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AMR: Botswana

AMR: Botswana

We expect the economy to contract by 11.8% y/y in 2020 and grow by 4.5% y/y 2021. We expect the C/A deficit to widen to 10.3% of GDP in 2020 before narrowing to 8.9% of GDP in 2021. We see BWP/USD at 11.27 by year-end.

Population
2.4m
Nominal GDP
USD18.37 billion
Real GDP growth
3.0%
CPI
2.8%

Medium-term outlook – constrained

The pandemic’s aftermath inevitably will see Botswana suffer an economic contraction in 2020; we forecast -11.8% y/y in 2020 and thereafter growth of 4.5% y/y in 2021. The government now forecasts a GDP contraction of -13.1% y/y in 2020. diamonds exports are likely to decline over the coming year as luxury spending will probably subside globally. This impact is expected to be meaningful for Botswana, considering that diamond exports make up 90% of total exports. Nonetheless, the government has already relaxed the lockdown. However, travel restrictions are likely to linger, such that tourism exports stand to remain constrained over the coming year. A weaker tourism sector will have negative spill-over effects to other sectors.

 Balance of payments – C/A deficit to widen

We expect the C/A deficit to widen to 10.3% of GDP in 2020 before narrowing to 8.9% of GDP in 2021. We estimate that it was 5.3% of GDP in 2019. The expected slowdown in global growth caused by the pandemic will result in lower tourism and diamond export earnings. Crucially, diamond exports account for 90% of total exports. Thus, we expect FX reserves decline to persist in 2020 but both goods and service imports are not expected to rise meaningfully. Moreover, considering a lower development budget, FX reserves may not decline substantially. At the end of Dec 20, FX reserves are likely to amount to USD5.9bn (12.6-m imports)

Monetary policy- remaining accommodative

We expect the BOB to maintain an accommodative monetary policy stance over the medium- to long term. We expect inflation to remain benign because we see limited domestic demand pressures and low imported inflationary pressures. Headline inflation is likely to reach an average of 2.6% y/y in H1:20, before rising to 3.0% y/y in H2:20.

FX outlook – taking a cue from the ZAR

We see USD/BWP at 11.27 and BWP/ZAR at 1.42 by the year-end. Indeed, FX reserves have dwindled, but we believe that the BOB would still be able to control their FX policy. FX reserves, although at historically low levels, covers above 12-m of imports. As such, USD/BWP moves will continue to follow the trajectory of USD/ZAR. The Bank of Botswana (BOB) recently revised the BWP rate of crawl against the currency basket to a 2.87% downward rate of crawl, after it decided to adjust to a downward rate of crawl of 1.51% from 0.3% upward rate of crawl in Jan.

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