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Low fuel prices lead to another inflation target breach

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November’s year-on-year headline consumer price inflation (CPI) recorded yet another drop to 2.9 percent – 0.2 percentage points lower than October’s rate of 3.1 percent.

This is also lower than our expectations of an unchanged inflation rate m/m. On a year-on-year basis, CPI is significantly lower than the 4.3 percent printed in November 2014. This larger than expected drop is due to low local fuel prices, combined with lacklustre domestic demand, which exerted greater downward pressures on prices than we had anticipated.

This is, however, in line with recent global trends. Inflation has now printed below the 3 percent bottom band of the inflation target range for four times this year.

Transport, the second biggest category in the inflation basket accounting for approximately 19 percent, fell by 7.0 percent y/y, decelerating further from the 6.5 percent-drop recorded in October. Local fuel prices continue to decline in line with the international oil price and were to a large extent cushioned by the National Petroleum levy, which aims to protect local consumers from the volatility of international oil prices.

In September, retail pump prices of petrol, diesel and paraffin were all reduced by 15 thebe, 40 thebe and 40 thebe respectively. The increase in the Transport deflation was as a result of this reduction as it filtered into the inflation numbers. More recently in December, there was another decrease in local fuel prices and we expect this to exert further downward pressure on Transport inflation, as well as overall CPI.

Since this reduction, international Brent Crude Oil prices have come under renewed pressure and fell a further 16.0 percent, giving yet more room for another reduction in local fuel if prices stabilise around these levels for some time.

International oil supply continues to remain stubbornly strong with both OPEC and non-OPEC producers maximising production. Furthermore, with Iran coming into the picture, things are likely to get worse before they can get better as far as the oil price is concerned. Other components of the CPI basket were generally stable over the past month, recording positive changes of less than 1 percent.

The biggest item in the basket – Food, with a weighting of approximately 22% – has been surprisingly absent among the main contributors to inflation over the year. It recorded a 0.9 percent increase in prices over the 12 months to November. The Housing, Water, Electricity Gas & Other fuels category recorded the biggest rate of price increase over the 12 months at 9.5 percent, mostly driven by increase in the Water supply category which was up 26 percent over the year.

Given the reduction in fuel costs earlier in the month and the delayed effect of the local and regional drought experienced in trickling down into the numbers, we believe the annual inflation rate in December will remain below the 3 percent bottom band.

The favourable exchange rate between the pula and the rand, which limits the extent to which we can import the increasing food inflation from South Africa, will also have a cooling effect on CPI. Inflation for the year to date has averaged 3.0 percent and we believe this level will be maintained for the full 12 months of 2015.

There are a number of risks to this outlook. On the upside, we believe it will be driven by food inflation and a possible increase in the alcohol levy this December. On the downside, the main driver will be the likelihood of another decline in fuel prices given the continued plunging of international oil prices.

Waning local demand, as indicated by the reduction in core inflation which registered a 0.3 percentage decrease to 4.7 percent from the previous month, is also expected to keep pressures on prices within check. Against this background, we believe that propelling economic growth remains the primary objective of the central bank.

We are therefore convinced that the monetary policy will remain accommodative for the foreseeable future. We do not believe that the central bank will reduce rates any further, as the recent reductions have not really propelled credit growth due to other structural hindrances.

TSHEPANG LOETO is an analyst at Investec Asset Management

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‘Manufacturing holds key to economic growth’

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Barclays bank’s economist Naledi Madala has urged the country to consider manufacturing, as a key tailwind to drive the economy and reduce inequality.

She was speaking at a gathering organised by the bank which focused on economic outlook for 2019. “We should not make a mistake of leapfrogging without manufacturing,” said Madala, lamenting that the country’s diversification remains a pipeline dream, as the diamond is still the economy’s mainstay. She bemoaned that mining activities in the country could not spring forward diversification, though non-mining GDP has been steady over the years.

“Extractive industries are not good stepping stones for diversification, the sector does not prepare us for the next step,” said Madala at the Barclays’ Economic Outlook Forum Review 2019. The economist further noted that government should confront head-on challenges of productivity and competitiveness to attract the much needed Foreign Direct Investment (FDI). Though diversification efforts continue to hit a brick wall, Madala said the country should expect increased activities in the mining sector hinged to ramp up in coal production in the year ahead.

She also implored government to consider a welcoming attitude towards foreign investors and generous tax incentives to businesses that set up in the country. Madala is also upbeat that the use of public private partnership model could also help diversify the economy coupled with privitisation. “Privitisation will offer opportunities for growth, through the renewed optimism from government, as business confidence has improved,” said Madala.

She implored the government and the business community to access what is going to drive and hinder growth highlighting that key headwinds to growth are income inequality, diversification challenge and productivity, among others. “The pace of poverty reduction has slowed down, while income inequality goes up,” said Madala

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MINISTER BEWAILS BAD REPAYMENT BY YOUTH

Keikantse Lesemela

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Minister of Youth Empowerment, Sports and Culture Development, Tshekedi Khama has told parliament his ministry continues to face challenges on the repayment of Youth Development Fund (YDF) loans.

Recently presenting the budget to Parliament, Khama said this financial year the ministry has received a total of 2582 YDF applications and approved 983of them to the value of P98 million. He said the programme attracts a high level of interest from youth but the ministry is only limited to funding a maximum of 1200 youth projects annually due to budget limitations.

“However the greatest challenge for the Fund is the repayment of the loan component by the majority of the youth businesses. The youth have advanced number of challenges for this including high rentals for operating spaces, low market access owing to tight competition and limited production capacities,” said Tshekedi, adding that they continue to pursue beneficiaries to repay the loans.

Out of the 919 businesses funded 1058 jobs have been created. The minister highlighted that disbursements of funds will continue to be undertaken until the end of the financial year. “The YDF is currently under review in line with the pronouncement made by the President, Dr Mokgweetsi Masisi in the State of the Nation Address, to improve beneficiaries through training, and encourage consortia and cooperatives,” said Tshekedi.

The ministry assists YDF beneficiaries in marketing their products and services through fairs and exhibitions. The ministry also runs entrepreneurship-training seminars for youth and in the past year 3692 young people were trained. Over 600 youth businesses attended fairs and exhibitions to market their products and services. Currently the ministry is collaborating with Local Enterprise Authority (LEA), First National Bank Botswana and Citizen Entrepreneurial Development Agency (CEDA) on training in entrepreneurship development and mentorship of YDF beneficiaries.

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