Economic Analysis - Current Account Surplus To Narrow - MAR 2018

BMI View: Botswana ' s current account will remain in positive territory going forward, mainly on the back of increased diamond exports. That said, an uptick in import demand driven by low inflation and a stable currency will keep the trade bala nce below its historic average.

After decreasing from 11.7% of GDP to 8.6% of GDP in 2017, the current account surplus in Botswana will remain in positive territory in the years ahead, on the back of rising diamond production and prices. That said, Botswana's current account will trend below its average for the last five years as low inflation and a strong currency are sustaining a strong increase in import demand. Finally, a projected increase in fixed investment coupled with a sharp depreciatory trend in the rand, which makes 50% of pula's crawling peg basket, will help the central bank hoard foreign reserves which have fallen sharply in the past decade. We expect the current account surplus to fall to 7.9% of GDP in 2018 before widening to 8.4% in 2019, averaging 8.3% over the next five years.

Current Account Balance To Remain Into Positive Territory
Botswana - Current Account Balance, Income Balance, Services Balance & Trade Balance (USDmn), Current Account (% GDP)
Source: BMI

Uptick In Diamond Production To Increase Export Revenues

An uptick in diamond production and prices will fuel an increase in export revenues over the coming quarters. As mining represents more than 80.0% of Botswana's trade balance, we expect this will feed into the country's current account, keeping it firmly in positive territory. Despite a 1.6% y-o-y decrease in exports in Q217, mainly due to sales being composed of lower-quality and smaller sized diamonds, diamond sector growth in Botswana has still surprised to the upside in the first three quarters of this year, with the miner De Beers increasing its production by 33.0% in Q317, fuelling an average rate of export growth of 20.1% y-o-y each month in H117.

We expect export revenues to increase by 7.0% in 2018 and by 7.5% in 2019, as rough demand will keep getting stronger going forward. While demand for polished diamonds has stalled in recent years, the outlook for rough diamond demand remains robust - the miner De Beers' rough-price index increased by 4% in the first half of 2017, reflecting an increase in manufacturer demand from important markets such as China and India.

Diamond Exports To Rebound In 2018 Amid Production Uptick
Botswana - Diamond Production And Exports
Source: Bank Of Botswana, BMI

Strong Consumer Drives Increasing Import Demand

A relatively strong currency and low inflation will help to support import demand in 2018, offsetting the impact of growing diamond export revenues. We expect household final consumption to increase by 3.0% and 4.5% in 2017 and 2018 on the back of low and stable inflation. Price growth declined from 3.5% y-o-y in March to 3.0% in October on the back of falling food prices, giving enough space to the Bank of Botswana to enact dovish monetary policy in a bid to increase liquidity and stimulate GDP growth.

Finally, the pula's recent strength will also limit the impact of the increase in exports. The unit, which maintains a crawling peg against a basket of currencies dominated by the rand, has appreciated by 14.8% against the US dollar since January 2016 on the back of currency strength in South Africa, making imports substantially cheaper. As the rand begins to depreciate in 2018, the weaker pula will push import prices higher in 2019, which will in turn increase Botswana's current account surplus.

Increased Consumption Will Augment Imports
Botswana - Household Consumption And Imports of Goods & Services (USDmn)
Source: Bank Of Botswana, BMI

Our expectations for the rand will also support the central bank in accumulating foreign reserves, as the cost of maintaining the peg declines, alongside strong inward investment, and the current account surplus supporting capital flows into the economy. This will in turn increase reserves by 7.2% [11.0 months' worth of import cover] in 2018 and 7.7% [11.1 months' import cover] in 2019.

Pula Strength To Increase Foreign Reserves
Botswana - Foreign Reserves & Exchange Rate BWP/USD
Source: Bank Of Botswana, BMI