Recent Economic Developments & Prospects

September 2006

Keith Jefferis

Structure of Presentation

Economic GrowthExchange Rates, Foreign TradeInflation, Monetary Policy & BankingFiscal DevelopmentsOutlook

Economic Growth

Botswana Prospects (Sept. 2005)

Evidence of short-term cyclical recoveryHigher inflation & interest ratesLonger-term reforms pending:

Sustainable budgetFIAS report recommendationsReal focus on competitivenessPrivatisation, liberalisation, PPPs

GDP Growth – Long Term

0

5

10

15

20

25

1975

/7619

77/78

1979

/8019

81/82

1983

/8419

85/86

1987

/8819

89/90

1991

/9219

93/94

1995

/9619

97/98

1999

/0020

01/02

2003

/04%

Growth volatile but long-term downward trend

May not yet have stabilised

GDP growth – mining vs non-mining

-5%0%5%

10%15%20%25%30%35%

'95/96

'96/97

'97/98

'98/99

'99/00

'00/01

'01/02

'02/03

'03/04

'04/05

Mining Non-mining priv.sect.

Contrast between mining and non-mining sector growth

Growth Developments

Good conditions in mining sectorworld commodity markets very tight;copper & nickel prices at very high levels; widespread prospecting (copper, nickel, zinc, diamonds, gold, PGMs, coal, gas)Good long-term prospects

Possible temporary weakness aheadmarket for diamonds weakening (US)metals prices expected to fall

Copper & Nickel Prices

10000

15000

20000

25000

30000

35000

Jan

Feb

Mar

AprMayJu

n Jul

Aug

Nic

kel,

US$

/t

3000

4500

6000

7500

9000

10500

Cop

per,

US$

/t

Nickel Copper

Ni prices more than doubled during 2006; Cu up 70%

Growth Developments

Forthcoming Mining & Related Projects

Diamondex mine early 2007 (TuliBlock)African Diamonds AK6 2007 (Orapa)African Copper 2008 (Dukwe)LionOre/Tati Nickel Activox refinery (Cu/Ni/PGMs) (Francistown)Mmamabula coal/powerDiamond aggregation/cutting

Growth Developments

Weak conditions in non-mining sector

Recession in manufacturing, trade;Impact of:

declining real incomes in public sectorslow public spending growthcredit squeezedevaluationHIV/AIDS

Is There a Recovery?

No new GDP data (only to June 05)BoB Business Expectations survey

less pessimistic in 2006H1 compared to 2005H2; contrast between domestic and exporting sectors overall confidence below 50%, but improving

BoB Business Confidence Survey

0%10%20%30%40%50%60%70%80%

2005H1 2005H2 2006H1

Exporters Non-exporters All

Growth Indicators – Private Business Credit

-5%0%5%

10%15%20%25%30%35%40%

2000 2001 2002 2003 2004 2005 2006

Busi

ness

cre

dit

grow

th

Strong signs of business recovery

Growth Indicators – Non-Mining Elec. Consumption

0%2%4%6%8%

10%12%14%16%18%

2000 2001 2002 2003 2004 2005 2006

Non

-min

ing

elec

tric

itygr

owth

Only weak evidence of recovery, and later

Growth Indicators – Electricity Consumption

-4%-2%0%2%4%6%8%

10%12%14%16%18%

2000 2001 2002 2003 2004 2005 2006

Elec

tric

ity c

onsu

mpt

ion

grow

th

Non-mining Mining

Clear contrast between mining & non-mining sectors

Exchange Rates FX Reserves

Exports

Exchange Rates

50

60

70

80

90

100

110

120

130

140

2002 2003 2004 2005 2006

Inde

x 19

96=1

00

NEERBWP/ZARBWP/USD

Crawling peg:started at 5%

now 4%

Real Effective Exchange Rates 1995-2005

80859095

100105110115120125

199519961997199819992000200120022003200420052006

Devaluations and crawling peg have restored competitiveness

Forecasts 2006-2011 Pula vs. ZAR

0.90

0.95

1.00

1.05

1.10

1.15

1.20

20052006 Q2 Q3 Q420072008200920102011

R/P

Rand/pula parity approaching –but probably not in next 5 years

Forecasts 2006-2011 Pula vs. USD, EUR

0.10.110.120.130.140.150.160.170.180.19

20052006 Q2 Q3 Q420072008200920102011

USD

, EU

R p

er P

USD/BWP EUR/BWP

Export growth (US$), 2003-05

39%

54% 57%

69%

28%

13%11%

0%

20%

40%

60%

80%

100%

Soda Ash

Vehicles

Meat e

tc.

Other

Diamonds

Total

Cu-Ni

Textil

esIn

crea

se in

US$

ter

ms

341%

Export growth very buoyant across a range of commodities

Major Exports (>P2m)June 2006

Pharmaceut. prods.20Electrical mach.10

Meat products19Iron & steel9

Fuels & oils18Pasta & biscuits8

Salt17Machinery7

Optical equip.16Vehicles & parts6

Pers. effects15Sugar confect.5

Hides & skins14Stamps, banknotes4

Paper products13Apparel/clothing3

Meat12Copper-nickel2

Plastics11Diamonds1

Foreign Exchange Reserves (Pula)

05000

1000015000200002500030000350004000045000

2001

2002

2003

2004

2005

2006

Pula

mn

Good exports resulting in reserves surpassing 2001 peak in Pula terms

Import cover approx. 24 months

Foreign Exchange Reserves (SDR, USD)

010002000300040005000600070008000

2001

2002

2003

2004

2005

2006

SDR

, USD

mn

US dollar SDR

Also recovery in SDR & USD terms - reserves at highest ever USD level

Botswana’s International Assets

0

10,000

20,000

30,000

40,000

50,000

60,000

2001 2002 2003 2004 2005

P m

n

Official reserves Direct inv. Portfolio inv. Oth. inv.

Official reserves now complemented by substantial privately held foreign assets (e.g. pension funds)

Inflation Monetary Policy

Banking

Inflation

Inflation rose sharply to 14.2% in April 2006, above expectationsMain cause was 2005 devaluation, compounded by:

world fuel pricesregional food pricestelecomms tariffs rebalancingschool fees

Inflation

Steady decrease since April, down to 11.9% in JulyDecline should continue; inflation to end year below 10%;Should fall to 7%-8% by Q1 2007Main risks:

world fuel pricesfurther telecomms rebalancingrising world and SA inflation

New CPI index before end of year will help more accurate measurement of inflation

Inflation Forecast

0%

2%

4%

6%

8%

10%

12%

14%

16%

2002 2003 2004 2005 2006 2007

BOB target range

F’cast

Inflation – Quarterly annualised

0%2%4%6%8%

10%12%14%16%18%

2004 Mar

May Ju

l

Sep

Nov

2005 Mar

May Ju

l

Sep

Nov

2006 Mar

May

July

Devaluations

Inflation has fallen more slowly after second devaluation – due to crawl, oil prices

Monetary Policy

Revision to inflation data in April has avoided need for further interest rate increases (since Feb 2006)Declining inflation favours rate reduction, but:

inflation way above BoB target range, and unlikely to fall within itBoB inflation range too low, given crawling pegmay see small reduction in rates in late 2006/early 2007

Mid-Year Review of 2006 Monetary Policy Statement – no change to inflation objective

Prime Lending Rate and Inflation

0%2%4%6%8%

10%12%14%16%18%

1998 1999 2000 2001 2002 2003 2004 2005 2006

Prime Inflation

BoB has traditionally been reluctant to cut rates much even when inflation falls sharply

Banking System Developments

Banking system going through period of changeRegulatory changes

BoBCsReserve requirementsFX dealing

Rapid expansion of deposit base, banks very liquid, additional profitsMay conflict with objectives of restraining credit growth

BoBC Holdings

0 2000 4000 6000 8000 10000 12000 14000

May

Feb

P mn

Banks - own Banks - cust Other FIs Other private

Change in BoB regulations has altered composition of BoBC holdings, but total is up

Banking Assets

0

5000

10000

15000

20000

25000

30000

'03

'04

'05

'06

Ass

ets,

Pm

n

Loans BoBCs Other

Effect has been to push funds into the banks – assets up nearly 50% in 3 months

BoB Liabilities

05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

2003 2004 2005 2006

Pm

n

BoBC's Govt Cap & res Oth

BoB cannot force reduction in BoBCs while reserves (=assets) are driving increase in liquidity

BoBC change will not save interest costs for BoB

Credit Growth

0%

5%

10%

15%

20%

25%

30%

2000 2001 2002 2003 2004 2005 2006

Banking sector liquidity may contribute to further credit growth

– perhaps above BoB range

Credit Growth

-10%

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005 2006

Business (priv) H'holds

Much stronger resurgence in business credit growth than household

Rising IndebtednessRatio of Credit to Non-mining GDP

0%2%4%6%8%

10%12%14%16%18%

93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06

Cre

dit

to N

on-m

inin

g G

DP

H'hold Pvt Business

HH credit may be saturated, private business sector under-borrowed

Banking – Loans in Arrears

0%1%2%3%4%5%6%7%8%

2001

2002

2003

2004

2005

2006

% o

f cr

edit

in c

ateg

ory

Households Business

But concern about rising arrears rates will constrain lending out of new funds

Fiscal Developments

Govt Revenue & Spending (Pmn)

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

'99

'00

'01

'02

'03

'04

'05

'06

P m

illi

on

Expenditure Revenue Balance

Concern over rapidly rising expenditure and deficits from 2001-03 – possibly unsustainable budget trends

Govt Revenue & Spending (% GDP)

0%

10%

20%

30%

40%

50%

60%

'99

'00

'01

'02

'03

'04

'05

'06

% o

f G

DP

Expenditure Revenue

Expenditure capped at 40% of GDP – in line with long-term revenue expectations – “Fiscal Rule” (NDP9 MTR)

Budget Balance

-8%-6%-4%-2%0%2%4%6%8%

10%

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

% o

f G

DP

Deficits reversed; budget stabilising around balanced budget

Government Budget

Immediate problems averted2006/07 budget combined fiscal restraint with expansion of development budgetConcern that authorised funds not being spent, delaying domestic economic recoveryFiscal balance still a challenge in future years

Economic Prospects

Botswana Economic Prospects 2006

2006H2 - 2007: slow resumption of growthdeclining inflation, and eventually lower interest rates;positive impact of salary and govt. spending increases (eventually);improved international competitiveness; positive devaluation impact feeding throughimpact of telecomms liberalisationimpact of ART rollout

Botswana Economic Prospects 2006

But overall growth rate likely to stay low – long-standing constraints remain:

Land cost and availabilitySkilled labour – sameSlow privatisation

And some new onesAnti-foreigner/FDI perceptionsIncreasing crimeCompetition from opportunities elsewhere in the region

What will BEAC deliver?

Economic Prospects

Growth ForecastsMFDP: 4.3% avg. to end NDP9IMF: 2005 3.8%;

2006 3.5%; 2007 3.5%

S&P: short-medium term 3.5% - 4%

SADC GDP Growth 2006IMF Forecasts

-10

-5

0

5

10

15

Zim'bwe

Swaz'ln

dLes

othoBotsw

ana

Mauriti

usNamibiaS. A

frica

Zambia

Md'gscr

DRCTan

zania

Moz'bque

Malawi

Angola%

27%

Botswana amongst the slowest growing economies in SADC

Thank You

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