We expect the economy to contract by 10.2% y/y in 2020 and grow by 6.3% y/y 2021. We expect the C/A deficit to widen to 13.2% of GDP in 2020 before narrowing to 10.2% of GDP in 2021. We see BWP/USD at 11.37 by year-end.
Medium-term outlook – 2021 recovery possible
We now revise our GDP growth forecast to -10.2% y/y for 2020, from -11.8% y/y, then 6.3% y/y in 2021 in anticipation of the government stimulating economic growth via its Economic Recovery and Transformation Plan (ERTP). The government forecasts an 8.9% y/y contraction in 2020, from 13.1% y/y previously.
Balance of payments – dull diamond exports
The widening of the C/A deficit could be deeper than expected. We now forecast the C/A deficit at 13.2% of GDP, from 10.3% of GDP previously and 7.5% of GDP in 2019. We then expect the C/A deficit to narrow to 10.2% of GDP in 2021 as global demand recovers. The trade balance deteriorated over 2019 and H1:20, with the trade deficit widening over fivefold. The main reason was dull diamond exports. The global growth slowdown implies that tourism and diamond export earnings will weaken. Thus, we expect the C/A deficit position to persist over the medium term. In 2021, the C/A deficit will be attributable to lethargic SACU transfers. Still, diamond and tourism export receipts should recover and improve the BOP.
Monetary policy- still accommodative
We revise our average headline inflation forecast to 1.6% y/y in 2020 and 2.4% y/y in 2021, from 2.8% y/y and 3.1% y/y respectively. Headline inflation eased to 0.9% y/y in Jul, from 2.4% y/y in May, attributable to the downward revision in petrol and diesel prices by BWP1.63 and BWP1.40 respectively in Jun.
We expect the Bank of Botswana’s MPC to remain accommodative in the medium term. Inflation should remain benign, with limited domestic demand pressures and limited imported price pressures over the medium term.
FX outlook – ZAR as guiding force
The deterioration of the BOP is unlikely to induce the BOB to change its FX policy. After all, FX reserves remain adequate, covering about 11-m of imports according to our estimates. The market may remain jittery as the pandemic and potential second waves linger. Still, there was liquidity support during the first wave, and our G10 analyst foresees the same should a second wave hit; similar liquidity support should prevent another incidence of USD strength. The BWP should firm against the USD in the next 6-m. USD/ZAR is likely to end the year at 16.50, putting USD/BWP at 11.37