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Botswana Country Risk Report Q2 2016

Botswana Country Risk Report Q2 2016

Core Views

Botswana's economy will be hit by the global diamond price anddemand slump, which slashed real GDP growth in half in 2015. Wehave revised down our near-term real GDP forecast for Botswana,the world's second biggest diamond producer after Russia. Economicgrowth will slow to 3.7% in 2016, compared to our previous forecastof 4.1%, though still a recovery on 2.5% in 2015.

The Bank of Botswana will keep rates unchanged in Q216. We expectinflation to remain low due to subdued oil prices, low demandpull pressure due to low real GDP growth and a depreciating SouthAfrican rand.

In the continued absence of meaningful economic diversification,the mining sector is set to remain a key engine of growth. Whilenickel, copper and particularly coal will become more prominent inthe country's export base, tourism-related investment will increase.

We expect a return to the political status quo in Botswana in 2016,following escalating tensions in the run up to the October 2014general elections.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
2016 Year Of Rebalancing For Diamond Supply
Subdued demand and prices for diamonds – Botswana's key commodity export – will continue to weigh on economic growth in 2016.
The drop-off in taxable diamond revenues will also curtail government spending, resulting in lower private consumption as 40% of the
workforce is employed in the public sector. Fixed investment into economic diversification strategies will contribute positively towards
real GDP but will only see effects in the long term.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Budget Deficit Will Continue Into The New Year
A supplementary budget of BWP1.34bn will exacerbate Botswana's fiscal deficit for FY2015/16 ,creating a spill-over effect into the
FY2016/17 fiscal budget, leading to a deficit of 1.6%. The government will tap into foreign reserves and its sovereign wealth fund to
stabilise revenues if needs be. Capital expenditure will be focused on infrastructure against power and water shortages.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
External Trade And Investment Outlook
Lower Diamond Demand To Depress Trade Balance
Low diamond prices and demand for the precious metal will narrow the current account surplus for Botswana over 2016. Imports will
remain strong due to the drought. However, various infrastructure projects over the next four years will provide a boost to exports.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS EXPORTS IN 2014
TABLE: TOP 5 GOODS IMPORTS IN 2014
Monetary Policy
Low Inflation Will Persist Amid Slowing Growth
Botswana will keep rates unchanged in Q216. We expect inflation to remain low due to subdued oil prices, low demand pull pressure
due to low real GDP growth and a depreciating rand.
Monetary Policy Framework
Currency Forecast
BWP: Depreciation To Continue At Slower Rate
Despite its close relationship with the South African rand, the Botswanan pula will depreciate at a gentler pace than the rand in 2016.
This is due to the inclusion of SDRs in the basket and stable inflation levels, as well as the economic rebalancing of diamond supply. We
forecast average depreciation of 3.8% in 2016, compared to 9.0% in 2015.
TABLE: BMI CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Botswanan Economy To 2025
Long-Term Prospects Still Positive
Despite ongoing efforts by the government to diversify Botswana's economy away from a heavy reliance on diamonds, we believe the
precious stone will remain the mainstay of the southern African country's economy over the foreseeable future.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Khama's Authoritarian Approach Will Be Short-Lived
President Ian Khama's authoritarian ways are causing him to lose popularity in Botswana. However, this is just a slight blip in the ruling
party's reign, since his second term will come to an end in 2019. His authoritarianism will pose challenges, such as participating in
teamwork while he manages his role as chairman at the SADC during 2016 and maintaining the ruling party's election prospects in the
long-term.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
An Incomplete Miracle
Botswana's status as one of the most stable and politically progressive countries in Sub-Saharan Africa (SSA) is likely to endure for the
foreseeable future. While we see the potential for political or social upheaval as minimal, over the next decade the government will come
under mounting pressure to address the country's extreme inequality, as well as facing the prospect of a reinvigorated opposition.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: BOTSWANA IMPORT AND EXPORT DOCUMENTS
TABLE: SUB-SAHARAN AFRICA – TRADE PROCEDURES AND GOVERNANCE RISK
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: BOTSWANA – MACROECONOMIC DATA & FORECASTS

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