• Government revenue under pressure • Reserves to stagnate
• Diamond production expected to fall again
Debswana production took a 31 percent knock during the third quarter of 2015. This, according economists, will lead to a budget deficit in the next fiscal year and a marked reduction in government revenue. Consequently, the economists have opined, growth in domestic output will be subdued, projecting Gross Domestic Product (GDP) growth at two percent, while some put it at a deplorable one percent.
Motswedi Securities Head Researcher, Garry Juma said the fall in production is not good for the country’s revenue income emphasizing that the country’s economy is dependent on diamond revenues, and a cut in Debswana production would lead to declining revenues. “There were going to be many repercussions, but government has been proactive with the announcement of the stimulus package,” cited Juma, adding that without the stimulus package it was going to be very tough.
Juma is corroborated by Tshepang Loeto, an analyst at Investec Asset Management, who said that diamonds are the backbone of government revenue, followed by tax. “So, any significant cut in either of the two means that the budget balances could experience deficits,” he said, projecting a budget deficit equal to 4 percent of GDP for the current fiscal year. Sadly, Loeto also foresees a reduction in Southern African Customs Union (SACU) revenue as a result of reduced trade.
While Juma is excited that government will stimulate the economy by drawing down from the reserves, Loeto is apprehensive drawing from the reserves at a time when their main source of replenishment, diamond revenue, is on a decline could spell doom for the economy. He projected a two percent economic growth for the next fiscal year.
Econsult quarter three economic review report states 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. The report, compiled by Dr Keith Jefferis, Brandon Basele, and Sethunya Sejoe, noted; “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.” The trio said that with Debswana’s diamond output now projected at 20 million carats for 2015, total diamond production is likely to drop 10 percent when compared to 2014 production figures.
“As a result, our revised forecast for real GDP growth for 2015 is now only 1 percent, lower than the revised projection of 2.6 percent released by the Ministry of Finance and Development Planning in its Budget Strategy Paper in September,” the trio projected.
The analysts commented after Anglo American announced that Debswana suffered a 35 percent decline in production year – on – year (y/y). Debswana, a joint venture between Botswana government and De Beers recorded just over 4 million carats in recovered diamonds for the 2015 q3, a 35 percent tumble as compared to the 6.2 million carats recorded during the 2014 q3.
At Debswana, the y/y production decreased as a result of planned maintenance being prioritised in light of current trading conditions at both Jwaneng and Orapa, whilst at Jwaneng there was also a focus on waste mining and the processing of lower grade material. 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 three of 2015.
This was on the backdrop of De Beers’ decision to cut production in all their operations because of the depressed demand and dwindling commodity prices globally.
At De Beers Group level, diamond production decreased by 27 percent to 6.0 million carats, following the decision to reduce production to better reflect current trading conditions..
According to Anglo American third quarter production report, all Debswana mines production took a knock, with Damtshaa mine leading with a 46 percent decline. Compared to 83, 000 carats the mine produced in 2014, Damtshaa mine only produced 45, 000 carats this year. Debswana’s largest diamond mine by value, Jwaneng also took a knock producing 1,936,000 compared to 3,333,000 during the same period in 2014. Orapa mine followed suit producing 1,959 million carats in this reporting period compared to 2, 651 million in the previous reporting period. Letlhakane Mine also recorded 15 percent less carats, producing 134 million carats compared to 157 million carats recorded previously in 2014.
Meanwhile reports have surfaced from international media that Anglo American Plc cut its production target for diamonds for the third time this year as demand for the precious stones continued to soften. Full-year diamond output at its De Beers unit will be 29 million carats from an earlier target of 29 million to 31 million carats. According to the Bloomberg report, De Beers had initially sought to produce as many as 34 million carats this year.