1. Coping with the Crisis and future Challenges: Economic Performance and Prospects Keith Jefferis 29 June 2010

2. The Botswana economy is … Highly dependent on mining for … Highly dependent on mining for … GDP (40%) GDP (40%) Government revenues (40-50%) Government revenues (40-50%) Exports (75%) Exports (75%) Highly dependent on government (which is dependent on mining) for Highly dependent on government (which is dependent on mining) for Employment Employment Investment Investment Spending Spending Very open to international trade (exports + imports > 80% of GDP) Very open to international trade (exports + imports > 80% of GDP) Hence highly vulnerable to adverse international economic developments, especially in mining Hence highly vulnerable to adverse international economic developments, especially in mining

3. Global Economy

4. Global growth slowdown... and recovery Depths of recession – 4Q2008 and 1Q2009 Recession was deep, but recovery has been robust Fears of prolonged depression not realised Global growth projected to settle in 3% - 4% range in 2010- 11 Danger of double-dip recession still a concern Source: JP Morgan

5. Emerging markets leading the recovery Recovery has been driven by emerging markets Faster emergence from recession Higher growth during recovery Less affected by financial crisis and debt problems – more resilience Developed economies – sluggish recovery: Fiscal/debt problems Unemployment Euro-zone crisis Source: JP Morgan

6. Signs of recovery... minerals prices Copper Nickel Source: LME

7. Economic Growth

8. 2009 – a year of recession for Botswana 2009 – a year of recession for Botswana Annual growth in 2009 was minus 6% Severe recession – first since data series started in 1975

9. Annual sectoral growth 2009 – contrasts between export and domestic sectors Overall growth dragged down by massive mining contraction Manufacturing & tourism also weak Healthy growth in parts of the non- mining private sector Much of this driven by government spending

10. 2009 – a year of recession …. but robust recovery forecast 2009 – a year of recession …. but robust recovery forecast IMF forecasting growth around 6% for 2010 and 2011 Driven by mining sector recovery

11. Trade & Exchange Rates

12. DTC Diamond Sales DTC diamond sales reasonably good in 2010 H1, with improved prices and volumes But well below peaks of 2007 and early 2008 Driven by retail market recovery and re-stocking of inventory Supply restrictions also suporting prices

13. Exports & imports... in shock Exports have fallen dramatically.. but now recovering Imports have also dropped off Lower oil prices Fall in diamond imports But much smaller decline than fall in exports Balance of trade still negative

14. Trade balance.. big deficits Trade surplus has generally been strongly positive over past five years Collapse of diamond exports has led to unprecedented deficits since 2008Q4 Large deficits still persisting into early 2010

15. Exchange rates Bilateral rates volatile More volatility against USD Short-term pula movements against USD and ZAR tend to be in opposite directions

16. Nominal Effective XR (Pula basket) Exchange rate policy governed by pula basket composition and rate of crawl Both not disclosed Basket is broadly trade weighted Crawl gradually downward – approx 3% at present – to maintain competitiveness No change as a result of global crisis

17. FX Reserves FX reserves peaked in 2008 – have since been depleted by BoP deficits resulting from global crisis Supplemented by external borrowing (AfDB & World Bank) in 2009

18. Import cover FX reserves well below their peak but still respectable in terms of months of import cover

19. Inflation, Interest rates and Financial Sector

20. Inflation... should stay low for a while, but how low? Inflation has recently been around upper end of BoB’s 3%- 6% target range VAT and electricity prices pushed inflation to 7.8% in May Underlying inflation remains low Upside risk from international oil prices BoB MPS 2010 forecasts inflation in range 4-5% in 2011 Low international and domestic inflation pressures Well below historical inflation rates in Botswana Market not convinced – expected inflation well above BoB forecasts

21. Monetary policy – easing with large cuts in interest rates Interest rates sharply lower in response to declining inflation Bank rate cut by 5.5% since Nov 2008 But inflation has fallen faster than nominal interest rates, hence real interest rates have not fallen as much BoB likley to pause and watch inflation developments Further interest rate cuts justified if inflation stays below 6%

22. Financial sector: has remained strong during global crisis Banking sector has remained profitable, although profitability has declined Slowdown in credit extension, but now recovering Some problems with bad debts, but concentrated on households rather than businesses

23. Bank credit – growth recovery Arrears – a problem to watch

24. Government Budget

25. Fiscal policy – stimulus helped the economy, but at the cost of large deficits Govt spending rose sharply in 2009 – helped to maintain non-mining economy Turnaround from fiscal surplus to substantial deficit, driven by both increased spending and falling revenues 2009/10 deficit estimated at 15% of GDP is unsustainable 2010/11 Budget has a continuation of revenue decline and P2bn cut in total spending Deficit cut, but still huge Revenues less than 30% of GDP – last seen in 1970s Fiscal adjustment now needed

26. Impact of deficits on Govt finances Net financial position – govt. deposits & reserves at BoB less public debt (foreign & domestic) Peaked at P41bn in 2008 Cumulative deficits in 3 yrs 2008-2011 = P30bn Continuation of deficits will lead govt to become net debtors Reason for credit rating downgrade

27. Summary and Outlook

28. Summary Headline GDP growth hit hard by recession – but concentrated on mining/exports Headline GDP growth hit hard by recession – but concentrated on mining/exports Non-mining growth steady in 2009 – hence limited impact on employment Non-mining growth steady in 2009 – hence limited impact on employment Fiscal stimulus helped – but deficit/debt problems resulted – with the crisis compounding adverse medium term trends Fiscal stimulus helped – but deficit/debt problems resulted – with the crisis compounding adverse medium term trends External sector: exchange rate steady, BoP deficit, but FX reserves helped to stabilise, with modest drawdown External sector: exchange rate steady, BoP deficit, but FX reserves helped to stabilise, with modest drawdown Inflation – substantial decline, monetary easing helped to cushion impact of crisis Inflation – substantial decline, monetary easing helped to cushion impact of crisis Financial sector stable, now growing after a pause in 2009H1 Financial sector stable, now growing after a pause in 2009H1

29. Prospects International Improving global growth prospects – but still volatile Shifting of global economic balance to emerging markets Commodity markets strong – good for mining Uncertainties remaining over govt debt, withdrawl of fiscal stimulus, de-leveraging, euro- zone stability Domestic Growth rotation in place : 2009 – mining/exports weak, non-mining/domestic demand strong 2010 – opposite Weakness in household consumption and fiscal spending as export markets recover Trade, balance of payments should continue to improve – but not back to normal Fiscal sustainability the overriding issue

30. Thank You Keith@econsult.co.bw 3900575