More uncertainties for the economy
Owing to Russia/ Ukraine conflict
The ongoing Russia/ Ukraine war is expected to let loose more uncertainties onto the global economy, with the local market not safe.
Kgori Capital Portfolio Manager, Tshegofatso Tlhong said the Russia/ Ukraine conflict has affected energy markets significantly as Russia is a significant producer of oil and gas.
“Prices have shot up in anticipation of the application of sanctions on these commodities, and this would have the effect of reducing supply,” Tlhong said. She however highlighted that it is difficult to tell with certainty whether prices will go up further.
“However, should the US and Iran nuclear negotiations yield an agreement, further supplies of oil from Iran will be unlocked in the market, increasing supply and taking prices lower,” Tlhong said. Last week, the oil prices hit the highest price in years to sell at US$ 100 per barrel, raising fears that the increase would soon be passed over to consumers in the local market. On the other hand, Tlhong noted that global equity markets have traded lower, with the Russian stock market selling down aggressively, as investors sold out of risk assets. “Fixed income markets have not been impacted as much. There is still a lot of uncertainty as to how this conflict will unfold, markets will remain jittery until there is more clarity on how other nations will respond,” Tlhong continued. With so many uncertainties, the local market is already reeling from rising inflation as indicated by the January annual inflation rate hitting a double digit figure after several months of remaining above the central bank’s short to medium term target of three to six percent. The annual inflation rate for January was 10.6 percent, registering an increase of 1.9 percentage points from the December 2021 rate of 8.7 percent and the main contributors were transport, housing, water, electricity, gas and other fuels, food and non- alcoholic beverages and miscellaneous goods and services. Finance and Economic Development Minister, Peggy Serame has also highlighted that opportunities of the economy recovering have been accompanied by rising inflation. She said the 8.7 percent inflation rate in December 2021 was the highest in a decade, explaining that it was driven by higher global fuel prices and administered prices. “Global economic recovery from the COVID- 19 recession in 2020 has caused demand for many goods and services to rise sharply in 2021, pushing up commodity prices and freight costs. As a result, most countries are experiencing higher inflation,” Serame said. She however highlighted that inflation rise is expected to be a short- term phenomenon and should normalise during 2022.
Meanwhile, the central bank’s Monetary Policy Committee ( MPC) has decided to maintain the country’s bank rate at 3.75 percent. “The MPC decided to continue with the accommodative monetary policy stance and maintain the bank rate at 3.75 percent, to continue to support the nascent economic recovery,” Bank of Botswana Governor, Moses Pelaelo said. He said the bank remains ready to respond appropriately as conditions evolve. BoB has projected that the economy will operate below full capacity in the short to medium term, therefore not creating any demand- driven inflationary pressures, going forward. “The projected increase in inflation in the short term is primarily due to transitory supply- side factors that, except for second- round effects and entrenched expectations, do not normally attract monetary policy response,” Pelaelo elaborated. Pelaelo said the MPC applauds the growth- enhancing economic transformation reforms and supportive macroeconomic policies currently being implemented. The policies and reforms include accommodative monetary conditions, improvements in water and electricity supply, reforms to further improve the business environment and government interventions against COVID- 19, including effective vaccination rollout programmes.
“In addition, the successful implementation of the Economic Recovery and Transformation Plan ( ERTP) should help anchor the growth of exports and preserve a sufficient buffer of foreign exchange reserves,” Pelaelo pointed out.