, registering year growth continued its resurgence during- onthe- year growth of second In exceptline with for Wa the improvedter & Electricity recorded either the same or economic performance, all sectors 4.4%, compared to 3.3% in Q1 2018. This is the highest rate higher growth rates in Q2 2018 compared to Q1. Mining was quarter4.4%, compared to 3.3% in Q1 2018. This of 2018, registering y-o-y growth of 4.4%, compared is the highest rate to excepthigher for Watergrowth & ratesElectricity in Q2 2018 recorded compared to Q1. Mining was either the same or higher 3.3%of y-on in -Q1y GDP growth recorded since 2014 Q3. Growth has 2018. This is the highest rate of y-on-y GDP growth the fastest growing sector recording ygrowth rates in Q2 2018 compared-o-y growth of 5.6% to Q1. Mining was, in the fastest again been driven by the recovery of the mining sector, of y-on-y GDP growth recorded since 2014 Q3. Growth has contrast to the previous quarter when it was the slowest the fastest growing sector recording y-o-y growth of 5.6%, in recordedagain been driven by the recovery of the mining sector, since 2014 Q3. Growth has again been driven by the growingcontrast to the previous quarter when it was the slowest sector recording y-o-y growth of 5.6%, in contrast to the recoverywhich recorded y of the mining-o-y growth of 5.6%, up from negative sector, which recorded y-o-y growth of growing sector.previous This recoveryquarter when is it mainlywas the technical, slowest due to the growing sector. This which recorded y-o-y growth of 5.6%, up from negative growing sector. This recovery is mainly technical, due to the 5.6%,0.3% in Q1 2018 up from negative. This is also the first quarter to produce 0.3% in Q1 2018. This is also the first effect of the BCL closurerecovery is mainly gradually technical, dropping out of growth due to the effect of the BCL closure 0.3% in Q1 2018. This is also the first quarter to produce calculations.effect of the BCL closure However, there was also strong growth in the gradually dropping out of growth quarterpositive y to -oproduce-y growth in the positive y-o-ymini ng growthsector since Q4 2014. in the mining sector gradually dropping out of growth calculations. However, there Growth in the non-mining private sector (NMPS) increased output of diamonds, coal and soda ash. calculations. However, there was also strong growth in the There was also a since positive yQ4 2014. Growth-o-y growth in the in the non-miningmini privateng sector since Q4 2014. sector (NMPS) was also strong growth in the output of diamonds, coal and soda to 4.4%, from 3.3% during the previous quarterGrowth in the non-mining private sector (NMPS) increased indicating significant increase in the growthoutput of diamonds, coal and soda ash. rates of the Trade, There was also a increasedan improvement across the to 4.2%, from 3.6% whole during economy. the previous quarter Manufacturing and Agriculture ash. There was also a significantsectors compared to Q1 2018, increase in the growth rates indicatingto 4.4%, from 3.3% during the previous quarter an improvement across the whole economy. indicating of thesignificant increase in the growth Trade, Manufacturing and Agriculture rate sectorss of the compared Trade , to an improvement across the whole economy. recording yManufacturing and Agriculture -o-y growth rates of 4.1%, 3.8% and 2.7% sectors compared to Q1 2018, respectively.Q1 2018, recording y-o-y growth rates of 4.1%, 3.8% and 2.7% respectively.recording y-o-y growth rates of 4.1%, 3.8% and 2.7% respectively.

Annual Credit Growth Arrears on Bank Lending

Annual Credit Growth ArrearsArrears on Bank on Bank Lending Lending 45% Annual Credit Growth 45% 10% 10% 40% 9% 40% 9% 35% 8% 35% 8% 7% 7% 30% 30% 6% 6% 25% 5% 25% 5% 4% 4%

20% % of credit to sector 3% 20% % of credit to sector % of credit to sector 3% 15%% of credit to sector 2% 15% 2% 1% 10% 1% 10% 0% 0% 5% 5% 0% 20100% 2011 2012 2013 2014 2015 2016 2017 2018 Business Households Total 2010 2011 2012 2013 2014 2015 2016 2017 2018 Business Households Total Total Firms Households Arrears as a proportion of outstanding bank credit fell Total Firms Households Arrears as a proportion of outstanding bank credit fell Annual bank credit growth has continued its upward marginally dur ing the second quarter of 2018. Total arrears Annual bank credit growth has continued its upward marginally during the second quarter of 2018. Total arrears trajectory. Total bank credit rose Annual bank credit growth has continuedby 7.3% in its upward the year to trajectory. July decreased to 6.9% in Q2 2018, from 7.0% in Q1. The reduction Arrears as a proportion of outstanding bank credit fell marginally trajectory. Total bank credit rose by 7.3% in the year to July decreased to 6.9% in Q2 2018, from 7.0% in Q1. The reduction 2018 from 6.Total bank credit2% in April. This has been driven by a sharp rose by 7.3% in the year to July 2018 from 6.2% in household arrears from 6.3%during the second quarter of 2018. in Q1 2018 Total arrears to 5.9% decreased in Q2 2018 to 2018 from 6.2% in April. This has been driven by a sharp in household arrears from 6.3% in Q1 2018 to 5.9% in Q2 2018 increase in thein April. This has annual been driven growth by a rate sharp of credit to firms increase in the annual, which has been6.9% in offset by an increase in both business and Q2 2018, from 7.0% in Q1. The reduction in household increase in the annual growth rate of credit to firms, which has been offset by an increase in both business and rose from 3.6% in April to 8.3% in July. This may growth rate of credit to firms, which rose from 3.6% inreflect the April to government & arrears from 6.3%parastatal arrears. Business arrears rose in Q1 to 5.9% in Q2 2018 has been offsetto by rose from 3.6% in April to 8.3% in July. This may reflect the government & parastatal arrears. Business arrears rose to reported increase in business confidence within the 8.3% in July. This may reflect the reported increase in business 8.9% in Qan increase2 2018 in both, up business from 8.3% in Q1 and government, whilst government & & parastatal arrears. reported increase in business confidence within the 8.9% in Q2 2018, up from 8.3% in Q1, whilst government & economy over the first half of the yconfidence within the economy over theear. Household credit first half of the year. parastatal arrearsBusiness arrears rose increased to 6.5% from 6.1% during the to 8.9% in Q2 2018, up from 8.3% in Q1, economy over the first half of the year. Household credit parastatal arrears increased to 6.5% from 6.1% during the growth increased marginally to 7.6% from 7.3% during the Household credit growth increased marginally to 7.6% from 7.3% same period.whilst government & parastatal arrears increased to 6.5% from growth increased marginally to 7.6% from 7.3% during the same period. same period.during the same period. 6.1% during the same period. same period.

Interest Rates Interest Rates page 4 Interest Rate Spread 14 Interest Rate Spread 14 35% 12 35% 12 30% 30% 10 25% 10 25% 8 20% 20%

% 8 15% 6 % 15% 6 10% 10% 4 5% 4 5% 2 0% 2 0% 0 0 Return on Advances Cost of Deposits Margin Bank Prime BoBC91 BoBC14 Return on Advances Cost of Deposits Margin Bank Prime BoBC91 BoBC14 The long-term trend of both lending and deposit rates for The Bank of Botswana’s Monetary Policy Committee (MPC) The long-term trend of both lending and deposit rates for The Bank of Botswana’s Monetary Policy Committee (MPC) commercial banks has followed BoB’s Bank Rate decided to maintain the Bank Rate at 5% in August 2018. downwards.commercial banks However, the average return on advances has has followed BoB’s Bank Rate Consequently, thedecided to maintain the Bank Rate at 5% in August 2018. commercial banks’ Prime Rate also downwards. However, the average return on advances has Consequently, the commercial banks’ Prime Rate also fallen much more than the cost of deposits, and hence the remained unchanged at 6.5%. Money market rates have spread between the two has alsofallen much more than the cost of deposits, and hence the fallen, from over 20% in remained unchanged at 6.5%. Money market rates have however continued to slowly increase. The BoBC91 interest 2009 to only 8% in recent years. However, the cost of spread between the two has also fallen, from over 20% in however continued to slowly increase. The BoBC91 interest rate rose to 1.52% in Q3 2018 from 1.48% in Q2 2018, and the deposits has begun to rise as liquidity has tightened and 2009 to only 8% in recent years. However, the cost of rate rose to 1.52% in Q3 2018 from 1.48% in Q2 2018, and the BoBC14 rate rose from 1.47% to 1.52% during the same bankdeposits has begun to rise as liquidity has tightened and s compete for deposits. This situation will be BoBC14 rate rose from 1.47% to 1.52% during the same period. exacerbated bybanks compete for deposits. This situation will be the government’s decision to move “special period. funds” deposits from commercial banks to the central bankexacerbated by the government’s decision to move “special . funds” deposits from commercial banks to the central bank. AnnualAnnual Credit Credit Growth Growth ArrearsArrears on Bank on Bank Lending Lending 45% 45% 10% 10% 40% 40% 9% 9% 8% 35% 35% 8% 7% 7% 30% 30% 6% 6%

25% 25% 5% 5% 4% 4% % of credit to sector 20% 20% % of credit to sector 3% 3% % of credit to sector % of credit to sector 15% 15% 2% 2% 1% 1% 10% 10% 0% 0% 5% 5%

0% 0% 2010 20112010 20122011 20132012 20132014 20142015 20152016 20162017 20172018 2018 BusinessBusiness HouseholdsHouseholds Total Total

Total Total Firms Firms HouseholdsHouseholds Arrears as a proportion of outstanding bank credit Arrears as a proportion of outstanding bank credit fell fell Annual bank credit growth has Annual bank credit growth has continuedcontinued its upward its upward marginally durmarginally during the ingsecond the second quarter of 201 quarter of 2018. Total arrears 8. Total arrears trajectory. Total bank credit rose trajectory. Total bank credit rose by 7.3% inby 7.3% in the year to the year to July July decreased to 6.9% in Q2 2018, from 7.0% in Q1. The reduction decreased to 6.9% in Q2 2018, from 7.0% in Q1. The reduction 2018 from 6.2018 from 6.2% in April. This has been driven by a sharp 2% in April. This has been driven by a sharp in household arrears from 6.3%in household arrears from 6.3% in Q1 2018 in Q1 2018 to 5.9% to 5.9% in Q2 2018 in Q2 2018 increase in theincrease in the annual annual growth growth rate of credit to firms rate of credit to firms, which , which has beenhas been offset by an increase in both business and offset by an increase in both business and rose from 3.6% in April to 8.3% in July. This may rose from 3.6% in April to 8.3% in July. This may reflect the reflect the government & government & parastatal arrears. Business arrears rose parastatal arrears. Business arrears rose to to www.econsult.co.bw reported increase in business confidence within the reported increase in business confidence within the 8.9% in Q8.9% in Q2 20182 2018, up from 8.3% in Q1, up from 8.3% in Q1, whilst government & , whilst government & economy over the first half of the yeconomy over the first half of the year. Household credit ear. Household credit parastatal arrearsparastatal arrears increased to 6.5% from 6.1% during the increased to 6.5% from 6.1% during the growth increased marginally to 7.6% from 7.3% during the KEYgrowth increased marginally to 7.6% from 7.3% during the ECONOMIC VARIABLES same period.same period. same period.same period.

Interest Rates Interest Rate Spread

Interest Rates Interest Rates InterestInterest Rate Rate Spread Spread 14 14 35% 35% 12 12 30% 30% 10 10 25% 25% 20% 8 8 20% % % 15% 15% 6 6 10% 10% 4 4 5% 5%

2 2 0% 0%

0 0

Return on Advances Return on Advances Cost of Deposits Cost of Deposits Margin Margin Bank BankPrime PrimeBoBC91 BoBC91 BoBC14 BoBC14

The longThe -termlong- termtrend of trend of both lending both lending and depositand deposit rates rates for for The Bank of Botswana’sThe Bank of Botswana’s Monetary Policy Committee Monetary Policy Committee (MPC) (MPC) commercial banks has followed BoB’s Bank Rate Thedecided to maintain the Bank Rate at 5% in August 2018. Bank of Botswana’s Monetary Policy Committee (MPC) commercial banks The long-term trend ofha boths followed BoB’s Ba lending and deposit ratesnk Rate for commercial decided to maintain the Bank Rate at 5% in August 2018. decided to maintain the Bank Rate at 5% in August 2018. banksdownwards. has followed However, the average return on advances has BoB’s Bank Rate downwards. However, the Consequently, the commercial banks’ Prime Rate also downwards. However, the average return on advances has Consequently, theConsequently, the comm commercialercial banks’banks Prime’ Prime Rate also Rate also remained averagefallen much more than the cost of deposits, and hence the return on advances has fallen much more than the cost of remained unchanged at 6.5%. Money market rates have fallen much more than the cost of deposits, and hence the remained unchanged at 6.5%. unchanged at 6.5%. Money marketMoney market rates have rates have however continued spread between the two has alsodeposits,spread between the two has also and hence the spread between fallen, from over 20% in the fallen, from over 20% in two has also fallen, however continued to stohowever continued to s slowly increase. The lowlyBoBC91 lowlyincrease. The BoBC91 interest interest increase. The BoBC91 interest rate rose to 1.52% in Q3 from2009 to only 8% in recent years. However, the cost of over 20% in 2009 to only 8% in recent years. However, the rate rose to 1.52% in Q3 2018 from 1.48% in Q2 2018, and the 2009 to only 8% in recent years. However, the cost of rate rose to 1.52% in Q3 2018 from 1.48% in Q2 2018,2018 from 1.48% in Q2 2018, and the BoBC14 rate rose andfrom the deposits has begun to rise as liquidity has tightened and costdeposits has begun to rise as liquidity has tightened and of deposits has begun to rise as liquidity has tightened and 1.47%BoBC14 rate rose from 1.47% to 1.52% during the same to 1.52% during the same period. banks compete for deposits. This situation will be exacerbated by BoBC14 rate rose from 1.47% to 1.52% during the same banks compete for deposits. This situation will be banks compete for deposits. This situation will be period. the government’s decision to move “special funds” deposits from period. exacerbated byexacerbated by the government the government’s decision to ’s decision to movemove “special “special commercialfunds” deposits from commercial banks to the central bank banks to the central bank. We expect the trend of . funds” deposits from commercial banks to the central banktightening margins (and bank profitability) to continue as the cost . of deposits rises.

We expect We expect the trend the of tightening margins (and bank trend of tightening margins (and bank Inflation and Forecast profitability) profitability) to as the cost of deposits rises. Stockto as the cost of deposits rises. Markets Stock Markets InflationInflation and andForecast Forecast Stock Markets 150 150 16% 16% 140 14% 14% 140

12% 12% 130 130

10% 10% 120 120

8% 8% 110 110 6% 6% 100 100 4% 4% Index, Jan 2010 = 100 Index, Jan 2010 = 100 90 90 2% 2% 80 80 0% 0%

70 70 BoB UpperBoB Upper BoB LowerBoB Lower BSE DCIBSE (BWP) DCI (BWP) BSE DCI (USD)BSE DCI (USD) Actual Actual Forecast Forecast MSCI EMMSCI EM Headline inflation decreased slightly during Q3 2018, from Headline inflation decreased slightly during Q3 2018, from The Botswana Stock Exchange (BSE)’s Domestic CompThe Botswana Stock Exchange (BSE)’s Domestic Companies anies 3.1% in June to 2.9% in September. This is below the 3-6% Headline3.1% in June to 2.9% in inflation decreased slightly September. This is below the 3 during Q3 2018, from 3.1% -6% TheIndex (DCI) BotswanaIndex (DCI) Stockcontinued to Exchangecontinued to (BSE)’sweaken Domesticweaken into the Companies inthirdto the quarter Indexthird quarter of of inflation objective range of the BoB. Core inflation (trimmed in Juneinflation objective range of the BoB. Core inflation (trimmed to 2.9% in September. This is below the 3-6% inflation (DCI)2018. The DCI continued2018. The DCI to weakenfell by finto6ell.7 % and bythe 6third.7% and 8 .quarter5% in Pula and USD terms 8 of.5 % in Pula and USD terms 2018. The DCI mean measure) was recorded at 2.9% whilst core inflation objectivemean measure) was recorded at 2.9% whilst core inflation range of the BoB. Core inflation (trimmed mean measure) fellrespectively by 6.7%respectively and .8.5% Minergy in. PulaMinergy was the and USD was the best terms performing stock on the respectively. best performing stock on the Minergy without administered prices was 1.6%. Inflation is expected to was recorded at 2.9% whilst core inflation without administered was the best performing stock on the BSE board, gaining 21%. without administered prices was 1.6%. Inflation is expected to BSE board, BSE board, gaining 21%gaining 21%. Conversely. Conversely, Choppies, Choppies was the was the rise during Q4 given the increase in fuprices was 1.6%. Inflation is expected to el prices that took place rise during Q4 given Conversely, Choppies was the worst performer, losing 84% during rise during Q4 given the increase in fuel prices that took place worst worstperformer, losin performer, losing 84% during Q3 2018g 84% during Q3 2018 due to due to in October. We expect a further increase, similar in magnitude, thein October. We expect a further increase, similar in magnitude, increase in fuel prices that took place in October. We expect Q3concerns related to delays in the publication of its financial 2018 due to concerns related to delays in the publication of its a further increase, similar in magnitude, to take place in January financial concerns related to delays in the publication of its financial statements. The DCI was outperformed by both the MSCI to take place in January 2019, to take place in January 2019, and therefore project inflation and therefore project inflation statements. The DCI was outperformed by both the MSCI 2019, and therefore project inflation to rise above 4% during the Emergingstatements Markets Index,. T he DCI was outperformedwhich declined by 2.0%, and the by MSCIboth the MSCI to rise above 4% during the first quarter of 2019.to rise above 4% during the first quarter of 2019. Emerging Markets Index, which declined by 2.0%, and the first quarter of 2019. World IndexEmerging Markets Index, which declined by 2.0% which rose by 4.5%. , and the MSCI World Index which rose by 4.5%.MSCI World Index which rose by 4.5%.

page 5 De Beers Diamond Sales Exchange Rates 900 De Beers Diamond Sales Exchange Rates 900 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 800 6.0 2009 2010 2011 2012 2013 2014 2015 2016 20171.45 2018 800 6.0 1.45 700 700 1.40 600 7.0 1.40 600 7.0 1.35 500 1.35 500 8.0 1.30 400 8.0 1.30

US $ million 400 300 1.25 US $ million 300 9.0 1.25 200 9.0 1.20

200 Pula per USD 1.20 100 10.0 1.15 Rand per Pula Pula per USD 100 Rand per Pula 0 10.0 1.15 1.10 0 11.0 1.10 11.0 1.05 1.05 The global demand for rough diamonds has been relatively 12.0 1.00 12.0 1.00 stable during the third quarter of 2018. The global demand for rough diamonds has been relatively De Beers Global BWP per USD ZAR per BWP Sightholder Sales (DBGSS) recorded sales valued at stable during the third quarter of 2018. De Beers Global BWP per USD ZAR per BWP USD1.Sightholder Sales (DBGSS) recorded sales valued at 038 billion from the two sights held in Q3 2018. This is The Pula strengthened against the SA rand by 1.3% during Q3, to The Pula strengthened against the SA rand by 1.3% during Q3, to 4.2% lower than the value of USD1.038 billion from the two sights held in Q3 2018. This is sales for the same period last end the quarter at ZAR1.3339 compared to ZAR1.3171 at the year.4.2% lower than the value of Total sales for the year to Q3sales for the same period last 2018 were valued at end of Q2. This is mainly due to a major sellend the quarter at ZAR1.3339 compared to ZAR1.3171 at the -off of South African USD5.223year. Total sales for the year to Q3billion, up from USD4.891 billio 2018n over the same were valued at bonds in August and the general weakneend of Q2. This is mainly due to a major sellss of the South African -off of South African period in the previous year. It is however worth noting that USD5.223 billion, up from USD4.891 billion over the same economy, which caused a weakening of the rand against the US bonds in August and the general weakness of the South African there had been one more sight held over the most rperiod in the previous year. It is however worth noting that ecent dollar and the Pula during the quarter. However, partial link to economy, which caused a weakening of the rand against the US twelve month period.there had been one more sight held over the most r ecent the rand also caused the Pula to depreciate against the US dollar and the Pula during the quarter. However, partial link to twelve month period. the rand also caused the Pula to depreciate against the US We expect the trend of tightening margins (and bank We expect the trend of tightening margins (and bank profitability) to as the cost of deposits rises. profitability) to as the cost of deposits rises. Inflation and Forecast Stock MarketsStock Markets Inflation and Forecast 150 16% 150 16% 14% 140 14% 140

12%12% 130 130

10% 10% 120 120

8% 8% 110 110 6% 6% 100 100 4% 4%

Index, Jan 2010 = 100 90 Index, Jan 2010 = 100 90 2% 2% 80 80 0% 0% 70 70 BoB Upper BoB Lower BoB Upper BoB Lower BSE DCI (BWP) BSE DCI (USD) Actual Forecast BSE DCI (BWP) BSE DCI (USD) Actual Forecast MSCI EM Headline inflation decreased slightly during Q3 2018, from MSCI EM Headline inflation decreased slightly during Q3 2018, from The Botswana Stock Exchange (BSE)’s Domestic Companies 3.1% in June to 2.9% in September. This is below the 3-6% The Botswana Stock Exchange (BSE)’s Domestic Companies 3.1% in June to 2.9% in September. This is below the 3-6% Index (DCI) continued to weaken into the third quarter of inflation objective range of the BoB. Core inflation (trimmed Index (DCI) continued to weaken into the third quarter of inflation objective range of the BoB. Core inflation (trimmed 2018. The DCI fell by 6.7% and 8.5% in Pula and USD terms mean measure) was recorded at 2.9% whilst core inflation 2018. The DCI fell by 6.7% and 8.5% in Pula and USD terms mean measure) was recorded at 2.9% whilst core inflation respectively. Minergy was the best performing stock on the without administered prices was 1.6%. Inflation is expected to BSE board, respectivelygaining 21%. Minergy. Conversely was the, Choppies best performing stock on the was the rise during Q4 given the increase in fuwithout administered prices was 1.6%. Inflation is expected to el prices that took place BSE board, gaining 21%. Conversely, Choppies was the rise during Q4 given the increase in fuel prices that took place worst performer, losing 84% during Q3 2018 due to in October. We expect a further increase, similar in magnitude, www.econsult.co.bwconcerns related to delays in the publication of its financial worst performer, losing 84% during Q3 2018 due to in October. We expect a further increase, similar in magnitude, to take place in January 2019, and therefore project inflation statementsconcerns related to delays in the publication of its financial . The DCI was outperformed by both the MSCI to take place in January 2019, and therefore project inflation to rise above 4% during the first quarter of 2019.KEY ECONOMIC VARIABLES Emerging Markets Index, which declined by 2.0%statements. The DCI was outperformed ,by and the both the MSCI to rise above 4% during the first quarter of 2019. MSCI World Index which rose by 4.5%.Emerging Markets Index, which declined by 2.0% , and the

MSCI World Index which rose by 4.5%. De Beers Diamond Sales Exchange Rates De Beers Diamond Sales Exchange Rates 900 De Beers Diamond Sales 2009 2010 2011 2012 2013Exchange 2014 2015 2016 Rates 2017 2018 800 900 6.0 1.45 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 700 800 6.0 1.40 1.45 7.0 600 700 1.35 1.40 500 600 7.0 8.0 1.30 1.35 400 500 US $ million 300 8.0 1.25 1.30 400 9.0

200US $ million 1.20 300 1.25 Pula per USD 9.0 Rand per Pula 100 10.0 1.15 200 1.20 0 Pula per USD 100 1.10 Rand per Pula 11.0 10.0 1.15 0 1.05 1.10 The global demand for rough diamonds has been relatively 12.0 11.0 1.00 1.05 stable during the third quarter of 2018. De Beers Global BWP per USD ZAR per BWP Sightholder Sales (DBGSS) recorded sales valued at The global demand for rough diamonds has been relatively 12.0 1.00 The Pula strengthened against the SA rand by 1.3% during Q3, to USD1.stable during the third quarter of 2018. 038The b globalillion from the two sights held in Q3 2018. This is demand for rough diamonds has beenDe Beers Global relatively stable The Pula strengthened againstBWP theper USDSA rand by 1.3%ZAR perduring BWP Q3 4.2% lower than the value of Sightholder Sales (DBGSS) recorded sales valued at during the third quarter ofsales for the same period last 2018. De Beers Global Sightholder end the quarter at ZAR1.3339 compared to ZAR1.3171 at the 2018, to end the quarter at ZAR1.334 compared to ZAR1.317 year.USD1. Total sales for the year to Q3Sales038 (DBGSS) billion from the two sights held in Q3 2018. This is recorded sales valued 2018 at were valued at USD1.038 billion from end of Q2. This is mainly due to a major sellatThe Pula strengthened against the SA rand by 1.3% during Q3, to the end of Q2. This is mainly due to a major-off of South African sell-off of South USD4.2% lower than the value of 5.223the btwoillio sightsn, up from held in Q3USD 2018.4.891 Thissales for the same period last b isillio 4.2%n over the same lower than the value bonds in August and the general weakneAfricanend the quarter at ZAR1.3339 compared to ZAR1.3171 at the bonds in August and the general weaknessss of the South African of the South economy, which caused a weakening of the rand against the US period in the previous year. It is however worth noting that year.of Total sales for the year to Q3 sales for the same period last year. Total2018 sales were valued at for the year to Africanend of Q2. This is mainly due to a major sell economy, which caused a weakening of the rand- off of South African against Q3 2018 were valued at USD5.223 billion, up from USD4.891 dollar and the Pula during the quarter. However, partial link to the US dollar and the Pula during the quarter. However, partial there had been one more sight held over the most rUSD5.223 billion, up from USD4.891 billion over the same ecent bonds in August and the general weakness of the South African twelve month period.billion over the same period in the previous year. It is however the rand also caused the Pula to depreciate against the US linkeconomy, which caused a weakening of the rand against the US to the rand also caused the Pula to depreciate against the US period in the previous year. It is however worth noting that worth noting that there had been one more sight held over the dollar. The Pula-US dollar exchange rate was 10.59 by the end dollar and the Pula during the quarter. However, partial link to there had been one more sight held over the most rmost recent twelve month period. ecent of September 2018, down from 10.40 at the end of June 2018, the rand also caused the Pula to depreciate against the US twelve month period. dollar. The Puladollar. The Pularepresenting a- depreciation-US dollar exchange rate was 10US dollar exchange rate was 10 of 1.9%. .59 by the end of .59 by the end of September 2018, down from 10.40 at the end of June 2018, September 2018, down from 10.40 at the end of June 2018, representing a depreciation of 1.9%.representing a depreciation of 1.9%. Work Permit Holders FYQ1 Budget Outturn WorkWork Permit Permit Holders Holders FYQ1FYQ1 BudgetBudget Outlay

20,000 20,000 16,000 16,000 14,000 14,000 18,000 18,000 12,000 12,000 16,000 16,000 10,000 10,000 8,000 14,000 14,000 8,000 6,000 6,000 12,000 4,000 12,000 P million 4,000 P million 2,000 10,000 10,000 2,000 0 0 8,000 -2,000 8,000 -2,000 6,000 -4,000 6,000 -4,000 4,000 4,000 2,000 2,000 0 0 2017/18 2018/19 2017/18 2018/19

The number of individuals holding work permits in Botswana Fiscal data for Q1 of the 2018/19 financial year, released Fiscal data for Q1 of the 2018/19 financial year, released The number of individuals holding work permits in Botswana has declined by 71% from 19The number of individuals holding,080 in Q4 2009 to 5 work permits in Botswana,561 has September Fiscal data2018, indicate for Q1 of thes a budget deficit 2018/19 financialof P3.0 billion for the year, released September 2018, indicates a budget deficit of P3.0 billion for the has declined by 71% from 19individuals in Q2 2018. declined by 71% from 19,080The tr,080 in Q4 2009 to 5 end has however been in Q4 2009 to 5,561,561 individuals first quarter of theSeptember 2018, indicatesfiscal year a . This is a significant increase in the budget deficit of P3.0 billion for first quarter of the fiscal year. This is a significant increase in the individuals in Q2 2018. relatively flatin Q2 2018. since Q4 2016. With an improvement in the The trendThe tr has end has however been however been relatively flat since budget deficit given the the first quarter of the fiscalapproximately balanced budget in year. This is a significant increase the budget deficit given the approximately balanced budget in the relatively flatbusiness environment expectedQ4 2016. since Q4 2016. With an improvement in the With an improvement inunder the new the business environment same period in the previous year. The deficit isin the budget deficit given the approximately balanced mainly budget due to in a business environment expectedadministrationexpected under, we the expectnew administration, an increase in the numberunder the new we expect an increase of same period in the previous year. The deficit isreduction of 16% in revenuethe same period in the previous compared to Q1 FY2017/18 year. The deficit is mainly mainly due due to to. The a administrationexpatriates andin the number, we of foreignexpect expatriates investors an increase in the numberand foreignlooking investorsto do business in looking of to do reduction of 16% in revenuedrop ina reduction overall revenue has been driven of 16% in revenue compared to Q1 FY2017/18 compared to by a Q1 FY2017/18. 37% fall in mineral The. The business in Botswana. As a result, a rise in the number individuals drop in overall revenue has been driven by a 37% fall in mineral expatriates andBotswana. As a res foreignult, a rise in the number individuals investors looking to do business in drop inrevenues and a reduction of 11% in SACU receipts. overall revenue has been driven by a 37% fall in mineral There was Botswana. As a resholding work permitsult, a rise in the number individuals is expected and is a good barometer to revenues and a reduction of 11% in SACU receipts. also arevenuesn increase and a of 6% reductionin total government expenditure of 11% in SACU receipts. ThereThere was was, driven holding work permits is expected and is a good barometer check whether the changes in the business environment are truly also an increase of 6% in total government expenditure, driven by holding work permits is expected and is a good barometer also aby ann increase 11% increase in development spof 6% in total government expenditureending. The deficit has , driven to check whether the changes in the business environment coming to fruition. an 11% increase in development spending. The deficit has been by an 11% increase in development spending. The deficit has to check whether the changes in the business environment are truly coming to fruition. been funded by a combination of bond issuance and drawdowns funded by a combination of bond issuance and drawdowns of are truly coming to fruition. been funded by a combination of bond issuance and drawdowns of government balances at the Bank of Botswana.government balances at the Bank of Botswana. of government balances at the Bank of Botswana. page 6 www.econsult.co.bw

NEWS HIGHLIGHTS

5th July Bona Life closes shop. Troubled life insurance company, Bona Life, has shut its doors indefinitely, (Mmegi) marking the culmination of a bitter shareholder dispute that traces back to the P400 million battle between the Botswana Public Officers Pension Fund (BPOPF) and asset management firm, Capital Management Botswana (CMB).

6th July BSEL secures approval The Botswana Stock Exchange Limited (BSEL) will initiate a new set for "tough" new rules. of equity listing requirements in 2019 following regulatory approval (Mmegi) by the Non-Bank Financial Regulatory Authority (NBFIRA). The new requirements are intended to enforce compliance from listed companies, failing which tough penalties will be incurred. These include moving companies’ securities to a default board and a daily fine of P500 levied in the event of failing to publish financial statements. The new rules are applicable to all BSEL equity platforms.

9th July De Beers and Botswana The 2011 agreement between the Botswana Government and De Beers prepare for new sales diamond company regarding the marketing of Botswana diamonds is due deal. (Rapaport News) for renewal in 2020 and negotiations for new agreement are expected to begin in 2019. It is anticipated that under the new agreement the Government seek a greater supply of rough diamonds to the Okavango Diamond Company (ODC), with the aim of creating more jobs. Moreover, Botswana will continue efforts to diversify the diamond industry and the economy in recognition that diamond mining will not last forever. Botswana and De Beers have a long-standing relationship going back to the late 1960s.

26th July Botswana’s SACU Botswana’s revenue received from the Southern African Customs revenue decline by Union (SACU) Common Revenue Pool (CRP) fell from P15.82 billion in P4.1 billion. (Sunday 2015/16 to P11.77 billion in 2016/17, a decline of P4.1 billion. Under Standard) the SACU Agreement, member states collect and pay all custom duties, excise duty and additional duties into the CRP. Thereafter, revenues are shared according to an agreed formula, which favours the smaller member states (Botswana, Lesotho, Namibia and eSwatini).

30th July IMF proposes new The International Monetary Fund (IMF) Deputy Managing Director Mr growth model for Toa Zhang proposed a new growth model for Botswana, where the role Botswana. (Sunday and size of the government is different and the economy is led by private Standard) sector. Under the new model, Botswana has to diversify into sectors with export and employment potential, creating a good environment for private sector growth, whereby employers can hire a well-trained labour force. In this model, the public sector should focus on providing high quality and cost-effective public services and infrastructure.

3rd August Orapa’s cut 3 to remove The expansion of the Orapa diamond mine open pit, named “Cut 3”, will 96 million tonnes. require the removal of approximately 96 million tonnes of waste in order (Mmegi) to tap into the diamonds. According to Debswana officials, the Cut 3 project represents the next phase of mining at Orapa and is forecast to extend the mine’s lifespan beyond 2030. While the project is still at pre- feasibility stage, implementation is expected to start in 2020.

8th August Lucara announces Lucara Diamond Corp. announced its second quarter 2018 results. second quarter 2018 Revenue during the quarter decreased to USD64.5 million when results. (Newswire) compared to USD79.6 million in Q2 2017, this is attributable to smaller volume and lower quality of exceptional diamonds recovered during the period. On the other hand, operating costs increased to USD6.2 million in Q2 2018 from USD3.5 million in Q2 2017 as a result of higher depletion and amortisation expenses.

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NEWS HIGHLIGHTS

9th August Sefalana Group’s best Sefalana Group’s financial results for the year ended 30 April 2018 results ever. (The Patriot) revealed the company recorded a 12 percent revenue increase from P4.3 billion in the 2016/17 financial year to P4.8 billion in 2017/18. Operations in Botswana contributed 54 percent and 23 percent to the group’s revenue and profit before taxation, while the Namibian market contributed 32 percent and 23 percent respectively. According to the Group’s Managing Director, the results are the best ever the company has recorded. The group also has operations in Lesotho.

10 August Migration of special The Ministry of Finance and Economic Development (MFED) intends funds sparks bank to move Special Fund balances held by commercial banks to the Bank liquidity fears. (Mmegi) of Botswana (BoB). The move has sparked fears of a possible liquidity crunch in the commercial banking space reminiscent of the crisis that rocked the sector four years ago. The total value of the Special Funds is P8.2 billion, but it has not been announced how much of this is held by the banks, as much of it is already on deposit at BoB.

10th August BSEL to list on BSE. The Botswana Stock Exchange Limited (BSEL) plans to self-list, (Mmegi) following the finalisation of its demutualisation, a process that means the bourse is now a company owned by shareholders. BSEL is owned by the Government (81.3 percent), Stockbrokers Botswana (5.75 percent), Imara Capital (5.75 percent), Motswedi Securities (4.32 percent) and African Alliance (2.88 percent). At its demutualisation, BSEL was valued at P35.6 million.

13th August BPC extends grid to 100 The Botswana Power Corporation (BPC) is extending the national grid more villages. (Mmegi) to 100 more villages this year, in a move that will extend electricity to nearly all villages in the country. The extension of the grid has been a national priority for several years, with government’s position being that electricity provision is the bedrock of social upliftment as development depends on reliable and stable power. Moreover, the corporation intends to improve efficiency in delivery of its services by connecting electricity within 10 days of connection payment.

15th August First-half diamond sales Sales at Botswana's state-owned Okavango Diamond Company (ODC) down 16 percent at fell 16 percent by value in the first half of 2018, to USD 260 million, Botswana’s Okavango compared to the same period last year. The company sold 1.778 million Diamond Company. carats in H1 2018, down from 1.808 million carats in H1 2017. Sales (Mining Weekly) are expected to remain somewhat sluggish for the remainder of the year due to market conditions.

29th August Construction begins Minergy Limited has announced that the construction of the P400 million at Botswana's first Masama Coal Mine will begin in January 2019, making it Botswana’s privately-owned coal first privately-owned coal mine, and the second coal mine in the country. mine. (Reuters Africa) The mine is forecast to produce 2.4 million tonnes of coal per year. It is estimated that Botswana has total deposits of 212 billion tonnes of coal.

5th September IMF Executive Board The International Monetary Fund (IMF) Executive Board has concluded concludes 2018 Article the 2018 Article IV consultation with Botswana. Botswana has been IV consultation with commended for implementing sound policies which have contributed to Botswana. (International macroeconomic stability, low debt and strong buffers. The authorities Monetary Fund) noted the slower progress with regards to key structural reforms, hence, accelerating the implementation of the reforms is critical to promote private sector growth. Several recommendations has been made including relaxing restrictions on visas and work permits, and addressing data gaps to improve the quality of economic statistics and fiscal transparency.

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NEWS HIGHLIGHTS

8th September Botswana says china President Mokgweetsi Masisi has announced that China has agreed to agreed to extend extend a new loan facility to Botswana and in addition, cancel the existing loan and cancel debt. loan debt. The new loan will be used for rail and road infrastructure. The (Reuters Africa) President had recently visited China on a state and Forum on China- Africa Cooperation (FOCAC) summit accompanied by other cabinet ministers.

11th Local court to decide The matter between Norilsk Nickel’s USD277 million claim against September Norilsk claim on BCL. Bamangwato Concession Limited (BCL) will be decided in South Africa (Business Live) courts to find the merits of a mining right awarded to BCL. The BCL, represented by the liquidator Nigel Dixon-Warren, argues that the mining right should have not been transferred to BCL as the company was in financial turmoil. If BCL is successful in the court then Norilsk Nickal’s case will all about end. In 2014 Norilsk Nickel struck a deal with BCL to sell its 85 percent stake in the Tati nickel mine in Botswana and its 50% stake in South Africa’s Nkomati Nickel to the state-run nickel producer for USD337 million. The price was later reduced to USD277 million.

12th FNBB’s profits up 23 First National Bank Botswana recorded a 23 percent increase in profit September percent. (The Patriot) before taxation (PBT) for the year ended 30 June 2018. PBT increased from P680.32 million in 2016/17 to P838.21 million in 2017/18. This is attributable to a 24 percent reduction in impairment charges. Total as- sets stood at P4.36 billion in 2017/18 from P4.4 billion in 2016/17. The bank is optimistic about the future and expects positive growth during the National Development Plan (NDP) 11 period.

12th BBS floats shares on Botswana Building Society Limited has become the first company to September BSEL Serala board. register shares on the BSEL’s Serala board. Mr Pius Molefe, the Managing (Botswana Guardian) Director of BBS, has stated that by registering on the board it will enable existing shareholders to trade shares to interested buyers. Mr Molefe also stated that the company intends to apply for a banking license in accordance with the Banking Act, following which it intends to list on the BSEL main board. The OTC Serala board facilitates secondary (over- the-counter, or OTC) trading of shares in companies that are not yet fully listed.

14th Ministry of Investment, The Minister of Ministry of Investment, Trade and Industry (MITI) Ms September Trade and Industry Bogolo Kenewendo has stated that MITI is at the centre of economic at the heart of transformation of Botswana. So far MITI has passed a number of laws transformation. (The to improve the ease of doing business, which has been cited as one of Voice) the impediments to foreign direct investment and private sector growth in the country.

20th Minergy lauds Botswana Minergy Chief Executive Officer (CEO) Mr Andre Bojé praised regulatory September regulatory authorities. authorities for their use of legislation to assist mining investment. The (Mining Weekly) CEO stated that they experienced challenges with the Environment Impact Assessment (EIA), but once it was approved the mining license was granted in two days. Minergy will construct the first private owned coal mine in Botswana, Masama Coal Mine, the mine is expected to operate for about 70 years.

24th P5 billion budget deficit The revised budget from the Budget Strategy Paper (BSP) showed that the September for 2019/20 financial economy is forecast to record a budget deficit P4.57 billion in 2018/19, year. (Weekend Post) compared to a small surplus of P220.3 million in 2017/18. The deficit is attributable to flat revenue collection and higher total expenditures. Total revenue and grants are expected to record a marginal fall of P58.11 billion in 2018/19 from P58.15 billion in 2017/18. Revenues received from the SACU Customs and Excise pool are expected to decrease to P14.21 billion from P17.86 billion during the period. On the other hand, total expenditures and net lending is estimated to increase to P62.69 billion in 2018/19, up from P57.93 billion in 2017/18.

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NEWS HIGHLIGHTS

25th Pula Card to improve The Government has recently launched the Pula Card to improve service September service delivery. (Daily delivery and offer convenient access to cash and payments anytime. The News) card is intended to improve efficiency within the government revenue system as it will be used to receive or disburse payments to individuals without them having to travel to revenue offices. In addition, the Pula card is convenient for use anywhere in the world as it is a Visa card and can hold various currencies such as the Pound, US Dollar, Rand and Euro. The government plans to use the card for disbursement of social welfare programmes to beneficiaries and student allowances, thereby increasing financial inclusion.

26th Budget Pitso: Public The Government intends to continue to finance budget deficits by September debt within set range. borrowing from both domestic and external markets as well as tapping into (The Patriot) accumulated reserves. According to the deputy secretary for Economic Policy at the Ministry of Finance and Economic Development, Mr Kelapile Ndobano, public debt remains modest and within the statutory limit of 40 percent of GDP. The Budget Strategy Paper showed an estimated total debt of 25 percent of GDP in 2017/18, which is forecast to decline marginally to 23 percent of GDP in 2018/19.

27th Stanbic Botswana Stanbic Bank Botswana along with the Overseas Private Investment September secures USD125 million Corporation (OPIC) and Botswana Finance signed a USD125 million loan loan guarantee to guaranty to support lending to diamond manufacturers and polishing support the diamond companies. The support is expected to keep the value-adding process of sector. (Mining Weekly) the diamond supply chain in Botswana as well as promoting job creation and economic diversification.

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MACRO-ECONOMIC DATA

Key Economic Data unit 2013 2014 2015 2016 2017 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3

Annual Economic Growth GDP % 11.3 4.1 -1.7 4.3 2.4 4.0 3.2 1.8 2.4 3.3 4.4 .. Mining % 24.2 0.5 -19.6 -3.7 -11.2 -10.2 -10.0 -12.4 -11.2 -0.3 5.6 .. Non-mining private sector % 10.1 4.9 1.4 7.2 4.7 7.9 6.5 4.5 4.7 3.6 4.2 .. GDP current prices P mn 125,158 145,868 146,066 170,589 180,113 43,857 44,639 44,963 46,654 46,153 47,363 .. GDP 2006 prices P mn 84,081 87,569 86,083 89,797 91,917 22,467 22,893 22,660 23,897 23,545 24,099 ..

Money & Prices Inflation % 4.1 3.8 3.1 3.0 3.2 3.5 3.5 3.2 3.2 2.8 3.1 2.9 Prime lending rate % 9.0 9.0 7.5 7.0 6.5 7.0 7.0 7.0 6.5 6.5 6.5 6.5 BoBC 14-day % 3.06 3.07 0.97 0.84 1.45 1.26 1.34 1.42 1.45 1.47 1.47 1.52

Trade & Balance of Payments Exports - total goods P mn 66,404 76,261 63,484 80,336 61,093 17,535 14,931 13,204 15,479 13,737 .. .. Exports - diamonds P mn 55,367 65,328 52,730 70,781 54,384 16,084 13,246 11,400 13,654 12,345 .. .. Balance of payments P mn 1,340 11,404 - 57 2 843 6 258 4 783 2 437 - 326 - 636 - 766 .. ..

Foreign Exchange Exchange rate BWP per USD end 8.718 9.515 11.236 10.650 9.872 10.526 10.215 10.309 9.872 9.533 10.395 10.593 Exchange rate ZAR per BWP end 1.196 1.217 1.383 1.279 1.256 1.278 1.274 1.312 1.256 1.235 1.317 1.334 FX reserves $ mn 7,726 8,323 7,546 7,189 7,502 7,041 7,288 7,454 7,502 7,383 7,147 .. FX reserves P mn 67,772 79,111 84,881 76,804 73,693 73,957 74,734 76,763 73,693 70,582 74,297 ..

Financial Sector Deposits in banks P mn 48,512 51,492 59,961 62,438 63,581 60,120 62,380 63,842 63,581 62,495 64,838 .. Bank credit P mn 39,763 45,116 48,307 51,316 54,181 51,141 52,555 53,290 54,181 54,695 56,531 .. BSE index 9,053.4 9,501.6 10,602.3 9,727.7 8,860.1 9,225.2 9,244.2 8,930.4 8,860.1 8,589.6 8,402.7 7,837.3

Business Indicators

Diamond production (a) '000 cts 23,134 24,658 20,732 20,880 22,961 8,553 5,992 6,117 5,568 ...... Copper production (c) tonnes 49,448 46,721 23,050 16,878 1,239 0 689 340 210 ......

Nickel production tonnes 22,848 14,958 16,789 13,120 0 0 0 0 0 ......

Business confidence index 45% 52% 44% 43% 46% 48% .. 46% .. 58% .. ..

No. of companies formed 14,190 16,300 19,134 17,133 20,707 5,661 4,913 5,350 4,783 5,327 .. .. Electricity consumption GWh 3,502 3,990 3,974 3,929 3,772 888 899 1,018 967 960 992 .. Crude oil (Brent) $/bar 109.95 55.27 36.61 54.96 66.73 52.20 47.08 57.02 66.73 69.02 77.44 73.16

Employment (formal) Government 130,175 129,918 130,220 129,216 129,009 129,078 128,520 128,950 129,009 Parastatals 18,838 18,790 19,411 19,008 19,444 19,314 19,579 19,469 19,444 Private sector 189,894 191,399 191,484 194,202 193,745 193,582 192,937 193,480 193,745 Total 338,907 340,107 341,115 342,426 342,198 341,974 341,036 341,874 342,198

2016/17 2017/18 2018/19 Govt Budget 2014/15 2015/16 Outturn Actual ProposedRevised Revenues P mn 55,904 47,420 57,398 58,154 58,113 Spending P mn 50,564 54,411 56,275 57,934 62,688 Balance P mn 5,340 -6,991 1,123 220 -4,575 Public debt & guarantees P mn 33,131 35,342 36,864 38,000 38,539 Govt deposits at BoB P mn 41,680 33,916 29,819 30,094 30,596 GDP P mn 147,920 149,111 174,836 182,408 203,175

Revenues %GDP 37.8% 31.8% 32.8% 31.9% 28.6% Spending %GDP 34.2% 36.5% 32.2% 31.8% 30.9% Balance %GDP 3.6% -4.7% 0.6% 0.1% -2.3%

Public debt & guarantees %GDP 22.4% 23.7% 21.1% 20.8% 19.0% Govt deposits at BoB %GDP 28.2% 22.7% 17.1% 16.5% 15.1%

Sources: Bank of Botswana; MFED; Statistics Botswana; Department of Mines; Registrar of Companies; BSE; Econsult Notes: (a) From 2013, figures include production from Lucara Diamonds (Karowe mine) and Debswana. From 2016, figures also include production from Gem Diamonds (Ghagoo) and Lerala mines, which ceased in February 2017 and April 2017 respectively (b) Copper production starting Q2 2017 for Mowana mine (c) Numbers in Italics reflect revisions from the previous review

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SPECIAL FEATURE

Should Botswana Borrow from China?

Introduction As of March 2018, total government debt and guarantees Following the recent visit by His Excellency and other senior totalled 21% of GDP, of which 13% was external and 8% officials to China, it is reported that the government intends domestic (Figure 2). The MTDMS notes that while the to borrow a significant sum from China, possibly as much overall level of debt is well within statutory limits, the struc- as USD1.1 billion, or P12 billion. The loan(s) would be ap- ture is far from ideal. In particular, there is too much for- plied to infrastructure development, notably the rebuilding eign debt and too much debt with variable interest rates, of major trunk roads in the north and east of the country, as both factors that raise the level of risk (due to fluctuations well to construct a new northern railway link from Mosete in exchange rates and interest rates). It therefore sets an (north of Francistown) to Kazungula and across the new objective of reversing the current composition of total debt Zambezi bridge into Zambia. from 30% domestic/70% foreign to 70% domestic/30% foreign. “To achieve the goal of having a higher propor- Assuming that the money is indeed on offer from China tion of domestic debt in total debt portfolio would involve – part of a reported USD60 billion offered to various Af- restricting foreign borrowing to the bare minimum in the rican countries at the recent Forum on China – Africa Co- medium term, and prepaying some of the external loans, operation (FOCAC) – how should the government evaluate while continuing and/or increasing with the Government whether this is good offer to accept? As a starting point, Bond Issuance Programme” [para 38]. it is important to note that the Government of Botswana has many more choices with regard to the financing of in- Figure 2: frastructure development than most African governments. Government Debt and Guarantees (as at March) It is not obliged to borrow from China if it deems the des- Figure 2: Government Debt and Guarantees (as at March) ignated projects to be worthwhile, as it could also borrow domestically (by issuing bonds) or finance the investments 30% from its accumulated savings in the Government Invest- 25% ment Account (GIA) at the Bank of Botswana. With these 20% available choices, it is important to evaluate the various options and determine, on the basis of the costs and benefits 15% of each, which financing option(s) to use for infrastructure

percent of GDP 10% financing. 5%

Legal and Policy Framework for Project Financing 0% Government’s financing decisions are taken within the 2010 2011 2012 2013 2014 2015 2016 2017 2018 context of relevant laws and policies. The key law is the External - debt External - g'tee Internal - debt Internal - g'tee Stocks, Bonds and Treasury Bills Act, which specifies that Source: MFED, Budget in Brief, 2018 the total of government debt and guarantees is limited to Source: MFED, Budget in Brief, 2018 40% of GDP (in two tranches, 20% of GDP each for do- A second objective is to minimise the cost of debt issuance. The MTDMS notes that in order to mestic and foreign debt). The key policy is the Medium- make an appropriate comparison between the cost of foreign debt (mostly contracted in US Term Debt Management Strategy (MTDMS), 2016-2018, dollars) and domestic debt (in Pula), it is necessary to take into account changes in the Pula/US A second objective is to minimise the cost of debt issu- dollar exchange rate. Over the ten years from the end of 2007 to the end of 2017, the average which lays out the principles to be followed in managing ance. The MTDMS notes that in order to make an appropri- annual change in the BWP/USD exchange rate was 5%; on the assumption that this trend will debt. According to the MTDMS, “the primary objective of continue, this has to be added to the interest rate charged on a US dollar loan to determine its ate comparison between the cost of foreign debt (mostly Botswana’s debt management will be to ensure that the fi- true costcontracted. in US dollars) and domestic debt (in Pula), it is nancing needs and payment obligations of Government are Assessingnecessary the to Options take into account changes in the Pula/US dol- met at the lowest possible cost consistent with a prudent So lar how exchange does the proposedrate. Over loan the from ten China years stack from up in terms the end the legal of 2007 and policy parameters degree of risk, and in coordination with fiscal and monetary regarding borrowing? to the end of 2017,First, the legal limit of 20% of GDP for foreign debt and guarantees translates the average annual change in the BWP/ policies…[while] the secondary objective of the debt man- to around P40 billion in 2018/19; with around P23 billion currently outstanding, an addiUSD exchange rate was 5%; on the assumption that this tional P12 agement will be to support the development of the domes- billion can be accommodated with the legal limit.trend will continue, this has to be added to the interest rate tic capital market”. Where does it stand in terms of the Government’s debt management strategy? Clearly it conflicts charged on a US dollar loan to determine its true cost. with the stated objective of “restricting foreign borrowing to the bare minimum” and reversing the 70%/30% foreign/domestic mix – as it increases the foreign debt share, rather than reducing it. How about the cost? Nothing has been said publicly about the interest rate that would be paid on Chinese loans, but we understand that the average rate would be around 2%. This may sound low, but once we add on the exchange rate impact, the total cost becomes 7% (i.e., 2% + page 5%). 12We can compare this with the cost of domestic borrowing. At the most recent government bond auction, the benchmark 10-year bond yield was just under 5%, and even the 25-year bond had a yield of only 5.2%. While the cost of domestic debt might increase if bond issuance jumped sharply, it is evident that domestic borrowing is significantly cheaper than borrowing from China. It is also cheaper to issue domestic bonds than to use the savings in the GIA, which we estimate to have earned an average annual return of 8.1% over the past decade (and hence have an opportunity cost higher than the bond interest rate). www.econsult.co.bw

SPECIAL FEATURE

Assessing the Options next five years – exactly the same amount as the envisaged So how does the proposed loan from China stack up in borrowing from China. This is without factoring in potential terms of the legal and policy parameters regarding borrow- demand from foreign investors in Pula bonds. ing? First, the legal limit of 20% of GDP for foreign debt and guarantees translates to around P40 billion in 2018/19; So borrowing from China doesn’t appear to be a very good with around P23 billion currently outstanding, an additional deal, in terms of the government’s own strategy. It does P12 billion can be accommodated with the legal limit. not support the stated objective of reducing foreign borrowing and increasing domestic borrowing, and does not Where does it stand in terms of the Government’s debt minimise financing risks. It is probably more expensive than management strategy? Clearly it conflicts with the stated borrowing domestically, and so does not meet the cost objective of “restricting foreign borrowing to the bare mini- minimisation objective. Thirdly, it does not meet the objec- mum” and reversing the 70%/30% foreign/domestic mix tive of domestic capital market development. More gener- – as it increases the foreign debt share, rather than reduc- ally, it raises the question of what is the point of having ing it. an official debt management strategy if it is going to be ignored on implementation. How about the cost? Nothing has been said publicly about the interest rate that would be paid on Chinese loans, but There are also other issues associated with borrowing from we understand that the average rate would be around 2%. China, which is normally tied to procurement from Chinese This may sound low, but once we add on the exchange firms, which may not always offer the best value. As rate impact, the total cost becomes 7% (i.e., 2% + 5%). The Economist wrote in September this year, when We can compare this with the cost of domestic borrowing. discussing the decision by the new Malaysian Prime At the most recent government bond auction, the bench- Minister to cancel loans from China, one reason was that mark 10-year bond yield was just under 5%, and even the “we know how inflated the costs are, and how skewed the 25-year bond had a yield of only 5.2%. While the cost deals are in China’s favour”. of domestic debt might increase if bond issuance jumped sharply, it is evident that domestic borrowing is significant- Finally, it is important to realise that the financing decision ly cheaper than borrowing from China. It is also cheaper to is independent of the investment decision. The infrastruc- issue domestic bonds than to use the savings in the GIA, ture projects should be evaluated in their own right, and if which we estimate to have earned an average annual return they pass the economic viability tests that are (or should of 8.1% over the past decade (and hence have an opportu- be) central to the development planning process, they nity cost higher than the bond interest rate). should proceed. Once this decision is taken, the financing question can be addressed. If they are good projects, they Finally, how does foreign borrowing contribute to the sec- do not depend on loans from China, but can be financed ondary objective of developing the domestic capital mar- from domestic capital markets. Indeed, financing the proj- ket? Not at all, as capital market development depends on ects from other sources enables a much more rigorous and the issuance of debt instruments (such as bonds) in Pula. procurement process to be undertaken, based on competi- Indeed, domestic institutions such as pension funds and tive, open international tendering. Chinese firms would be life insurance companies have long been requesting greater welcome to participate in such tenders, as could firms from government bond issuance in order to meet their invest- other countries. The pricing of projects in these circum- ment needs. Estimates prepared recently by Econsult for stances is likely to be much more attractive than when the pension sector conclude that the industry requires P1.5 procurement and project implementation is tied to specific – P2.5 billion of additional bonds each year over the next sources of finance. five years, with a total demand of P11 – 12 billion over the

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