Botswana’s net exports is expected to be the key driver of economic growth in 2022, with diamond exports providing tailwinds to growth, according to Fitch Solutions.

Following the fall in real exports and imports over Q1 2022, the country’s trade balance turned positive, bolstering headline growth. Diamond production grew by a robust 25.0 per cent year-on-year in the quarter, and while output growth will likely slow over the coming quarters, annual production will expand.

“Our Mining Team projects that annual production will expand by 14.0% over 2022, well above the 2010-2019 average of 3.6%.This should offer tailwinds to export growth.”
Fitch Solutions

With the easing of domestic Covid-19 restrictions and the removal of inbound travel rules should bode well for tourism inflows, Fitch noted. But also, “we expect that import growth will remain subdued as domestic demand slows”. As such, Fitch forecasts that net exports will add 4.3 percentage points to headline growth in 2022.

To some extent, household spending will weaken in 2022. Strong inflationary pressures- consumer price growth reached 12.7 per cent year-on-year in June 2022. This is driven by fuel price hikes and rising food prices will erode consumers’ purchasing power, negatively impacting private consumption.

“We expect inflation to remain elevated over the remainder of the year due to the ongoing war in Ukraine, logistical issues in South Africa amid frequent power outages (Botswana imports roughly 60.0% of total imports from South Africa) and further increases in pump prices.”
Fitch Solutions

Indeed, the Botswana Energy Regulatory Authority announced that current fuel prices are still below the level required for local fuel suppliers to break even, indicating that more upward adjustments to petrol and diesel prices are likely.

Price Pressures Impact Spending

Price pressures have already started to impact consumer spending, with retail and wholesale trade growth (in real terms) having slowed to 4.0% in Q1 2022, below the 2018-2019 average of 6.3 per cent.

Taking these dynamics into account, Fitch projects private consumption to expand by 1.8% in 2022, down from 8.0% in 2021, adding 0.9 percentage points (pp) to headline growth.

Fixed investment will remain subdued over 2022. Despite the gradual easing of Covid-19 restrictions, gross fixed capital formation growth came in at a weak 0.9% year-on-year in Q1 2022, reflecting still tepid investor sentiment.

“We believe that fixed investment growth will remain subdued over the remaining quarters of the year amid risk off sentiment caused by elevated inflation and a weakening global economic backdrop. Furthermore, tighter monetary conditions are likely to constrain investment growth in the near term.”
Fitch

Indeed, the Bank of Botswana raised the interest rate by 50 basis points to 2.15 per cent in June 2022, and it is expected that it will hike further to 3.65 per cent by year-end.

On that basis, elevated diamond prices as well as Tlou Energy’s construction of a transmission line that will connect the Lesedi Power Project to the Botswanan power grid (construction started in May 2022) will provide support to fixed investment growth.

As such, Fitch forecasts gross fixed capital formation to expand by 3.4 per cent, below the 10-year pre-pandemic average of 6.2 percentage points, adding 1.1 percentage point to GDP growth.

In 2023, Fitch forecasts that real GDP growth will decelerate to 4.2 per cent given a weaker outlook for diamond production. Fitch’s Mining Team projects the country’s diamond output to slow to 2.0 per cent as favourable base effects wear off, which will weaken export growth.

That said, easing price pressures will improve consumers’ purchasing power in 2023, providing tailwinds to private consumption, which we expect to expand by 4.5 per cent.