Botswana: Risk Assessment
Business Climate Rating1
Growth dependent on diamond sector
The economy slowed in 2012 because of a downturn in mining activity, with demand for diamonds affected by the world economic slowdown. A growth rebound is expected in 2013 thanks to the recovery of the mining sector.
The government’s efforts to diversify an economy very dependent on diamonds has enabled a reduction in the mining sector’s contribution to around 30% of GDP, helped by rapid growth in manufacturing, construction and services. These sectors will also share in the economic rebound in 2013, but their development is restrained by the lack of skilled workers and high labor costs (driven up by the mining sector), as well as the narrowness of the domestic market. The country therefore remains exposed to worsening of the world economic situation, which is expected to further impact on demand for diamonds. Coalmine development projects are again attracting investor interest, while the government has gone back on its decision to put a moratorium on exploration licenses. Studies have begun again into the construction of railway lines linking Botswana to South Africa, on the one hand, and to Mozambique, on the other, to enable the exports of coal.
Inflation slowed in 2012 but is above the 6% limit set by the Bank of Botswana (BoB), due to the rise in fuel and foodstuff prices. Inflationary pressures are expected to diminish in 2013 with the moderation of domestic demand and a more favorable evolution of the prices of imported goods. Bank capitalization and liquidity ratios are also good. Non-performing loans have been cut sharply (2.4% of total loans in 2012 against 6.1% in 2010).
Favorable fiscal and external positions
The policies of spending cuts, notably the civil service wage freeze, as well as the rise in VAT and in revenues from the diamond sector have enabled Botswana to return to balanced budgets in 2012. The continuation of a prudent spending policy and measures aimed at improving revenue recovery will contribute maintenance of a fiscal balance in 2013. The recent civil service salary increase (2% against the 16% initially demanded by the unions), after several months of negotiations, will not threaten this balance and government debt will remain limited.
Despite the deterioration in diamond exports, the higher than predicted level of SACU (South African Customs Union) customs revenues led to an increase in the current account surplus in 2012. The current account balance will remain in surplus in 2013 despite a trade deficit linked to an increase in imports of capital goods for mining investments helped by substantial SACU revenue transfers. Although Botswana’s external position is favorable at present, it remains very dependent both on revenues from diamond exports (75% of the total) and on duties from the Customs Union formed with South Africa, Lesotho, Namibia and Swaziland.
Social and political stability
The country’s political stability is an undeniable asset in attracting investment. President Ian Khama (head of State and of the government) and his party (Botswana Democratic Party - BDP) are expected to continue to dominate the political scene until the next elections in 2014. An opposition movement (Botswana Movement for Democracy - BMD) was formed in April 2012 by former members of the BDP but it has difficulty in rallying the other opposition forces. The social situation is stable but high unemployment (17.5%), great poverty and social inequalities, which persist despite the economic performance, can be a source of tension.
Better governance than in the other countries of the region
Compared to the other Sub-Saharan African countries, the country offers businesses a strong regulatory framework, access to credit, facilities for property registration and good investor protection. Botswana has a higher rating than South Africa for most of the World Bank’s governance indicators, notably in terms of government effectiveness, quality of regulation, rule of law and combating corruption.
- Abundant and diversified natural resources (diamonds, copper, uranium, coal)
- First African destination for foreign direct investment in the mining sector
- Sustainable public and external debt
- Dependence on the diamond sector (75% of exports, 35% of fiscal revenues)
- Great poverty and inequality
- Prevalence of Aids among the highest in the world