www.econsult.co.bw compiled by KEITH JEFFERIS SETHUNYA SEJOE ECONOMIC REVIEW second quarter april - june 2016 in this issue ... COMMENTARY KEY NEWS MACRO- SPECIAL 1 ECONOMIC 3 HIGHLIGHTS 7 ECONOMIC 12 FEATURE 13 VARIABLES DATA COMMENTARY Deterioration contained as improvements seen in economic conditions Introduction The second quarter of 2016 has seen some improvement in economic conditions, at least to the extent that the deterioration experienced towards the end of 2015 has been contained, and in some respects macroeconomic conditions have improved. This is largely the result of the stabilisation – albeit at a somewhat subdued level - of global commodities markets. Diamonds stabilised, major producers are being extremely cautious, and As always, the global diamond market is of greatest importance Debswana has no plans at present to increase production for Botswana. After a dismal performance in the second half of above the revised target of 20 million carats for 2016. Other 2015, the recovery in sales of rough diamonds that started in signs of weakness are reflected in the decision by one of the first quarter of 2016 continued through the second quarter. Botswana’s smaller diamond producers, Gem Diamonds, to The reduction of rough supplies in 2015 had the desired effect reduce production at the Ghagoo mine. It may also be one of unblocking the diamond pipeline – the downstream diamond reason why Lucara Diamonds’ Lesedi La Rona gem from the traders, cutters, polishers and jewellery retailers – and Karowe mine – the largest rough diamond found in over 100 restoring demand for rough. This recovery provided a major years – failed to reach its reserve price when put up for auction boost for export earnings and government revenues, such in London in late June. More positively, another small mine, that the large balance of trade and fiscal deficits experienced Kimberley Diamonds’ Lerala Mine, re-opened in Q2. towards the end of 2015 should have been eliminated, or at least significantly reduced. Copper-nickel and BCL The stabilisation of the global rough diamond market is also This doesn’t mean that the diamond market is out of the woods reflected in other commodities markets. By the end of June yet. Consumer demand for jewellery remains weak, especially 2016, crude oil prices had risen by 85% from their mid-January in China, meaning that even a restored flow of diamonds lows, while copper and nickel prices have risen by 12% and through the pipeline is at lower levels than in recent years. 22% respectively. The ability of mid-stream players to hold diamond stocks is also under pressure, especially with the announcement The recovery in base metals prices, while welcome for by Standard Chartered Bank that it is withdrawing from the Botswana, does not, however, fundamentally change the financing of diamond firms, which will take around $2 billion critical situation facing the country’s largest copper-nickel out of the global industry. Hence, even though the market has producer, BCL. The company’s costs of production are well page 1 www.econsult.co.bw COMMENTARY above current price levels, even with the recovery, and it is Other events and developments contributing to global facing problems of low-grade ore, overstaffing, and the constant uncertainty include the US presidential elections in November, expectation that it will operate as a social welfare provider as the pace of economic slowdown in China, stresses within well as a commercial entity. It has high levels of debt, and as a the Chinese financial sector, the pace of monetary policy loss-making fully government-owned entity, is dependent upon tightening in the US, and concerns about over-valuations in government’s financial guarantees and cash injections for its major financial markets. survival. Undoubtedly, BCL’s survival is critical for the town of Selebi-Phikwe and the surrounding region, given that - apart Global growth forecasts have been revised downwards slightly, from government - BCL is the largest employer in north-east post-Brexit.2015 Nobody knows2016 how these will 2017play out, but there Botswana. But continuing “as is” is not an option, given the is consensus that risk is on the downside. Nevertheless, the World 3.10% 3.10% 3.40% huge financial cost this is likely to impose on taxpayers. A hard- IMF’s core scenario is that global growth will improve slightly, headed review is needed to determine whetherAdvanced the company economies from 3.1%1.90% in 2016 to 3.4%1.80% in 2017, although1.80% still below long- has any chance of commercial viability, whichChina is likely to term trend6.90% growth. 6.60% 6.20% require a fundamental restructuring to achieve a reduction in costs of around one-third, including a comparable reduction Figure 1: Global economic growth forecasts in staffing. Obviously such a large employer has important social and economic benefits to the region, including multiplier effects that support economic activity more broadly, but this 8% does not mean that it is entitled to a blank cheque of indefinite 7% or unlimited financial support from the taxpayer. 6% The ownership of BCL is being transferred from a direct 5% government shareholding to an indirect holding through the 4% Pecent new Minerals Development Company of Botswana (MDCB). Percent 3% The intention is that MDCB will operate on a commercial basis, 2% and how it manages BCL, as the sole shareholder, will be 1% a crucial test of its ability to ensure that government-owned 0% mining companies operate efficiently in future. 2015 2016 2017 Global Uncertainty World Advanced economies China The stabilisation of global commodities markets removes, or Source: IMF World Economic Outlook, July 2016 at least reduces, one element of the spectrum of uncertainty that has affected the world economy over the past 12 months. But there are other risks that could yet be destabilising. The National Development Plan 11 and Vision 2036 UK’s “Brexit” vote to leave the European Union, which was Uncertain global economic prospects provide the backdrop unexpected by most commentators, shows that people are for two important medium and long-term planning exercises prepared to support something that is not in their economic currently under way in Botswana. The 11th National self-interest, if other factors are perceived to be more Development Plan (NDP 11) is due to run from April 2017 to important. Misinformation and scaremongering by the media March 2023, and is currently being finalised. As with several and politicians may well be believed. But the result, as noted recent NDPs, NDP 11 is focused on economic diversification, the following day by the respected commentator Martin Wolf and has to do so in the context of declining fiscal revenues in the UK’s Financial Times, is “probably the most disastrous (relative to GDP) and continued expectations of high levels single event in British history since the second world war”, of government provision of infrastructure, services and social and as a result, “the UK, Europe, the west and the world are safety nets. damaged”. Certainly, it has had a destabilising effect on the global economy, not to mention the UK economy; for instance, The exercise to prepare a new Long-term Vision for Botswana the proposed mega-merger between the brewers ABInbev is also nearing completion. The new Vision 2036 will follow on and SABMiller may well fall apart, because it is no longer as from Vision 2016, which is coming to an end. Vision 2036 will attractive given that it is priced in devalued post-Brexit sterling. provide the framework for NDP 11 and the next two NDPs. Even for Botswana, Brexit adds to uncertainty, given that Botswana’s beef is exported to the UK under the recently- Both NDP 11 and Vision 2036 contain commitments towards signed EPA trade agreement with the EU. This uncertainty will the transformation of the economy towards a more diversified, remain for quite some time, until the form of post-Brexit trade private sector-led, outward-looking open economy integrated and economic relations between the UK, the EU and the rest into global markets, which is exactly what is needed to ensure of the world become much clearer. sustained growth. The test will be whether policies and the related actions and decisions are consistent with these objectives. page 2 Q3 182.5 23.0 150.0 359.4 1,550.5 412.6 Q4 162.8 23.8 156.5 345.3 2,085.4 675.7 2013 Q1 169.5 25.3 152.1 347.8 1,705.7 1,092.9 Q2 192.8 26.5 165.1 370.5 2,344.9 1,212.8 Q3 195.7 25.3 164.8 371.9 1,930.5 1,057.4 Q4 162.4 25.4 183.1 358.0 2,402.7 968.0 2014 Q1 182.9 26.5 160.7 348.9 2,145.3 785.4 Q2 185.8 27.5 163.3 370.6 2,304.8 939.7 Q3 193.2 26.3 147.4 360.1 2,260.7 868.7 Q4 181.4 24.5 160.3 363.4 2,233.1 1,065.1 2015 Q1 190.2 25.2 143.3 353.6 2,091.3 902.5 Q2 195.2 25.9 158.6 374.8 2,172.6 847.1 Q3 191.8 26.1www.econsult.co.bw147.6 358.4 1,505.0 232.4 Q4 188.4 24.6 158.5 360.9 1,778.7 429.2 KEY ECONOMIC 2016 Q1 VARIABLES189.3 25.5 140.2 342.5 1984.5 797.1 Annual GDP Growth Sectoral GDP Growth 30% Annual GDP Growth Sectoral GDP Growth Annual GDP Growth Trade Sectoral GDP Growth 20% 30% Annual GDP Growth Trans.