Sunday, September 20, 2020

Botswana – The new bling

Earlier this year, the Financial Times newspaper ran a piece about the
impact of the credit crunch on demand for diamonds, titled ‘austere is
the new bling’. The so-called diamond pipeline is notoriously dependent
on the availability of credit for its functioning. This was one reason
why it proved as susceptible as it did to the credit crunch. In the wake of the Lehman’s bankruptcy, retailers and cutters found themselves with excess inventory, at a time when bank credit was collapsing. Fears over the intensification of the downturn impacted the demand for luxury
items. The price of gem diamonds plummeted.

Botswana, the world’s largest producer of gem diamonds, was of course
caught up in this. In December 2008, the plunge in its key export
forced the closure of the country’s main diamond mines for a period of 4
months. In Q4 2008, the growth rate declined over 6% y/y. The downturn
worsened in Q1 2009, with the mines shut over this entire period. In
the first quarter of this year, Botswana’s economy contracted by 22%
y/y, one of the worst crisis-hit economic contractions in Sub Saharan
Africa.

However, Botswana was fortunate. Years of prudent management of the
economy had resulted in significant savings. Botswana had a high level
of import cover, and was able to run down some of its FX reserves to see
it through the crisis. Given its credit history, lending from multilateral agencies was at least available to it, allowing it to maintain spending on key infrastructure projects. Botswana also saw opportunity in the crisis, issuing longer-term debt to accommodate its
higher borrowing requirement – something the country’s pension funds had long wished for. Despite the severity of the crisis in mining, the
non-mining economy grew at a healthy pace – almost double-digits in Q1
09, helped by significant levels of government expenditure.

Eventually however, demand for diamonds was to recover. By April, the
green shoots of recovery were seen, led by confidence in Asia.
Botswana’s mines resumed production, although even today, they are
producing at only 80% of their capacity. Growth in the second quarter
of 2009 posted a massive 24.9% q/q surge, driven by the upturn in
mining. Q2 09 diamond exports were not far off from the levels seen in
Q2 2007, although of course, they failed to compensate in any meaningful
way for the lost quarter.

Where does the economy go from here? In many respects, the uncertainty
that still clouds the global recovery picture matters for Botswana too.
Since April, financial markets around the world have rallied, reflecting
massive amounts of liquidity on the sidelines, if not exactly confidence
in a robust and lasting economic recovery. Diamond markets have also
picked up, helped by the improved availability of credit. But just as
there are doubts about financial market performance should some of the
liquidity be removed (the so-called exit strategies from quantitative
easing), there are also doubts about to what to make of the recovery in
demand for diamonds. Is it driven by improvement in final retail
demand, or does it merely reflect restocking now that credit is more
readily-available? It is telling that initial data for Q3 2009 suggests
that diamond exports may have been a touch lower than in Q2 2009. Also,
as President Khama highlighted in Friday’s State of the Nation Address,
even though growth may now be bouncing back, diamond prices – and
government revenue – remain subdued. With Botswana likely to run a
fiscal deficit of at least 14% of GDP this year, there is still a need
for rebalancing.

What about the domestic economy? Although Standard Chartered recently
upgraded its full year forecast for Botswana’s growth in 2009, from a
contraction of 6.4% to a somewhat shallower downturn of 4.2%, on
account of the improving external picture, concerns about the lagged
impact of the crisis on the domestic economy remain in place. Despite
450 bps of easing since the start of the recent cycle, rates of private
sector credit growth to both corporates and households have tapered off.
There is evidence that faced with the uncertainty associated with the
downturn, banks have been tightening lending standards. For an economy
as credit-fuelled as Botswana’s, this may have growth implications
further down the line. Data on aggregate household (i.e. non-corporate)
deposits at commercial banks, also shows a slight dip – evidence perhaps
that households have been eating into their savings, as the rollover of
credit becomes more difficult. Finally, rising rates of delinquencies
are seen, with recent arrears (30-89 days) rising for both corporate and
personal lending.

Of course, nothing is a given – and policy action aimed at averting a
deeper slowdown may still be likely. While the recent State of the
Nation address stressed the need to ensure that future spending must be
below income, it also emphasised the need for ‘delivery’ and announced a
host of pro-poor measures, including supplementary income support. More
spending should not be ruled out. But Botswana’s experience during the
crisis demonstrated the dangers of overreliance on too narrow an
economic base. Spending in order to diversify the economy is likely to
be the key theme in the future. If it is labour-intensive, helping to
reduce the rate of unemployment, all the better.

Razia Khan is Regional Head of Research, Africa
Standard Chartered Bank

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Sunday Standard September 20 – 26

Digital copy of Sunday Standard issue of September 20 - 26, 2020.