Wednesday, January 26, 2022

Botswana faces fragile economic recovery ÔÇô Matambo

Botswana, which suffered a heavy battering from the past global economic recession, is facing a fragile economic recovery, the Minister of Finance and Development Planning, Kenneth Matambo, has said.

Speaking to The Sunday Standard upon his return from the International Monetary Fund and World Bank meetings, the finance minister said developments in the euro zone called for caution as fears for a double deep recession deepened.

The minister was expected to brief President Ian Khama on the global economic outlook, which will obviously have implications for the domestic economy given that the country is heavily dependent on revenues accruing from the exports of minerals, particularly diamonds.

“The level of the global economy is still recovering although fragile on the back of what is happening in the Euro Zone. There is fear of a double-deep recession. Things are just woolly. It is not clear whether the world economy is headed for another recession or not. As for Botswana, we will be affected if there is a recession. We will have to continue to be cautious,” said Matambo.

The minister, however, pointed out that while there were fears of a double deep recession, the sale of Botswana’s diamonds sales were doing well.

According to figures released by the Bank of Botswana, Botswana exported US$594.3 million worth of polished and rough diamonds in July 2011, shooting 371.3 percent year-on-year.

The high exports were a continuation of a trend since the beginning of the year as demand for diamonds soared compared to the previous year.

Month-on-month, exports declined by 11.4 percent though in June were unusually high reaching a record $670.8 million in diamond exports.

The country’s economy grew by 9.6 percent in the second quarter of 2011 compared to a 2.2 percent contraction in the first quarter, mainly due to increases in the construction and mining sectors.

On a year-on-year basis, gross domestic product expanded by 12.4 percent in the second quarter, after growing by 6.5 percent in the first quarter.

Although Matambo did not discuss the full details of what transpired at the Bretton Wood Institutions pending the presidential briefing, fears abound that if the world economy plunged into another recession the country would be hard hit and its efforts to balance the budget by the 2012/13 financial year derailed.

Meanwhile, the director of Investec Asset Management, Jeremy Gardiner, has warned the euro zone against throwing good money after bad money in its numerous bailout programme across Europe noting that the problem with Europe is that while they shared a common currency, unlike the US they do not share the same fiscal union.

So while investors in US bonds can rely on the fact that surplus taxes from Texas will be used to fund California and New York, investors in Greek bonds have no such comfort and have to rely on the welfare of countries such as Germany for survival.

He explained that for too long bailouts have been about plugging the immediate capital needs of the various countries in trouble, while they in turn agreed to cut spending and raised taxes by as much as they could get away with without antagonising protestors too much or destroying their economic growth.

“It’s a fine line, and too much austerity medicine too quickly runs the risk of pushing economies back into recession, which will result in taxes falling and austerity becoming even harder to implement. Solutions thus far have been designed to try and plug the hole without anyone having to compromise their lifestyles too much,” said Gardiner.

“Sadly, however, debt is debt and adding more debt to existing debt is not going to remove debt and fix problems unless people in the affected countries significantly change their “siesta” lifestyles. The problem is that those whose behaviour most needs to change are the most reluctant to do so.”

Effectively, everyone has been in denial as to the gravity of the situation and this worries markets. While there has been much discussion about the European Debt Crisis there has been very little action and until there is clear evidence that banks are going to be recapitalised and the European Financial Stability Facility is worth trillions and not millions of Euros, things are going to remain bumpy.

Denial appeared finally to make way for reality last weekend when finance ministers largely accepted that Greece is going to default. This means investors in Greek debt stand to lose between 20 percent and 50 percent of their investment.

This could be just the shock that the Europeans need to finally get some action going. Up until now they have been indulging themselves in intellectual economic hypothesising while the situation got worse, and markets have finally had enough. While default will reduce Greece’s debt burden it is going to make it very difficult for them to borrow again in the future (just ask Argentina, which defaulted in 1999 and still struggles to raise capital in the open market).

China, on the other hand, is sitting on over $3 trillion of hard-earned reserves, earned as a result of exporting far more than they have been consuming. Whilst they are understandably reluctant to get involved, they may have to, as the EU is their biggest trade partner, and if the EU were to collapse and stop buying Chinese goods, the Chinese economy would suffer.

The recent downturn in markets is their way of signalling further weakness ahead. The global economy is slowing; there are significant fundamental issues that need to be resolved; interest rates are at all-time lows; central bank cash is running out, and the ability to stimulate is limited.

“We may well see a double-dip recession in several developed market countries going forward. At this stage, it shouldn’t be as severe as the credit crisis of 2008, however if the European economies start defaulting in quick succession, anything is possible.

So, while the problems in the Euro zone are far from over, finally reality seems to be dawning and plans are being put in place. Let’s hope they work because a world of European countries defaulting like dominoes, followed by a European banking collapse and recession destabilising the entire global financial system, including China’s growth, is a world too scary even to contemplate. President Obama was right when he said “the Euro zone is scaring the world,” said Gardiner.

RELATED STORIES

Read this week's paper