Because of the near-collapse of the diamond trade, Okavango Diamond Company cancelled its November sight sale losing over P140 million, while Debswana revenue fell by a quarter. Botswana exports have seen a 62 percent decline year-on-year, shrinking government revenue in the process. Being a diamond led economy which failed to diversify, the continued downswing could be disastrous, Staff Writers KEABETSWE NEWEL, BOITSHEPO MAJUBE and Correspondent GAOKGAKALA MAENGE trace the latest developments.
Experts say the upheaval in the diamond sector will not only shrink foreign reserves but will also see the entire sector contracting and taking down its mainstream dependents.
One of the latest casualties emerged to be Okavango Diamond Company (ODC), the state owned diamond trading company which cancelled the November auction sale of diamonds because of a diminishing demand.
The company, headed by Tobby Frears, confirmed this week that ODC has been affected like any other diamond seller by the downward pressure on rough diamond prices that the market has witnessed since the fourth quarter of last year.
Public Relations Officer Kutlo Tlhatlhana said ODC took the decision to cancel its November sight sale which was scheduled to take place next week prior to the Diwali holiday in India when little trading takes place. The cancellation of the sale will see ODC missing an opportunity to make on average US$13.7 million (an equivalent of around P150 million) which could have been made in a single auction. During the nine months period to September 2015, ODC sold 1.64 million carats of rough diamonds valued at US$ 303 million (just over P3 billion), a 35 percent decline when compared to sales of the same period last year. During the 2014 period, ODC sold diamonds worth US$463 million (Around P5 billion).
While ODC sales volume continues to tumble, Thathana said that ODC wants to be a regular source of supply for their customers.
“Up until now we have maintained sales throughout the year according to our published sales schedule, albeit at reduced volumes in response to the challenging market conditions. This said, we elected to offer only +10 carats ranges at our latest auction in October, which generated US$13,7 million,” she said.
She said ODC saw healthy trading during the first half of 2014, but have seen a gradual softening of prices since mid-2014 as a result of high inventory levels in the mid-stream and lower than expected retail demand of polished diamonds, principally in China. It appears that ODC might also decide to cancel more sight sales going forward, depending on future prospects in the diamond sector.
“In so far as future sales are concerned, we will continue to monitor and respond to market conditions as appropriate and keep our customers informed accordingly,” Thathana said.
The turbulances in the diamond sector were a result of slowing demand in the United States, China and India, large consumers of Botswana diamonds. Commodity prices at the same time took a nosedive. These market headwinds affected not only ODC but companies like De Beers which slashed diamond prices by over 12 percent, while production was also cut by 32 percent.
Meanwhile, The Business Weekly & Review has established that Majwe Mining’s contract with Jwaneng Mine is coming to an end. It is not clear if the contract will be renewed as Jwaneng Mine spokesperson Montlenyane Baaitse would not respond to an inquiry sent to the mine over a month ago. Majwe Mining spokesperson, Archibald Ngakayagae sent this publication from pillar to post after he was sent a detailed inquiry.
Debswana, it has emerged, is planning to shed most of its contractors and subcontractors because after cutting production by over a quarter, their workload has declined. On a quarter – on – quarter (q/q) basis, production fell by 31 percent. During the quarter two of 2015, Debswana recovered 5.9 million carats, almost 2 million higher than the production recovered during the quarter which followed.
Analysts have said Debswana’s 31 percent decline in production during the 2015 third quarter, with expectations of a continued decline because of softening demand, will lead to a budget deficit in the next fiscal year.
Economists fear that dwindling diamond revenue will lead to subdued domestic output. An analyst at Investec Asset Management, Tshepang Loeto said that diamonds are the backbone of government revenue, followed by tax. “Any significant cut in either of the two means that the budget balances could experience deficits,” he said, suggesting we may see a budget deficit of 4 percent of GDP for this fiscal year.
The Econsult quarter three economic review report stated that Debswana had to respond to weak demand for rough diamonds by cutting production targets, which will in turn feed through to Botswana’s GDP growth.
“Lower exports and government mineral revenues will most likely lead to balance of payments and fiscal deficits in the second half of the year, perhaps extending into 2016,” read the report, adding that with Debswana’s diamond output now projected at 20 million carats for 2015, total diamond production is likely to be more than 10 percent down in 2014.
Exports on a decline, state coffers suffer
University of Botswana economist, Dr. Jonah Tlhalefang said over the years, Botswana has adopted an export-led growth strategy, which saw the country relying predominantly on diamonds. He said the dependence made Botswana particularly vulnerable to price movements in international markets as well as economic headwinds.
Total exports earnings fell 62 percent year-on-year, falling by almost 5 billion from P7.9 billion seen in August 2014 to P3 billion in August 2015, according to the latest Botswana International Merchandise Trade Statistics data. Statistics Botswana explained that this resulted from rough diamonds from the aggregation process not being exported on a monthly basis.
“Values are high during the months when rough diamonds from the aggregation process are exported and are low when there is no significant exportation from the aggregation process,” said the statistics office.
Due to weakened demand for diamonds, sluggish growth of the mining sector has been recorded. As a result, there has been a decline in export revenue and hence the decline in GDP growth. By end of August 2015, Botswana recorded a trade deficit of about P2 billion, with total exports valued at about P3 billion whilst imports were valued at about P5 billion.
Dr. Jonah Tlhalefang said that a decline in diamond revenue translates to a fall in export revenue since diamond exports account for about 80 percent of total exports. He continued to say that if diamond revenue declines, government revenue will decline and other sectors will also be affected through the fiscal linkage. With a decline in government revenue the country is likely to run a deficit.
“The deficit will need to be financed in one of the three ways; borrowing, drawing down the reserves or a combination of the two,” he said. Asked which is the better option, he said it depends on our Debt-GDP ratio, if below the ratio, we can borrow. “Whether to borrow or not depends on interest rates”, he responded.
Further, he said that currently interest rates are low, which means debt servicing will be low, but interest rates are likely to increase which will mean an increase in debt servicing. “If the reserves are chosen to finance the deficit, then it means our debt does not increase but then there is an opportunity cost of the gain that can be accumulated and it will also depend on whether we have sufficient buffer or not,” he explained.
However, Head of Africa Research at Standard Chartered Bank, Razia Khan said that borrowing has its challenges because with the current economic trends, where growth is softening, repayment of loans on the long term might be a challenge, which might affect credit rating going forward. Khan was interviewed in Johannesburg last week on the sidelines of the Ernst & Young Strategic Growth Forum, Africa in Sandton.
On the recent Economic Stimulus Program (ESP) and on whether it is a good idea to draw down reserves when diamond revenue is declining, Dr. Tlhalefang said if the economy is not doing well there are two options; to reduce expenditure or maintain expenditure and one of the main reasons for having reserves is to smoothen consumption in situations like slow growth of GDP. He said the package should address implementation because over the years we have had entities asking for money and under-spending by up to 25 percent.
“There is nothing wrong with under-spending, but that should be as a result of saving,” he commented, emphasizing that saving should be a result, however, of reduced cost of inputs or having completed projects below budget. He further noted that under-spending is problematic if projects are not completed, so implementation capacity should be the main concern of the package.
Botswana drunk with diamond dependency
Despite efforts to diversify the economy, Botswana’s dependency on diamonds is proving detrimental to other sectors. This has led to other sectors contributing less to GDP, and putting Botswana’s economy at risk. Low diamonds prices have not spared Botswana, forcing the country’s leaders to stimulate the economy.
Standard Chartered Bank’s Razia Khan said from a long time back, Botswana adopted a wrong economic strategy. She said the country became comfortable with diamond dependency, and never thought of planning for the future.
“Botswana should have used the diamond revenue which was being stashed in UK and USA as reserves to diversify economy. They should have invested in infrastructure, industrializing Botswana and boosting the manufacturing sector which could now be contributing largely to the economy,” she said.
Khan is corroborated by Dr. Martyn Davies, Managing Director for Emerging Markets & Africa at Deloitte. Speaking at a seminar hosted by Botswana Insurance Holdings Limited (BIHL) in Gaborone, Dr. Davies said “Botswana’s dependency on diamonds has ballooned from 45 percent in 2000 to 84 percent in 2013, which is dangerous.”
He said in 2000, multiple exports commodities contributed immensely to the country’s coffers, but they now have seen their contribution diminishing to lower levels.
“In the year 2000, copper contribution to the economy was 10 percent, but has fallen to 3 percent in 2013. Other commodities such as bovine meat, knitted jerseys, and unclassified transactions contribution have diminished to the lower levels. This is worrying for Botswana,” Dr, Davies, whose role is advising multinational companies on their investment strategies in Africa and other emerging markets, said.
The Economic Stimulus Package (ESP) as an economic diversification tool
During the State of the Nation Address (SONA), President Ian Khama acknowledged that the recently announced stimulus package is targeted at sectors that would help diversify the economy. Khama said Infrastructure, Agriculture, Tourism and Manufacturing and Services are sectors touted to diversify the economy. The ESP will draw down from foreign reserves.
Khan said that economic stimulus is not the answer, although on a short term it would seem efficient. She said Botswana was disadvantaged by a small population and being landlocked. Despite these challenges, she said Botswana continues to have unfriendly immigration laws and a taxing process of work and resident permits which scares away foreign investors.
“Now is the time for Botswana to attract Foreign Direct investment (FDI), by easing doing business at all costs to be competitive enough for investors to overlook other big and attractive economies which offer high returns,” she said.
Responding to the SONA, Leader of Opposition, Duma Boko said “…we are a country that has known fortunes from its diamond mines, some of which fortunes were applied to support our way of life at all levels.” He however warned that these diamond proceeds are no longer bountiful and reliable.
Boko further stated that we either give in to the idea of doing things the way we always did when diamonds were bountiful or we acknowledge we have to do much more than sugar-coat our state of health. “We need to be honest and acknowledge that we need change. We need transformation. We need to transform our economy,” he suggested.