Monday, October 24, 2016/ 3.22pm /BMI Research
BMI View: Low diamond prices will sustain pressure on Botswana's external accounts over the next year, as export revenues and inward investment remain sluggish. However, a relatively strong reserve position and an investor friendly business environment will ensure these dynamics do not become a lasting drag on the overall health of the economy.
Botswana's external accounts will continue to face pressure into 2017 as low diamond prices weigh on both export revenues and inward investment into the sector. Diamonds accounted for 23.5% of total export revenues in Botswana in 2015 according to the International Trade Centre, and as such, the decline in the precious stones' value has had a notable negative impact on the country's balance of payments.
As such, we expect a substantial reduction in Botswana's current account surplus in 2016, projecting it to reach 13.5% of GDP, down from an estimated 16.3% in 2015. With the years of strong production growth and high prices in the sector likely behind us, we expect this trend to continue beyond our short-term outlook.
While our Mining team does not forecast diamond prices, we do have a generally bearish view on the sector in Botswana. Prices have been falling in response to declining demand in key markets like China, reflected in the Rapaport One Carat Price Index.
The impact on Botswana's export revenues has been compounded by the fall in production, as producers have cut back on capital expenditure in response to tighter profit margins.
Production is expected to fall by 6.1% in 2016, having fallen by 2.4% the year previous. While prices have now likely stabilised, we believe that any gains in production will be slow, projecting an average growth rate of just 1.4% per annum between 2017 and 2020.
No Economic Shock from External Account Reversal
Despite the years of large current account surpluses coming to an end, we do not believe investors have any real cause to fear Botswana's changing external dynamics. Our view is underlined by two core factors
Firstly, years of large current account surpluses have left the central bank with relatively strong levels of international reserves, which stood at USD7.4bn as of June (around nine months of import cover).
While this figure has fallen by around USD1bn over the past year due to the government's use of reserves in its economic stimulus package, it fares well compared to those of regional peers.
As such, we do not believe that the pula's currency peg will come under any serious risk from the changing balance of payments dynamics.
Secondly, Botswana remains an attractive destination for foreign investors. Despite having recorded a small recession in 2015, real GDP growth is expected to recover well in 2016, projected at 3.3% and gradually climbing thereafter.
Despite the difficulties faced by the mining sector this growth is representative of the opportunities on offer elsewhere in the economy, facilitated by a stable government and business-friendly operating environment.
We highlight the infrastructure sector in particular as an attractive destination for foreign investor capital, following the government's efforts to improve national utilities – such as that of the water network. Indeed, robust levels of investment into Botswana's capital account will ensure that a gradual reversal in the economy's trade balance remains sustainable
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