- Gloomy diamond demand cloud hope for ambitious ODC
A new report on Botswana’s economy makes a grim reading, highlighting the uncertain future, likely brought by a depressed diamond market.
Econsult, a heavyweight economic think tank forecasts in its Q3 report lower growth in the fourth quarter of 2023 (Q4 2023) and in 2024 because of a depressed global diamond market.
Econsult economists, Keith Jefferis and Sethunya Kegakgametse see no immediate negative economic impact but said a depressed state of the global diamond market will have adverse impact on growth, exports and government revenue.
However, Econsult observed that the gloom has not yet fed through to diamond mining which, surprisingly, was up 7.1 percent in the 12 months to June 2023.
“This may just be the calm before the storm, however,” Econsult said in its report.
Diamond sales through DBGSS are down 31 percent over the first eight sales cycles of 2023 compared to the same period last year, and Okavango Diamond Company is experiencing similar pressures. Jefferis and Kegakgametse say it will not be possible to continue expanding mining with sales contracting, as the required stockpiling becomes increasingly expensive.
The global diamond market has been buffeted by multiple adverse factors during the year. Restrained consumer demand in the US, notwithstanding some resilience in the US economy, has been one factor, compounded by weak post-COVID recovery in China. Jefferis and Kegakgametse say recent demand may have been impacted by a sharp increase in diamond prices in 2022 when demand was strong, but the industry is now paying the price.
“Synthetic diamonds are taking increasing market share, at much lower prices than natural diamonds,” said the report.
With slowing demand, Econsult said downstream participants in the diamond value chain have cut back on purchases as their stocks have risen, impacting rough diamond demand.
As a result, De Beers has announced that sightholders would be permitted to defer up to 100 percent of their contracted purchases for the remainder of 2023 while Okavango Diamond Company (ODC) cancelled its planned November auction.
The IMF released its new World Economic Outlook (WEO) in early October, just after the end of the quarter. The IMF predicts a slowdown in global growth to 3.0 percent in 2023, down from 3.5 percent in 2022. Growth is projected to fall slightly further, to 2.9 percent, in 2024. Current and projected global GDP growth rates remain well below historical averages. The IMF notes that three factors are driving the slowdown in growth. One is the tailing off of the post-COVID economic recovery, particularly following the very strong 2022 recovery in travel and tourism.
The second is the consequence of the tighter monetary policy implemented in most countries to bring inflation down, with the tightening of credit conditions impacting aggregate demand. Third, the impact of the commodity price shock following Russia’s invasion of Ukraine persists, notably through higher energy prices, reducing real incomes in energy-importing countries and of consumers generally.
To what extent have these factors had an impact on Botswana?
“Certainly economic growth is tailing off, with annual GDP growth down to 5.0 percent in Q2 2023, with a projected further decline to 3.8 percent for the year as a whole,” Jefferis and Kegakgametse wrote.
However, they say the slowdown appears to be having a greater impact on sectors that have a domestic focus (such as agriculture, food manufacturing, wholesale and retail, and other domestic services).
“The main outward-facing sector that has experienced a severe slowdown is diamond trading,” the two economists said.
With regard to monetary policy tightening, the two economists highlighted that the country is feeling the impact of global developments, but there has been no real domestic impact given that the Bank of Botswana has hardly tightened monetary policy while many other central banks have raised policy rates significantly.
“But Botswana has felt the impact of higher energy prices, which remain elevated despite some easing earlier in 2023, and there has been a squeeze on real incomes and living standards as a result,” said Econsult.
After the sharp drop in inflation from its peak of 14.6 percent in August 2022 to 1.2 percent a year later, Jefferis and Kegakgametse said the increase to 3.2 percent in September was not unexpected. Fuel prices have been the main driver of changes in inflation over the past two years, in part because international oil prices have been so volatile, combined with their very high weight in the Botswana Consumer Price Index (CPI) basket. After the upsurge in oil prices caused by Russia’s invasion of Ukraine, to over US$110 per barrel in June 2022, the economists indicate that prices fell to just over $70 a barrel in March this year.
“The decline enabled pump prices to be reduced, leading to the dramatic fall inflation as the previous year’s increases dropped out of the annual inflation calculation,” said Econsult report.
In recent months, however, Jefferis and Kegakgametse noted the deliberate actions by OPEC+ member states to restrict production and supply have pushed prices back over $90 per barrel, “a selfish move seemingly calculated to put further pressure on households across the world who have already been badly impacted by the cost-of-living crisis”.
In Botswana, regulated pump prices – which are determined under a highly politicised adjustment mechanism – have lagged the increase in global prices. For instance, the two say the price increase in late October came about a month after the relevant increases in global prices. Following this increase, they expect inflation to continue to rise through to the end of 2023 and into 2024 when it is likely to temporarily go above the upper end of the BoB’s 3-6 percent inflation objective range. “This means that there is unlikely to be any reduction in the BoB’s monetary policy rate (MoPR) in the near future.”
Jefferis and Kegakgametse said the likelihood that inflation will rise in the coming months means that domestic interest rates are likely to be maintained – at levels that are low by international standards – for the foreseeable future. “Projections of adverse climatic conditions in the coming months – with forecasts of higher temperatures and lower rainfall – are likely to have a negative impact on agriculture, water supplies and tourism, and illustrate the longer-term challenges posed by global climate change,” the economists at Econsult noted.
Fortunately, the said, Botswana’s critical financial buffers – in the form of the Government Investment Account at the BoB and the foreign exchange reserves – have been rising, assisting the ability of the economy to withstand possible shocks, at least in the short term.