Saturday, July 2, 2022

The financial crisis hits Botswana where it hurts most

A local brokerage firm, Motswedi Securities, has warned of a full-blown impact of the global financial crisis on the country’s foreign exchange reserves, pension funds and the mining sector as the crisis deepens across the world.

In its review for the year 2008, the firm said “there is no doubt that the global financial crisis” has impacted on the three aforementioned areas but added that the local banking sector still remains sound due to adequate capitalization and prudent monitoring from the regulators.

“There is no doubt that the global financial crisis has negatively impacted on the country’s foreign exchange reserves and, to some extent, on an offshore holdings of pension funds as most of these funds include investment in global stock markets, which have fallen sharply,” a researcher at Motswedi Securities, Garry Juma, said in the report posted this week.

His comments come at a time when the Central Bank is saying that foreign exchange reserves have eased by 3.5 percent, a drop from P68 billion to P65 billion between August and November last year.

As measured in US dollar terms, the foreign exchange reserves collapsed by 5.9 percent during the same periodÔÇömeaning that it would be more expensive for the country to do business with the outside world if need be.

However, Finance and Development Planning Minister, Baledzi Gaolathe, has urged the nation to remain calm in the face of the financial tsunami as captains of the industry are clamouring for government to be transparent about the crisis and come up with a sketch plan for a rescue plan for the corporate sector.
“Some of the pension funds are already sounding warning bells that their investment returns are likely to be affected by the current turmoil on the global equity markets in the form of sharp decline in their offshore investments,” Juma said in his report.

The national pension industry is estimated to be valued at over P35 billion at mid last year valuations. And, according to Botswana’s laws governing the industry, pension funds can invest up to 70 percent of their allocations outside the country. Most of the funds were invested in the United States of America where the global financial crisis started before spreading across the world.

“The local mining sector has been hit the hardest as indicated by most mining firms that are contemplating on reducing production and, in some instances, lay off some of their work force to contain spiraling costs, albeit on sharp decline in commodity prices, such as copper and nickel prices have soften by more than 60 percent in value,” Juma said.

BCL, the oldest copper/nickel mine in the country, said it is shedding 10 percent of its work force while Tati Nickel mine has seen at least 500 jobs being lost since the closure of the Activox project. As that was not enough, the fledgling diamond cutting and polishing industry has shaved close to 400 jobs between November and December and more are expected starting next week when companies open for the New Year next week.

The diamond industry is in a trough from any other angle. Worldwide, cutting and polishing companies are reporting shocking losses of up to 30 percent, some are filing for bankruptcy and the mining sector is either suspending projects, sending employees on unpaid leave or closing indefinitely.

The story is the same across all continents as the United States, which consumes 50 percent of finished diamond jewellery, is caught in a debt trap of incomeÔÇôtoÔÇôdebt ratio of 1:140 percent, is in the ditch, together with Japan, which closely follows at 19 percent.

“Demand, for diamonds, the country’s major source of foreign currency, has also been weakened by the current financial crisis and this will further weaken the country’s foreign exchange earnings in the form of low export earning from mineral sales and can impact negatively on the country’s economy if it is prolonged,” Motswedi Securities said.

Some of the diamond mining houses, such as DiamonEx, have issued a flurry of statements warning against the impact of the global financial crisis on their business and at the same time fishing out for some money from investors in a bid to keep afloat. The diamond cutting and polishing industry, which is already indebted to the tune of US $19 billion and with stocks enough for a year supply, have driven the prices by as much as 60 percent and the outlook for the year is that the whole industry will have a 12 percent hole to deal with.

Given the optimistic 12 percent deficit, the industry is expected to recover by the fourth quarter of next year, however, if the impact takes more than that, the consequences are likely to be more severe.
The current crisis has seen foreign exchange reserves being shaved by 5.9 percent to US dollar terms during the past year and, according to the Central Statistics Office, the country experienced the worst trade deficit during the month of October as its competitiveness slouched-down by nearly 50 percent.

However, Motswedi Securities’ reports the local banking industry is insulated from the global problem, while other analysts are saying the sector will not dole a lot of personal loans in the coming year for fear of risks associated with the mining industry.


Read this week's paper