Botswana's economy contraction by 3.7% quarter on quarter in the third quarter could leave the country's overall growth rate in 2015 at 2.3%, lower than IHS's current expectation of 2.6%.
IHS perspective |
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Significance | The estimated gross domestic product (GDP) at constant 2006 prices for the third quarter of 2015 amounts to a decrease of 3.7% in real quarter-on-quarter growth. |
Implications | The disappointing growth numbers suggest that Botswana's overall GDP growth rate could average 2.3% in 2015 as predicted by the International Monetary Fund, slightly lower than IHS's current forecast of 2.6%. |
Outlook | Expected continued weaknesses in the global diamond market suggest that Botswana's economy might contract further. However, IHS expects GDP growth to rebound to 4.5% in 2017 as the effects of the foreign reserves-backed stimulus package intended to revive the economy kick in. |
The estimated GDP at constant 2006 prices for the third quarter of 2015 was USD1,837.6 million compared with USD1,908.9 million registered in the second quarter of 2015, representing a decrease of 3.7% quarter on quarter (q/q). Real GDP decreased by 3.5% in the third quarter of 2015 compared with an increase of 4.0% amassed in the same quarter in 2014. The decline in GDP growth rate was attributed to a decline in diamond production (which is a key contributor to the country's gross domestic product [GDP]) by 33.4% compared with an increase of 14.1% registered in 2014 owing to weaker global diamond demand and prices. Total copper production also contributed to the lethargic growth as it decreased by 75.6% compared with a decrease of 17.3% in the same quarter last year. The disappointing growth numbers suggest that Botswana's overall GDP growth rate could average 2.3% in 2015, which is slightly lower than IHS's 2.6% prediction, as the decline in commodity demand and prices translates into low export earnings.
Botswana's annualised quarterly growth, % | |||||||||||
Y/Y | Q/Q | ||||||||||
Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q2 2015 | Q3 2015 | |
Real GDP | 11.7 | 7.6 | 2.8 | 2.0 | 4.0 | 3.9 | 2.7 | 1.7 | -3.5 | -0.1 | -3.7 |
Total final consumption | 8.5 | 1.6 | 2.0 | 3.9 | 5.0 | 3.8 | 5.2 | 7.4 | 2.7 | 3.7 | -1.0 |
Gross fixed capital formation | -14.0 | -7.3 | 22.2 | 10.5 | 12.4 | 16.2 | -2.5 | 5.6 | 11.7 | 3.2 | -1.2 |
Source: Statistics Botswana | |||||||||||
Mining sector weighs down growth in Q3
At the industry level, latest official statistics published by Statistics Botswana show that most of the contraction in the third quarter of 2015 was attributed to mining which declined by 40.6% q/q on the back of a plunge in diamond and copper production. The pronounced weakness of the mining sector also reflects dismal global demand conditions, weak international commodity prices, and a burdensome cost structure in the sector. The water and electricity sector also contributed significantly to weak growth as it registered a decline of 114.9% q/q, respectively. The decline recorded in the water and electricity sector is largely by the electricity sub-sector which has been contributing negatively to the economy since the first quarter of 2012 owing to a substantial increase in intermediate consumption. Local production of electricity decreased by 27.5%, although imports increased by 61.2%. Drought-related weak agricultural production fell by 0.7%. However, all other industries recorded a positive growth in the third quarter of 2015. Central government had the largest growth of 6.9% q/q followed by transport and communication and trade, hotels, and restaurants, with 6.2% and 5.9% q/q growth, respectively.
Gross value added by kind of economic activity at constant 2006 prices (q/q % change) | |||||||||
Sector | Q3 2013 | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | Q1 2015 | Q2 2015 | Q3 2015 |
Agriculture | 3.5 | 3.7 | 0.3 | 0.0 | -3.2 | 1.5 | -0.7 | 2.1 | -0.7 |
Mining | 46.5 | 19.9 | 4.7 | -6.7 | 5.7 | -0.2 | 1.9 | -8.2 | -40.6 |
Manufacturing | 9.2 | 7.7 | -1.5 | -1.6 | 0.2 | 4.5 | 4.2 | 3.6 | 2.5 |
Water and electricity | 149.6 | -9.3 | -56.8 | -39.6 | -73.5 | -31.3 | -55.6 | -135.9 | -114.9 |
Construction | 4.7 | 4.8 | 1.7 | 2.8 | 3.2 | 3.4 | 4.9 | 3.0 | 2.9 |
Trade, hotels, and restaurants | 8.5 | 9.0 | 6.1 | 8.2 | 6.2 | 7.8 | 6.4 | 6.9 | 5.9 |
Transport and communication | 6.5 | 6.9 | 6.3 | 8.4 | 7.9 | 7.1 | 4.1 | 4.5 | 6.2 |
Finance and business service | 5.2 | 5.6 | -0.9 | 2.4 | 5.2 | 3.1 | 1.9 | 3.7 | 2.2 |
General government | 6.5 | 2.0 | 5.9 | 1.5 | 3.2 | 7.5 | 0.8 | 5.7 | 6.9 |
Social and personal services | 6.1 | 7.1 | 4.0 | 4.4 | 4.9 | 3.5 | 4.5 | 4.1 | 2.9 |
Source: Statistics Botswana | |||||||||
Outlook and implications
Growth prospects for Botswana's economy continue to be gloomy. IHS aggressively cut the country's 2016 growth forecast to 3.2% on the back of expected weakness in the global diamond market. Botswana remains highly dependent on diamonds, for which demand and prices are subject to global fluctuations. Overall, the country's ability to finance its spending and investment initiatives will be notably affected by the subdued international diamond demand and prices in the next 12 months.
Southern African Customs Union revenues, which constitute about 30% of Botswana's total revenues, are also expected to take a hit owing to the slowdown in regional and international trade, posing further risk to growth and fiscal finances. Household consumption expenditure is unlikely to record similar growth as recorded in 2014 as credit extension to the private sector continues to dwindle.
Both domestic and international growth drivers of the Botswana economy will remain under strain in 2016. IHS has now lowered global growth prospects below the 3% threshold for 2016. With international commodity prices expected to bottom-out during the latter course of 2016, a further slump in Chinese industrial production could prove detrimental to this outlook. US dollar strength is expected to prevail in 2016, which adds to commodity price risks in the near term.
For the near term, we predict annual headline inflation to average 5.1% and 5.7% year on year in 2016 and 2017, respectively. The current drought prevailing in Sub-Saharan Africa has seen food crop production far lower than the expected requirement, thus increasing vulnerability to high regional and international food prices. Further pressure on underlying inflation is expected as the increase in food prices is forecast to be persistent, hence creating expectations of rising inflation that could spill over into higher wage demands. However, average inflation is expected to remain within the target range of 3–6% in the medium term on the back of an anticipated continuous drop in international fuel prices.