Sunday, May 29, 2022

Botswana wary of economic developments in America, Euro zone

Botswana is worried if that the debt problems engulfing the United States of America and the Euro Zone are not solved expeditiously, they pose a potential danger to Botswana’s economic recovery in the aftermath of the global economic recession.

The Minister of Finance and Development Planning Kenneth Matambo told Sunday Standard America is a big market for Botswana diamonds and if it is besieged by economic problems, “our economy will definitely be affected”.

“If they have problems, it will affect us. We are keeping our fingers crossed that they do not default on their debt obligations because that would cause another financial crisis. If they default, they will not be able to borrow and buy our diamonds”, said Matambo adding that economic stability is needed in those countries.

America has up to August 2 to meet its debt obligations and its failure to do so might affect the world economy as the country is the biggest world economy.

As for the Euro zone, especially the debt crisis in Greece, Matambo said their problems are a good lesson for Botswana in that it teaches the country on the need to suppress borrowing lest it is engulfed in a debt crisis.

The debt crisis in Greece has resulted in national riots that are unprecedented.

“We are definitely apprehensive because the west and the euro zone are a major market. We are seeing slow economic recovery which should not be distracted. We do not want to experience another financial crisis and no country would want to experience that especially that economic recovery has been very slow,” said the finance minister.

Unlike Matambo, economic expert, Dr Keith Jefferis is confident that the American debt problem will be resolved in the short term.

“I don’t think they will default. They still have the August 2 deadline,” said Jefferis adding that the main problem is that “America’s debt level is too high and their budget deficit too large.”
He said in that economic situation, it would be difficult for the world’s biggest economy to attain a sustainable budget because the American politicians are not very good at making the necessary compromises.

“I am confident they won’t default. The probability of default is very small. Their problem is long term budget sustainability. The other thing is that their (America’s) credit rating of AAA may be downgraded even if they do not default. That would be traumatic for the US because the current assumption is that their government bonds and treasury bills are risk free and that is connected to dollar as the world’s reserve currency”, said Jefferis.

He explained that if America’s credit rating is downgraded, that would undermine their currency (the dollar).

Although Jefferis is not as worried as Matambo, he quickly admits that if anything that is not expected happens, it would affect Botswana’s foreign exchange reserves because the value of the US government bonds would fall.

“It would not be a huge impact. But the effect would also be felt by the pension funds. As for Europe or the euro zone the problem is the interaction of debt problems in countries like Greece, Portugal, Ireland and Spain with the single/common currency (Euro). If they didn’t have a single currency then Greece’s debt crisis would not be a big problem because it’s a small economy,” said Jefferis.

He noted that the problem calls for concern for the euro zone because they have not found a way of managing debt problems in the context of the common currency.

“It is possible that if Greece defaults on its debts, that would cause problems for the European banking system and the single currency. While it does not cause direct problems for Botswana, it (euro zone) is the second biggest economy in the world. Any major developments there inevitably have a global impact,” concluded Jefferis.

Secretary for Economic Affairs in the Ministry of Finance Dr Taufila Nyamadzabo noted earlier this year following the delivery of the budget speech that the impact of reduced growth in the euro zone is that the area is highly integrated with the global economy through exchange of goods and services in the international trade markets.

“The euro financial markets are also more developed and integrated with both the developed and developing countries. In this connection, the reduced growth in the euro zone means that there is reduced demand for goods and services from other countries including developing countries such as Botswana,” said Dr Nyamadzabo.

Botswana sells beef, diamonds and copper at high prices to countries that are members of the European Union.

“The reduced growth in the euro areas means that those business people importing our products have less income at their disposal and hence their purchasing power is reduced. Alternatively, Botswana could look for other lucrative markets which is not an easy thing to do. Hence reduced growth in the euro area would result in Botswana losing out in terms of revenue from mining and beef products,” said Nyamadzabo.

The European Union supports Botswana in terms of development aid as well as through the European Development Fund. Such programmes may be reduced or stopped if reduced growth persists in the euro area.

At the time of going to press Bank of Botswana had not yet responded to this newspapers enquiry on the likely impact on the country’ foreign exchange reserves and the economy in general.

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