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RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 GABORONE 000123 
 
SIPDIS 
 
STATE FOR AF/S, AF/EPS, EEB 
STATE PLEASE PASS USTR WJACKSON 
 
E.O 12958: N/A 
TAGS: ECON ETRD EFIN KHIV BC
SUBJECT: BOTSWANA ECONOMIC BRIEFS JANUARY 2009 
 
¶1.  This is the first edition of U.S. Embassy Gaborone's Botswana 
Economic Briefs, covering economic and commercial news from January 
¶2009.  Topics of this edition are: 
 
- Botswana Stock Exchange Awaits GOB Budget News 
- Consumers and Businesses Brace for Tough Year 
- Botswana's Economic Freedom Ranking Improves 
- Inflation Down by 1.3 Percent 
- Analyst: Botswana to Come out of Recession in Bad Shape 
- World Bank Loan Helps Botswana Combat HIV/AIDS 
 
 
BSE Looking for Hope from the Budget Speech 
------------------------------------------- 
¶2.  For the first time in at least five years, the domestic board of 
the Botswana Stock Exchange (BSE) closed the year down in 2008. 
With confidence levels at an all-time low on the market, investors 
awaited the Government of Botswana's  financial year 2009-2010 
national budget, as they were eager to learn how the GOB would 
respond to the global recession.  Given that the government is the 
biggest driver of the Botswana economy, investors are hoping that 
the budget will restore confidence in the economy.  Industry 
analysts believe the all-important diamond market will withstand the 
international financial storm, but expect it will take up to two 
years before there is a real turnaround.  Since Botswana's economy 
relies heavily on diamonds, this has generated a huge loss of 
confidence throughout the economy.   Although stocks across the 
board suffered last year, the mining counters were worst hit, 
primarily because of their exposure to developments on the 
international markets while, unlike domestic counters, they had 
inherited no gains in 2007.  Although there have been a few bargain 
hunters, most investors are lurking on the sidelines and are still 
reluctant to commit themselves in a volatile environment.  COMMENT: 
The GOB unveiled its budget on February 2.  Post will report on the 
budget septel.  END COMMENT. (Mmegi; January 21, 2009) 
 
 
Consumers & Businesses Brace for a Tough Year 
--------------------------------------------- 
¶3.  Botswana's consumer prices are expected to drop in the first 
half of 2009, but the effects of the global economic recession will 
continue to bite.  The mining industry has been hit hard and giants 
such as Debswana and the copper/nickel mine Bamagwato Concessions 
Limited (BCL) have resorted to retrenchment in order to cut costs. 
The credit crunch in the latter half of 2008 and depressed metal 
prices brought uncertainty, indicating a tough start to the new 
year.  For BCL, the year ended on a low note with a forced shut-down 
that will cost the company millions of pula.  A pile up in the flash 
furnace halted production on December 3, 2008, resulting in the mine 
declaring a 45-day shutdown to refurbish the smelter.  Against the 
backdrop of falling metal prices, BCL also announced a 7 percent cut 
in its workforce late December 2008.  Metal prices are down and the 
latest shutdown is the last thing management wanted. COMMENT: Dozens 
of contractors at the mine also face a bleak future as the mine has 
recently announced that it will not increase salaries this year. END 
COMMENT.  (Mmegi; January 08, 2009) 
 
Economic Freedom Ranking Improves 
---------------------------------- 
¶4.  According to the Heritage Foundation's 2009 Index of Economic 
Freedom, Botswana improved its economic freedom ranking, moving up 
to number 34 from its 2008 position of 36 on the annual list. 
"Botswana's overall business climate is stable, superior for Africa, 
and a model for the region", said the Heritage Foundation report for 
¶2009.  The assessment also notes that "Botswana's competitiveness is 
founded on a sensible business regulatory environment, openness to 
foreign investment and relatively flexible employment regulations." 
However, the Foundation also suggests that Botswana could improve 
its scores for trade freedom and freedom from corruption.  For 
example, points were deducted from Botswana's trade score because 
"the government maintains import bans and restrictions on some 
products, a cumbersome standards regime, domestic bias in government 
procurement, and weak enforcement of intellectual property rights." 
The country scored higher in fiscal freedom due to tax rates that 
are among the lowest in southern Africa. The report also notes that 
Botswana's investment regulations are transparent and bureaucratic 
procedures are streamlined and open but somewhat slow.  The 
country's banking system was ranked as very competitive and one of 
Africa's most advanced.  Botswana fared relatively poorly in the 
category of labor freedom because employers are still not required 
to make pensions, health insurance and unemployment insurance 
contributions.  (Business Week Mmegi; January 16, 2009) 
 
 
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Inflation Down by 1.3 Percent 
------------------------------ 
¶5.  Consumer inflation slowed to 13.7 percent in December 2008, down 
by 1.3 percentage points from 15.0 in November as fuel costs fell. 
The slower inflation follows a leap to 15 percent in November when 
the GOB imposed a 30 percent levy on alcoholic beverages.  Four 
group indices recorded changes of more than 1.0 percent between 
November and December - Alcohol beverages, tobacco and narcotics 
(1.1 percent), clothing and footwear (1.1 percent) and Restaurants & 
hotels (1.0 percent).  Inflation started easing in September 2008 
after an upward trend spanning nearly a year on the back of high 
food and fuel prices.  The Bank of Botswana cut its bank rate by 50 
base points to 15 percent in December 2008, saying it expected 
inflation to move towards its 3 - 6 percent target in 2009. 
Analysts believe that the central Bank's 3 - 6 percent inflation 
target range will be attainable during the last quarter of 2009, as 
long as food and fuel prices remain at the current levels. 
(Business Monitor; January 19, 2009) 
 
 
Botswana to come out of the recession in bad shape - BIDPA 
--------------------------------------------- --------- 
¶6.  A senior official at the Botswana Institute of Development and 
Policy Analysis (BIDPA) said Botswana will emerge from the current 
credit crunch with some dents, as the mineral sector will be hard 
hit, blighting the growth prospects of the real economy.  Professor 
¶H. Taye said what happened in the last three months raises concern, 
but the country is still in better shape compared to other African 
states.  Botswana's financial sector has experienced some downturn 
with the foreign companies' index in a decline and at the same time 
sluggish diamond prices.  The current account is positive for 
Botswana and the foreign exchange reserves represent an import cover 
of about 30 months.  He said in order to understand the extent of 
the credit crisis it is important to establish where the bulk of the 
pensions and the foreign exchange reserves are invested.  Analysts 
said it is difficult for anyone in Botswana to guess the extent of 
the impact since there is no readily available data that could be 
used to map the way forward.  (Sunday Standard; January 26, 2009) 
 
World Bank Loan Helps Botswana Combat HIV/AIDS 
--------------------------------------------- - 
¶7.  Botswana's Finance Minister Baledzi Gaolathe signed a US $50 
million loan agreement with the World Bank on January 29.  The 
money, repayable over the next 25 years, will be used by the GOB for 
its HIV/AIDS programs.  As a middle-income country, Botswana is not 
eligible for concessionary financing from the Bank, but the European 
Union has agreed to "buy down" the interest on the loan, essentially 
making it a no-cost transaction for Botswana.  This innovative 
design is being looked at as a potential model for donors to support 
development projects in other middle-income countries in future. 
Botswana's national HIV prevalence rate is estimated at 24%, and an 
estimated 283,000 adults are suffering from the disease.  However, 
Botswana, in partnership with the USG and other donors, is making 
impressive gains against the disease.  It was the first African 
country to provide free anti-retroviral therapy to its citizens in 
need, and as of June 2008 about 93% of citizens in need were 
receiving lifesaving drugs.  Thanks to near-universal treatment and 
extensive HIV testing, Botswana has reduced AIDS-related deaths by 
50%.  (World Bank press release, January 29, 2009) 
 
¶8.  COMMENT:  Since 2004, the USG has provided over 300 million 
dollars to Botswana under our PEPFAR program.  During the second 
phase of PEPFAR (2009-2014), we will continue to provide strong 
support for Botswana's struggle with HIV/AIDS.  However, PEPFAR 
funds for Botswana are expected to decline over the next five years, 
and we appreciate the GOB taking proactive steps such as securing 
this World Bank loan, which should enhance the government's ability 
to respond to the crisis.  However, it is strange that the GOB has 
chosen to take out a WB loan rather than take advantage of their 
Global Fund eligibility with a strong proposal there instead.  There 
are also nuances to this loan agreement that are worth watching. 
The EU's agreement to buy down the interest is conditional and 
depends on the GOB meeting performance targets.  GOB AIDS program 
staff will be under significant pressure to meet all targets, which 
may be difficult given their lack of experience with WB rules and 
conditions.  This could have a negative impact on the GOB's ability 
to implement programs funded by other donors, including the USG.  To 
reduce the possible negative impact of the WB loan project on other 
ongoing HIV activities, the Botswana PEPFAR Team hopes to find ways 
to link with and collaborate on Bank-funded activities so that we 
create synergy between activities funded by these two sources (WB 
and PEPFAR).  END COMMENT. 
 
 
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NOLAN