- Fitch says slow progress in diversifying industries poses risks to social stability
- May weaken electoral support for ruling party in future elections
- Botswana occupies a lofty position in the RMB’s political stability rankings
A report by Fitch Solutions has warned that the slow progress in diversifying industries beyond diamond mining could pose risks to social stability in Botswana and may weaken electoral support for the Botswana Democratic Party (BDP) in future elections.
Botswana occupies a lofty position in the RMB’s political stability rankings, which attributes this to the country’s strong tradition of free elections and political cohesion. According to RMB, Botswana is a model of stability that many African nations admire. The ruling BDP, led by President Mokgweetsi Masisi, is widely expected to retain control and maintain its large parliamentary majority. President Masisi has declared October 30th as the national election day, following the dissolution of parliament earlier this week.
However, RMB has noted that while Botswana’s political stability is commendable, it has not translated into a robust import sector, where the country ranks last. The economy remains heavily reliant on diamonds as a primary source of revenue.
In its report on the country’s infrastructure, Fitch noted that Botswana is a small, open economy that is heavily affected by external shocks, such as price rises related to the Russia – Ukraine conflict.
Three-quarters of the SADC member’s exports are diamonds and nearly one-third of this volume is destined for the UAE, and another one-fifth for Belgium, according to RMB, which said for a small, open nation, this leaves Botswana’s economic fortunes largely in the hands of forces outside its control.
The diamond market has been under significant pressure due to competition from synthetic lab-grown diamonds (LGDs), reduced demand in China, and the effects of sanctions imposed by G7 countries on Russian diamonds. Debswana sales have plunged in the first half of 2024. As of September 1, 2024, the G7 has expanded import restrictions to include diamonds of 0.5 carats and above. Miners will now need to provide evidence of diamond provenance as the size threshold for these restrictions has been reduced from 1 carat.
While the diamond malaise is expected to continue Fitch noted Botswana’s administration’s aim to expand the country’s diamond-processing capacity. Under its new deal with the government of Botswana, De Beers will be expected to set up a jewellery manufacturing facility, a vocational training institute and grading labs and to establish diamond entrepreneurship and talent programmes. Minerals Minister Lefoko Moagi previously said there are 350 skills set for immediate attention in areas that include pricing, valuation, grading and marketing.
“All of these things talk to the skills we need to impart on Batswana so that they grow beyond being just workers,” said the minister.
Fitch expects the expansion of diamond processing capacity will provide upsides for industrial construction. RMB believes the diamond deposits and political stability contribute to a major attraction of Botswana in the form of a high GDP per capita although this cannot be viewed without the context of high inequality and unemployment.
“Over the long term growth in Botswana’s construction industry will average 3.5% a year, to reach an industry value of P64.0 billion (USD4.3 billion) in 2033,” Fitch said.
This growth is supported by government investment in infrastructure development, Botswana’s reputation as a business-friendly investment destination, and its emergence as a major transportation hub for the Southern African North-South Corridor.
RMB said the landlocked nation has a small domestic market and relies on its southern neighbour South Africa for imports of electricity and petroleum. “This has not been a problem during spells where South Africa has been stable and growing,” RMB said noting that South Africa has entered a period of deep structural challenges, including an inability to produce sufficient electricity for its own needs, stagnant growth, deteriorating infrastructure and political schism.
Fitch adds: For Botswana’s power authorities, reducing the country’s reliance on electricity imports from South Africa is a key goal.
“Operational issues at South Africa’s state-owned utility Eskom have seen the company struggle to provide adequate supply to meet domestic demand, with a knock-on impact on Botswana.”
According to the research firm, the Morupule A and B power plants account for approximately 80 percent of Botswana’s power output. The 600MW Morupule B plant, commissioned by China National Electric Engineering (a sister company of China Machinery Engineering Corporation) in 2012, has faced technical faults and breakdowns that have significantly reduced its output over the years. Remedial work began in June 2019, but completing the project to restore all four units to full functionality has been delayed. Meanwhile, work on Morupule A has been completed, returning its operational capacity to 100MW.
While the government has been seeking to increase its coal-fired capacity to meet the demands of industry, particularly mining, and those of its growing urban population, Fitch observed that the process has been hindered by contractual disputes.
Fitch forecasts that Botswana’s power supply will come almost exclusively from coal-fired power plants over the next decade.
“The gradual commissioning of other coal projects and increasing coal-mining activities, which will produce more reliable feedstock for the country’s power sector, will ensure that coal remains the dominant source of electricity generation over the next decade.”
RMB said investors will do well to monitor Botswana’s capacity to limit reliance on a troubled South Africa and diversify its export basket away from diamonds – ideally to products with greater complexity, such as industrial machinery and iron and steel products.
A current national priority is to foster growth through increased exports. Over the years, policies have evolved as the government has tackled significant challenges. This issue is typical for countries rich in mineral resources, which often struggle with over-reliance on a single resource for economic stability. Various studies and theories have been proposed to explain the difficulties mineral-rich economies face in diversifying beyond their primary resource.
One notable perspective comes from Ricardo Hausmann and his team at the Harvard Kennedy School, who developed the Atlas of Economic Complexity. This tool is designed to evaluate the level of productive knowledge within countries and to identify how they can enhance this knowledge by producing more complex goods.
According to their theory, as economies develop and evolve, they shift from one area of competitive advantage to another that is closely related. For instance, Israel transitioned from exporting oranges to focusing on IPOs of high-tech firms, while Turkey moved from exporting olive oil to producing and exporting cars and electronics.
The explanation is that these economies are able to acquire new productive capabilities, knowledge, and technologies that enable them to engage in more diverse and valuable activities.
In other words, their competitive advantage in certain industries equips them to transition smoothly into new and closer sectors.
It’s easier to transition from textiles to garments and then to electronics because these sectors are closely related. The shift is more seamless compared to moving from mineral extraction or diamond mining to manufacturing cars. The knowledge and experience gained in one sector are less transferable to another when there’s a significant gap between them.
For countries rich in minerals, the industries where they currently excel or have a competitive advantage don’t easily translate to other sectors.
