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Monday, November 13, 2017 5:45 PM / BMI Research
BMI View: Botswana's
economic recovery will stumble in 2017, as base effects following a recession
in 2015 are no longer enough to offset persistent headwinds in the mining
sector. That being said, the Southern African economy remains an attractive
destination for foreign capital, with foreign inflows into coal mining likely
to offer a significant long-term boost to growth.
Botswana's economy will likely see
a modest deceleration in real GDP growth to 3.3% in 2017, as sustained weakness
in the country's diamond industry and the diminishing impact of base effects
following a recession in 2015 weigh on headline figures. Headwinds to the
country's diamond sector – which traditionally accounts for 80% of export
revenues – have seen growth struggle to reach the highs recorded between 2010
and 2014, when real GDP grew at an average rate of 6.9% per annum, peaking at
11.3% in 2013.
That being said, the outlook
thereafter is relatively robust, with real GDP growth forecast to reach 4.5% in
2018. The country remains an attractive destination for foreign investment and
will likely continue to post stable growth beyond any short-term headwinds.
Slowing Diamond Sector Hits 2017
Growth
The main headwind to growth in
2017 will come from Botswana's diamond industry, which has long been the
backbone of the economy. The sector has struggled in line with a slowdown in
global demand after a period of over-production for much of the last two
decades, leading to a supply glut and lower prices.
The industry has been particularly
hurt by falling demand from East Asia following a slowdown in emerging markets
and a weaker appetite for precious metals amongst China's ruling class. In
Botswana, we believe the diamond industry is still adjusting to the new market,
with businesses slowing or shuttering production and diamond production falling
by 2.7% y-o-y in the first quarter of 2017.
Falling diamond production is part
of a wider slowdown in the mining sector in general. Although accounting for a
much smaller percentage of the country's total output, gold, copper and nickel
producers have also struggled to maintain operations in a climate of low and
volatile commodity prices. Weak revenues have forced several companies to
liquidate assets, including the state-owned mining company, BCL Mine.
Botswana's mining production index stood at just 77.1 in Q117, a 14.4% y-o-y
contraction.
Headwinds Will Not Derail Positive
Longer-Term Outlook
While headwinds to some of
Botswana's key industries will weigh on headline GDP growth in 2017, we do not
expect these to detract from what is otherwise a positive story. The country
remains one of the most attractive destinations for foreign capital in Sub-Saharan
Africa, scoring fourth highest in the region in our proprietary Operational
Risk Index (50.6 out of 100 compared to a regional average of 42.9) due to
political stability and business-friendly regulation.
This operating environment will
see foreign investment continue to enter the economy, even in those sectors
currently facing short-term headwinds to growth, such as mining.
Our Mining team have identified
that the coal industry will likely post robust growth over the coming years, as
a number of foreign companies have launched new projects and shown appetite for
M&A activity, suggesting investors remain largely positive towards
Botswana's mining sector.
Coal has remained an attractive
opportunity for investors partly due to the government's own plans to promote
coal-powered electricity generation. This forms part of a broader programme of
infrastructure investment under the 11 National Development Plan (NDP11).
Under the NPD11, the government
hopes to progress with a number of projects, not just in the energy sector, but
also those aimed at developing water infrastructure, such as the North-South
Carrier II project. These projects will see Botswana's construction industry
continue to post robust levels of growth, reaching 4.7% and 4.3% in 2017 and
2018 respectively before accelerating thereafter.
This attractive operating
environment will continue to support investment into the economy over our
short-term outlook, mitigating much of the impact on growth of any short-term
headwinds.
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