Sunday, May 29, 2022

The collapse of Eurozone may hurt Botswana

Bank of Botswana (BoB) is reluctant to say what contingency measures are in place to cushion Botswana’s economy from tumbling amid fears of another global financial meltdown as a result of the possible collapse of the Eurozone next year.

The bank’s spokesman, Andrew Sesinyi, told the Sunday Standard that there are “considerations that may not permit immediate response”.

“With the Annual Report publication due soon and the accompanying economic briefings, including cabinet briefings, I think the Bank is likely to avoid pre-empting such briefings. Your questions may hence be covered in the forthcoming briefings and it would be somewhat inappropriate to pre-empt such occasions,” said Sesinyi.

Local commercial banks would also not want to be drawn into discussing whether there would be ripple effects that the country may suffer as a result of Botswana’s diamond market’s reliance on the European and the United States markets.

Policymakers and firms across Europe were last week making preparations to cope with a break-up of the single currency, with the president of the Swiss central bank becoming the latest senior figure to admit to contingency plans for a “collapse” of the eurozone, according the United Kingdom media.
The British media further reported that Bank of England is poised to cut interest rates or launch another round of quantitative easing if the euro collapses.

Switzerland has already taken an economic hit from appreciation of the Swiss franc over the past year. Last September, the SNB put a cap on the currency’s value against the euro to protect exports.
Sterling has also appreciated considerably since the beginning of the year as market fears over the future of the single currency have increased. Bank of England Governor, Sir Mervyn King, said this month that the Bank was preparing contingency plans to cope with a potential major economic shock to the UK economy emanating from the eurozone.

It is not just eurozone officials who are making emergency preparations. The chief executive of Lloyd’s of London, Richard Ward, according to press reports has said the insurance market was also developing contingency plans. “I don’t think that if Greece exited the euro it would lead to the collapse of the eurozone, but what we need to do is prepare for that eventuality,” Mr Ward told Britain’s The Sunday Telegraph. “We would switch to multi-currency settlement if the Greeks abandoned the euro and started using the drachma again.”

Local economic analyst Dr. Keith Jefferis offers that there should not be panic over what is happening in the Eurozone at least at the moment.

“The collapse of the Eurozone is not a very likely development at this stage. It is more likely that Greece will have to leave the Eurozone, but this does not mean that the Eurozone will collapse. Nevertheless, there is a lot of uncertainty about how events will develop if Greece does leave, because the current set of circumstances is not one that has ever been experienced before,” Jefferis says.

Jefferis says while many countries and financial institutions have undoubtedly made preparations for a Greek exit, and have already taken precautions to manage their losses, the main issue of concern relates to whether other countries (such as Spain) will prove vulnerable to similar pressures, which would be much more difficult to deal with.

“However, there is a very high level of determination amongst Eurozone policymakers and the ECB to make sure that the Eurozone survives, and to take whatever action is necessary to achieve this,” says Jefferis.

Jefferis however, admits that there are main risks faced by Botswana. Those main risks he says are a slowdown in the global economy as a result of increasing levels of risk and uncertainty and risks to the value of holdings of Eurozone assets, which may fall in value as the euro weakens and the euro-zone economy enters recession.

“With regard to managing, if the global growth slowdown that is already under way turns into a full-scale global recession, our diamond exports will be affected. In response we would need to be very cautious with our spending, particularly government spending, given that our ability to run large budget deficits as we did during the last global recession is now more limited, as accumulated savings have been depleted and government has borrowed heavily. So there would be a negative impact,” cautions Jefferis.

The economist says this means divesting out of euro and euro-zone assets to the extent that these form part of Botswana’s foreign exchange reserves.

“Action to achieve this would form part of the normal process of foreign reserve management undertaken by the BoB, with asset composition being adjusted in response to changing circumstances and risks,” says.

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