The road to diversification is paved with pain. Forecasts of another world financial crisis, possibly worse than the last, are gaining traction. In Gaborone, economic planners are wringing their hands. This time, as last time, the worry is that the economy has neither deepened nor diversified enough to weather another hit. ‘Diamonds are forever ÔÇô but diamond buyers are fickle’. The statement sums up the perennial challenge of an economy that rests on the bedrock of diamonds.
Witness the scenes of woe for Botswana’s economy last time around, when the US housing bubble burst, dragging the entire world into a crisis that had echoes of the 1930’s depression.
The global slump slashed jewellery demand, the slowdown forcing even the wealthiest shoppers to spend less. Signet Jewellers Limited ÔÇô the world’s largest jewellery-store owner ÔÇô reported losses as sales wilted. Debswana temporarily closed its mines because of weaker demand. “If the past is any indicator of what is to be expected in another crisis, then Botswana will be in serious trouble again,” say economists.
As dark clouds hovered over the world’s economy, Botswana’s diamond sales closed 2011 on a decidedly shaky note. Sales had sharply dropped by nearly 65 percent from August and September. In November and December, they dropped to $184 million and $160 million respectively from a high of $594 million in July.
Minister of Finance and Development Planning, Kenneth Matambo, said there was no guarantee of a reversal in the trend soon unless the economies of the USA and Europe improves.
“In the USA for example, there are already signs that the economy is entering another recession with the GDP currently showing an expansion of only 1.3 per cent and consumer spending up by 0.1 percent in the second quarter of 2011,” Matambo told reporters, adding that the US had revised its growth forecasts for 2011 from the initial 6.8 percent to 5.7 percent. “We are keeping our fingers crossed so that this does not become worse. Although there have been indications of economic recovery, falling into double dip recession is still realistic.”
However, the US economy looks likely to grow faster this year, as long as it is not impacted by Europe’s sovereign debt crisis. Leading US economists predict a growth of 2.4 percent in 2012. But Europe remains a risk, with its debt crisis potentially triggering a worldwide credit freeze like the one that hit Wall Street in late 2008. The economists believe the European economy will decline by 0.5 percent in 2011 and fall into a recession as countries with large-scale debts scale down spending banks reduce lending.
“You have to remember two things ÔÇô election in America in November, so you are going to see a lot of good news. Of course, you have the American government spending staggering amounts of money right now, printing a lot of money and getting ready for an election,” investing guru Jim Rogers told The Economic Times, an Indian English-language newspaper.
For Botswana, falling demand for diamonds will hit the economy particularly hard, given that the country’s four largest diamond mines account for about 70 percent of the country’s exports and 30 percent of gross domestic product (GDP). Economists will not easily forget how diamond exports plunged by close to 90 percent between August and November of 2008. At the start of the crisis, very few would have predicted Botswana’s delicate situation, given that only seven months before, the economy was flourishing, the country struggling to meet the huge demand for diamonds. “When this crisis started, we thought it was only the financial sector that would be impacted,” said Nchidzi Mmolawa ÔÇô director of mineral affairs at the Ministry of Minerals, Energy and Water Affairs. “I don’t think anyone expected it would hit the mining sector as much as it did.”
With another crisis lurking, it is little wonder Matambo and his team are worried. The global warning signs are there for a repeat of 2008, with a growing number of prominent voices in the financial world issuing a warning. In a startling recent report, the World Bank revised world growth estimates for 2012 sharply downward, warning that Europe was on the brink of a devastating financial crisis, that the rest of the world better “prepare for the worst”.
Andrew Burns, lead author of the report, said if the sovereign debt crisis gets even worse, the world faces an economic crisis that could even be worse that the last one. “An escalation of the crisis would spare no one. Developed and developing- country growth rates could fall by as much or more than in 2008/9.”
It is not just the World Bank making this sombre warning. “The fundamental outlook is even worse now than it was a few weeks ago, given (the lack of positive) developments in Europe and growing evidence that the economies of major countries around the world are deteriorating fast,” notes Michael Panzer of Financial Armageddon.
Originally, it was hoped that economic problems in Europe could be contained to just a few countries. But this looks like it will not happen. Trends forecaster Gerald Celente recently explained to ABC Australia that much of Europe is already essentially experiencing an economic depression. “If you live in Greece, you’re in a depression; if you live in Spain, you’re in a depression; if you live in Portugal or Ireland, you’re in a depression,” Celente said. “If you live in Lithuania, you’re running to the bank to get your money out of the bank as the bank runs go on. It’s a depression. Hungary, there’s a depression, and much of Eastern Europe, Romania, Bulgaria.”
The troubling news from Europe is coming in waves. For example, manufacturing activity in the euro zone has fallen for five months in a row. Germany’s economy contracted during the fourth quarter of 2011. Bad loans in Spain recently hit a 17-year high and the unemployment rate is at a 15-year high. Eventually, Europe’s ills will spread to the USA, whose debt problem has worsened since the last crisis.
Among the biggest worries is that a major country such as Italy will default on its debt. That could spark a credit crunch like the one that followed the 2008 failure of Lehman Bros.
So what will happen to Botswana if, as predicted, the malaise grows and further hits diamond sales? As happened during the last crisis, expect a deteriorating fiscal deficit, with reserves likely to erode. In his December briefing to journalists, Minister of Finance and Development Planning, Kenneth Matambo said reduced spending and increased efficiency in delivery of goods and services should be intensified. Also, some development projects might be deferred until the economy is fully recovered.
