Friday, April 3, 2020

Escalating global tensions won’t spur Botswana’s economy

If the global tensions escalate they may have far reaching implications for the Sub Saharan Africa, Botswana included.

China and United States trade wars have been ongoing for over a year now although the super powers appear to have entered a truce lately.

Earlier this month, the US started another war with Iran. The US drone air strike that recently killed Iran’s second most powerful man, General Qassem Soleimani, the leader of the Iranian Revolutionary Guard’s elite Quds force, unleashed calls for vengeance in Tehran and exacerbated already deteriorating US-Iranian relations. This has since caused a global concern and brought uncertainties.

Looking closely at the macroeconomic standpoint, global growth for 2019 recorded its weakest pace since the global financial crisis a decade ago stemming from common influences across developed countries, according to the October 2019 World Economic Outlook (WEO) report.

Already, the uncertainty brought about by increased trade barriers and geopolitical risks weighed on business sentiment and activity. Some advanced economies, and indeed China, have shown cyclical slowdowns as a result of trade tensions. In the report, the International Monetary Fund (IMF) has yet again revised global growth for 2019 to 3 percent, following a downward trend from 3.8 percent in 2017.

Consumers and businesses are increasingly feeling the impact of these tariffs as they weigh on household spending and investors decisions, exerting downside pressure on growth. In response to slowing growth, global policymakers continue to ease monetary policy, particularly in emerging markets where several central banks have moved to cut interest rates in order to support growth.

Worries about the U.S.-China tariff fight have contributed to heightened volatility in global markets, with investors adjusting their positions in anticipation of the projected slowdown in economic growth and company earnings in the financial year 2020.

Motswedi Securities Senior Researcher, Garry Juma shared with  The Sunday Standard this week that, “oil prices are threatened and this means a possibility of fuel prices hike locally and Botswana’s exports are also coming under pressure. With the declining disposable income, this puts more pressure on the households as well.”

Botswana’s economy continues to show signs of weakness, with the latest Gross Domestic Product (GDP) figures revealing that the diamond dependent economy staggered following slowed growth in key sectors. Statistics Botswana’s recently published data shows that real GDP grew by 3.1 percent in the third quarter of 2019 (Q3 2019), which was a similar rate compared to the second quarter. However, the 3.1 percent annual growth rate is lower than the 4.1 percent rate recorded in 2018’s third quarter. The GDP growth was constrained by both mining and non-mining sectors.

The diamond industry has struggled to maintain resilience in the first three quarters of 2019 following mild growth in the last two years. The global diamond crisis is still caught up in a recession that has its roots in the 2015 downturn and was exacerbated by overproduction of rough diamonds in 2017, leading to higher inventory levels that generated a ripple effect through the supply chain.

The rough diamonds markdown has be a reflection of a number of influences which included amongst others; weak final demand for diamond jewellery in the major markets-the USA and China; overstocking in the midstream diamond cutters and polishers; lack of profitability due to narrow margins between rough and polished prices; lack of bank liquidity in India to finance diamond stocks; and the continued downward pressure on prices of lower-value diamonds due to competition from supplies of lab-grown diamonds.

At the backdrop of this, Juma warned that weaker global economy is bad for diamonds market, adding that what is needed is peace.

Late last year, E-Consult’s owner and chief Economist, Dr Keith Jefferies cautioned that the situation facing the industry also intensifies the fiscal challenges facing government. “Revenues have been in structural decline for several years, relative to GDP, and weak diamond sales will make it difficult to achieve the 2019/20 revenue targets set out in the government budget.”  

Botswana exports mostly diamonds (more than 60 percent of total exports), copper and nickel, beef and textiles. Botswana’s main exports partners are United Kingdom (56 percent of total exports), South Africa, Israel and Belgium. Second to the US, China is Botswana’s second biggest market for its diamond, which is the mainstay of the economy of this landlocked small two million populated country.

Looking regionally, economic ties between China and the African continent have deepened as China’s economy has thrived. China surpassed the United States as Africa’s largest trade partner in 2009. China is a destination for 15 to 16 percent of sub-Saharan Africa’s exports and the source of 14 to 21 percent of the region’s imports, according to estimates from Thomson Reuters and the World Bank.

While the majority of Africa’s exports to China are comprised of mineral fuels, lubricants, and related materials, it also exports iron ore, metals, and other commodities, as well as small amounts of food and agricultural products. China exports a range of machinery, transportation, communications equipment, as well as manufactured goods to African countries.

African economies are slowly recovering from the effects of the 2014–2015 commodity price crunch. These trade wars should be a wakeup call to Africa that the region needs to focus now more than ever on the benefits of greater regional integration.

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