1. BOTSWANA – RECENT
ECONOMIC DEVELOPMENTS
FEBRUARY, 2008
Keith Jefferis

2. Structure of Presentation
Botswana Economic Developments
Growth
Exchange Rates
Inflation and Interest Rates
Government Budget
Economic scenario 2008

3. Economic Growth

4. Recent Economic Growth Experience
Long term decline in economic growth rates
Overall growth rate volatile due to mining
Diversification has been slow - mining and government still
account for over 50% of GDP
Non-mining private sector growth has been weak
But, signs of significant improvement in past 18 months
Good export performance, including reduced dependence
upon diamonds
Non-mining private sector growth has picked up, although
still dependent upon government

5. Growth Developments - Mining
Good conditions in mining sector
world commodity markets tight, although for metals less so
than in 2006;
copper & nickel prices at high levels by historical standards,
but off their peak in 2007H2;
widespread prospecting taking place in Botswana, (copper,
nickel, zinc, diamonds, gold, PGMs, uranium, coal, gas)
Market for diamonds weak in short-term
US slowdown & dollar weakness will hurt in 2008
but long-term supply-demand imbalance will support prices,
with long-term real price rise forecast

6. Mining-related Developments
Ongoing and Forthcoming Projects
Diamonex, 2008 (Tuli Block – licensed, funded and under construction)
African Diamonds AK6, 2008/9 (Orapa) – mining licence applied for
African Copper 2008, (Dukwe – licensed, funded and under construction)
Norilsk Nickel/Tati Nickel Activox refinery (Cu/Ni/PGMs), 2007-9 (Francistown) – under
construction
CIC coal/power, 2008-12 (Mmamabula) – moving closer to conclusion of negotiations
BPC expansion (coal, power) (2008-11)
Diamond aggregation/cutting, 2008 onwards
Discovery (nickel, zinc) and A-Cap (uranium) – very good prospecting results & favourable
price developments
Longer-term possibilities: gas, trans-Kalahari coal
Huge investments in processing as well as mining
Positive impact on exports, jobs, spin-offs
Very active prospecting continuing
Not yet impacting on economic growth data, although signs of capex feeding
through to trade data

7. Economic Growth
16%
Headline GDP growth has
14% recovered from (a
12% revised ) 0.6% in
10% 2005/06 to 6.2% in
8% 2006/07
6%
Confirms earlier signs of
4%
recovery from other
2% indicators
0%
Growth in NMPS even
more buoyant – up from
a revised 5.3%
GDP NMPS (previously 2.5%) to
9.7%

8. Economic Structure (GDP, 2006/07)
Soc. & Per. Trade, Mining still dominates
Serv hotels etc.
4% 11% GDP
Mining & government
Govt
16% contribute 58% of GDP,
so non-mining private
Fin. & bus.
Mining sector well under half
42%
Serv
11%
of the economy
Transp.
& comms Trade
4% 11%
Constr. Water Manuf
4% & elec 4%
2%

9. Growth by Sector, 2005/6 & 2006/7
Transp & comms Transport &
Trade communications, trade,
Manuf'g manufacturing and
Construction construction fastest growing
Total GDP sectors
Fin/bus. serv.
All showing improved
Water & elec
performance over the
Mining '06/07
previous year
Agriculture '05/06
Government However, growth figures
Soc/pers. serv. are preliminary and are
-5 0 5 10 15 20
subject to revisions
% growth

10. Growth by Sector 2005/06: Original & Revised
Transport Previous year’s growth
Soc/pers. serv. performance revised
Government upwards for several sectors
Water & elec Notably, finance/business,
Fin/bus. serv. trade and manufacturing,
Trade which all had appeared to
Manuf'g do badly
Construction
Agriculture
Mining
-10 -5 0 5 10 15 20
Revised (2008) Original (2007)

11. BoB Business Confidence Survey
90% Clear upturn in confidence
% rating conditions satisfactory
80%
shown in BoB survey
70%
60%
Striking recovery amongst
50% firms serving the domestic
40% market
30% Surprising decline in
20% confidence amongst
10% exports, but BoB caution
0%
about small sample
Exporters Non-exporters All

12. Growth Indicators - 1
Non-mining electricity Real business credit (y-o-y
consumption (y-o-y growth) growth)
16% 30%
14% 25%
12% 20%
10% 15%
8% 10%
6% 5%
4% 0%
2% -5%
0% -10%
Source: BPC Source: BoB

13. Growth Indicators - 2
Real Government Multiple Indicators
Spending 30% 16%
20% 25% 14%
15% 20% 12%
10% 15%
10%
5% 10%
8%
5%
0% 6%
0%
-5% 4%
-5%
-10% 2%
-10%
-15% -15% 0%
Govt. Exp RBC NMEC

14. Investment (GFCF) & Savings
60%
Declining rate of
50% investment (% GDP) does
not augur well for future
40%
growth
% of GDP
30%
Not due to shortage of
20% savings, which remain
10%
very high
Reinforces need to
0%
improve investment
-10% climate, encourage FDI
GFCF Savings

15. World Bank “Doing Business” 2007
Ranking (178 countries) Botswana amongst the top
0 50 100 150 performers in African on
Paying Taxes the WBDB survey, but slow
Getting Credit slipping
Closing a Business
Regulatory reform can
Registering Property
Doing Business
address some of the
Employing Workers weaknesses
Enforcing Contracts
Starting a Business
Protecting Investors
Dealing with Licenses
Trading Across Borders

16. External Sector

17. Exchange Rates
Rate of crawl reduced
130 from 4% to 2% in July -
120 reflecting smaller inflation
gap between Botswana
110 and trading partners
Index 1996=100
100 Basket weights adjusted –
ZAR reduced - presumably
90 reflecting growth of non-
80 diamond exports outside
of the region
70
Will make BWP slightly
60 more volatile against ZAR
50
Basket parameters still not
2003 2004 2005 2006 2007
disclosed (against advice
of IMF, credit rating
NEER BWP/ZAR BWP/USD agencies & BoB)

18. Exchange Rate Forecasts to 2012
ZAR per BWP BWP per USD & EUR
1.18 10
1.17
9
1.16
1.15 8 USD
1.14 EUR
1.13 7
1.12
6
1.11
1.10 5

19. Real Effective Exchange Rate (REER)
125
Long period of REER
appreciation (declining
120
competitiveness) through to
115 2004
Index 1996=100
110 Devaluations and crawling
105
peg have achieved REER
depreciation and restored
100
competitiveness
95
90

20. Exports & Imports
3500
Much faster export growth
3000 than imports – as intended
2500 by exchange rate policy
Monthly (Pmn)
2000 Healthy balance of trade
(
surpluses & accumulation of
1500
fx reserves
1000
Recent pick up in imports
500 driven by capital goods –
0 suggesting investment may
2003 2004 2005 2006 2007 be recovering
Exports Imports
Exp trend Imp trend

21. Export growth, Jan-Sep 2006-7
200% Strong export growth in
2007, driven by
150% non-diamond exports
100% Textiles, Cu-Ni & Meat the
best performers
50%
Diversification of exports
0% taking place
-50%

22. Non-diamond Exports, Jan-Sep 2007
Nickel & copper dominate
non-diamond exports, but
Soda ash Textiles the rest is quite diversified
17% Other
4% 17%
Meat
7%
Machinery
2%
Gold
2%
Nickel/
copper
51%

23. Foreign Exchange Reserves (Pula)
70 Trade performance
60 resulting in rapid growth
of fx reserves – more
50
than doubled since late
Pula million
40 2003.
30 Import cover approx. 30
20
months
10
0

24. Inflation & Monetary Policy

25. Inflation
Inflation fell sharply early in 2007, as expected,
from 14.2% in April 06 to a low of 6.3% in April
07
falling away of one-off impacts (devaluation, school
fees)
lower world fuel prices in late 06/early 07
Subsequent increase (to 8.1% in December) due to:
Higher fuel prices
Higher food prices (esp. cereals and dairy)
Rising domestic demand

26. Inflation
Inflation likely to continue rising, should end year
around 8%;
Main risks:
world fuel and food prices
further BTC telecomms rebalancing
administered prices (health costs, housing, water, electricity)
rising world and SA inflation

27. Inflation & Forecast
16% Inflation likely to continue
rising in 1st half of 2008,
14% due to
12% world fuel and food
prices
10%
administered prices
8% (housing, water)
6%
rising power costs
rising world and SA
4% inflation
2% But should peak and fall in
H2
0% Forecast of inflation around
8% by year-end

28. Fuel Prices
600 800
Close relationship
550 between local fuel prices
700
500 and world crude prices,
Brent crude (pula/barrel
with a 4 month lag
Petrol (Thebe/litre)
450 600
400 Still may be further rises
500 if international fuel
350
prices do not fall
300 400
250
300
200
150 200
2005 2006 2007
Crude Oil Petrol (lagged 4 months)

29. Monetary Policy
Interest rates cut by 0.5% in June 2007, but no more rate cuts
likely in the short term:
Inflation now above BoB target range
High credit growth pushing up demand pressures
Increasing government spending also contributing to inflationary
pressures
Next move likely to be upwards
2008 Monetary Policy Statement
Due late February
Likely to have less positive outlook than 2007 MPS
MPC meetings slightly more transparent

30. Credit growth (yoy)
30% Credit growth has risen
sharply
25%
Now well above BoB
20%
target range (11%-
15% 14%)
Driven by improving
10%
economic sentiment,
5% inflow of funds from
non-bank BoBCs in 2006
0%
2005 2006 2007

31. Inflation and Interest Rates
Prime Rate & Inflation Real Prime Rate
18 12%
16
10%
14
12 8%
%
10
6%
8
6 4%
4
2 2%
0 0%
Inflation Prime Rate

32. Government Budget

33. Govt Revenue & Spending - actual
45% After deficits in the late
1990s and early 2000s,
40% spending is now well
below revenues
% of GDP
35% Decline in spending (as
% of GDP) has led to
30% major reduction in
demand
25%
Expenditure Revenue

34. Budget Balance
15% Budget situation has
turned around
10%
significantly in last two
years
% of GDP
5%
2006/07 surplus over
0%
11% of GDP – largest
-5%
since late 1980s
-10%

35. Budget balance – actual vs. forecast
12% Quality of budget
10% actual forecasts seems to
8%
6%
have declined
% of GDP
4% Mainly due to
2%
shortfalls on
0%
-2%
expenditure
-4% forecast
-6%

36. Budgeted Expenditure
16,000 +37% 2008/09 Budget entails
14,000 major increase in spending
12,000 compared to last year of
10,000 +36% +110% actual data (2006/07)
8,000 Total +53%
P mn
6,000 Recurrent +36% (without
4,000 public sector pay rise)
2,000 Development +110%
0 Demands much improved
implementation capacity
2006/07 2007/08 2008/09

37. Expenditure Budget Efficiency
110% Progressive decline in
105% proportion of budget
% of budget actually spent
100% actually spent
95% Particularly a problem
90%
with development
budget – only 67%
85%
spent in 2006/07
80%
75%
70%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

38. Government Spending Cycle
Spending Growth (%) Long-term decline in
40% growth rate of
35% government spending –
30% which is appropriate
25% Budgeted figures for
20% 2007/08 suggest much
15% larger increase in
10% spending than has been
5% achieved in recent history
0% – and are therefore
unlikely to be realised
1995/96
1996/97
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
Likely to be destabilising

39. Long-term Mineral Revenues
7000
6000
5000
4000
Diamond revenue
in millions of
3000 dollars
2000 Mining goes
underground before
Recycling of existing waste resources are
(higher production of lower- totally depleted
1000 quality diamonds as
underlined by a lower price
trend)
0
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
Source: IMF

40. Economic Prospects

41. Botswana Economic Prospects 2008-9
2008: improved growth to continue, driven by
Rising government spending
Mining projects
Export uncertainty, due to US recession and international
economic slowdown, but impact will be confined and not
widespread through the economy, as long as growth
slowdown is not long-term
Main threats to domestic growth:
Volatility in government spending, and hence uncertainty
Power constraints
Sharply higher inflation, and rising interest rates

42. Power Supply Issues
Sources of Supply Sources of Demand
300 300
250 250
‘000 MWh/month
/month
200 200
150 150
100 100
50 50
0 0
Morupule Imports - Eskom Imports - other Mines Non-mining

43. Power Supply Issues
Emerging Supply Deficit Peak demand increasing at
800
around 8% p.a.
700
Tati, other new mines
600
excluded
Peak demand (MW)
500
400
Eskom firm supply reducing
300
from 2008-2011
200 Gap emerging – around
100 80MW in 2008
0 60MW from HCB in 2008,
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
but then what?
Morupule Eskom Deficit Major shortfalls from 2010

44. Thank You