Wesbank

Geopolitics: Major 2018 economic risk

SHARE   |   Monday, 05 March 2018   |   By Ditiro Motlhabane 
Geopolitics: Major 2018 economic risk

As Botswana celebrates Governor Moses Pelaelo's announcement on Tuesday that economic growth is expected to accelerate to 5.3 per cent in 2018, supported by increased government spending and lower lending rates, experts warn of risks elsewhere. According to the central bank, Botswana's economy grew at an estimated 4.7 per cent in 2017, contracting in the third quarter following a sharp fall in gem exports due to weak global demand. The local economy is heavily dependent on the performance in the global economy as it provides a market for local exports. Therefore, now that the world economy has turned a new leaf and prospects for a steady and strengthening recovery have improved, things are looking up for the domestic economy. An economist at Barclays Bank Botswana, Naledi Madala, forecasts improved performance in mining and manufacturing sectors in 2018.  "Although economic structure signals that there has been diversification due to increase in contribution to GDP by non-mining sector, it could possibly be a reminder that natural resources are finite," she warns. She said just like in 2017 inflation is forecast to remain stable for 2018, while Bank of Botswana is expected to leave the bank rate unchanged at 5% for most of 2018. She, however, said although household expenditure responds to rate cuts, it remains very volatile. Positive projections create economic opportunities, Madala observes, but there is an urgent need to accelerate pace of reforms like decentralisation of service provision, increase in Research & Development spending to create a growth catalyst. 

Geopolitics 

At the opening of the 2018 economic outlook forum discussing global trends, regional developments, and reviews on the local economic landscape last week, Jeff Gable, Chief Economist and Head of Research Barclays Africa Group cautioned that although the global economy enters 2018 from a position of strength there are key risks to look out for. Top of the list is uncertainty over US policy and the Trump factor. Since his election as US President Donald Trump has made drastic pronouncements, with far reaching implications on the US foreign policy and threatens to strain relations with hitherto friendly nations. Even worse, most of these pronouncement are made on social media platforms particularly Twitter.  Political developments in Europe also pose major challenges to investor confidence and create uncertainty about the global economic landscape. Among these are concerns pessimism over Brexit deadlines and implications thereof, the German coalition, Italian elections and developments in Catalonia. In the Far East China's on-going readjustment, with the latest shocking proposal to remove Presidential terms to allow Xi Jing Ping to rule indefinitely, has created panic in the global economic landscape.  Although the regional outlook is also improving concerns are also rising, says Gable. He says the macro environment is improving, but with challenges, showing growth recovery never seen since the 2008 global economic meltdown. Throughout the region there is stability in foreign exchange, inflation and monetary policy, Gable declares enthusiastically.  But going forward countries have to pay particular attention to fiscal rebalancing to ensure debt sustainability. They have to exploit opportunities created by growing appetite for infrastructure in the region by prioritising where to invest to maximise the pay off. Further, the positive economic outlook presents a great opportunity for countries in the region to intensify efforts towards diversifying economies.  

SA example 

Making an example of the biggest economy in the region, Gable said even as South Africa awaits direction from its new political leadership, there is palpable optimism in SA politics following the removal of Jacob Zuma, who has since been replaced by Cyril Ramaphosa. However, a factionalised ruling party – the African National Congress (ANC) – presents a major challenge to Ramaphosa, who faces a mammoth task of uniting the party, the fight against corruption (difficulty in finding replacements), reducing policy uncertainty and defining the radical economic transformation policy [and questions over policies of the last 23 years, land redistribution]. More rhetoric questions on regional economics abound. Gable asks, although growth is edging higher with comfortable inflation and stable Monetary Policy Statements, current account supports the rand, but at what cost? What about the looming drought?  In terms of public finance, Gable says the Ramaphosa’s administration has to quickly decide where to find the money to avert death spiral at state owned entities (SOEs), address growing spending pressures from higher education, and the public sector. 

Crypto-currencies 

Crypto-currencies have been identified as the latest trends in conducting major transactions and investments. Almost as a side comment, Gable quipped that while South Africa welcomes crypto-currencies, it is surprising that Botswana and other countries continue to disregard them despite that there is no turning back. That position is dangerous, he warns. He is supported in this view by Mphoeng Mphoeng, a lecturer in the department of Accounting and Finance at the University of Botswana (UB).  Mphoeng said crypto-currencies are effectively an 'internet' of payment systems, a blockchain technology the most popular being Bitcoin. Others include ethereum, monero, bitcoin cash and lite coin.Blockchain applications include banking- transaction processing, cross border transactions; finance crowd funding, and capital raising; supply chain management; health care -medical records, claims processing;  real estate; stocks and bonds trading; and  voting. Block-chain technology, crypto-currency, removes third party trust in transactions by using encryption. 

Block-chain threats 

Challenges brought about by blockchain include lack of regulation, which increases the risk of scams, provides a platform for money laundering and hacking.  On Thursday, South Africa's Timeslive reported that more than 27‚500 people‚ including South Africans‚ Americans and Australians have been fleeced by the one of biggest bitcoin scams to hit the country. Intelligence agency, Hawks, confirmed that their serious commercial crimes unit was investigating complaints against BTC global‚ a company in which thousands invested crypto-currency valued at over $50-million by transferring bitcoins into an online wallet address. "Central banks and financial institutions should have a serious conversation about the advent of crypto-currencies` as they are not likely to go away. They should view them not as make-money-quick schemes but important for other uses and thus need for regulation," cautions Mphoeng.  He said the biggest thinking points in Botswana at the moment should be on the looming political transition and what it will mean for business. On April 01 incoming President Mokgweetsi Masisi will be sworn in to replace Ian Khama whose term ends on March 31.  Mphoeng said Government should address grievances about issuance of Work and Residence permits for potential investors; reduce bureaucratic red tape in registration of companies and curb corruption. He said Government should consider promoting value-based spending and priorities to address deteriorating health and education and a drop in the ease of doing business in Botswana. "Perhaps we should forget diversification, let's go back to basics. Can we still afford Ipelegeng and other social safety net programs e.t.c? Shouldn't we be changing them from consumptive to productive initiatives/ projects?" quizzed Mphoeng.