The growing fears that the United States economy may go back into recession, on the back of new debt ceiling deal that came with expenditure cuts, reverberated this past week, sending worries in the market that Botswana could be drawn back into recession itself.
Concerns in the city are that if the U.S falls into recession, the export dependent Botswana will see another slump in diamond sales, which would see the country’s foreign earnings being affected.
The recession fears come at a time when the country’s diamond industry was beginning to show signs of recovery.
Therefore, consensus amongst city analysts is that a problem in the U.S, which accounts for about 50 percent of global diamond markets, is likely to have a negative impact on Botswana economy.
This will lead to low inflow of revenues from diamond sales and therefore an impact on government projects.
“We can once again expect to see the suspension of some development projects. The government may also not adjust salaries,” Chief Executive Officer of Stockbrokers Botswana, Geoffrey Bakwena, said.
“It will boil down to reduced disposable income for Batswana because of the inflationary effect. The buying power of Batswana will simply be eroded,” he added.
It was reported by the U.S media that the debt deal would raise the government’s $14.3-trillion debt ceiling, allowing vital borrowing by the Treasury Department in exchange for more than $2 trillion in long-term spending cuts.
The spending cuts will mean Americans will spend less on luxury goods like diamonds.
A senior lecturer at the University of Botswana – Department of Economics, Gaotlhobogwe Motlaleng added that if the U.S economy is not growing it would mean Botswana’s exports to that market will not grow.
The U.S and Asia are the largest consumers of Botswana’s diamonds ÔÇô the country’s single largest foreign exchange earner.
Motlaleng is not particularly worried about the U.S raising its debt ceiling and, in fact, supports it as the right move.
“The U.S debt is being used to grow the economy. I do not have any fears for debt, if it is productive debt,” said Motlaleng.
“I do not know any other alternative that a government can employ to grow an economy emerging from recession,” said the lecturer.
Global markets have been volatile since the U.S raised its debt ceiling, which runs into trillions of US dollars. Some indexes around the world have fallen.
Stock markets are the first indications of the directions of the economy. When they collapse, the worst usually follows as seen by the recession that originated on the subprime securities in America.
Volatility across financial markets has spiked over the past few weeks, with rumours flying about the health of European banks, questions mounting about the stability of money markets and growing fears that the U.S economy may tip back into recession or a prolonged period of tepid growth.
At the end of the week, European stock markets struggled as a ban on short-selling of financial sector shares failed to put a lid on concerns over banks and the spread of the euro zone’s debt crisis to France.
World shares edged lower after sharp gains as investors resumed a sell-off of riskier assets that has knocked more than 10 percent off stock prices in the past two weeks.
Reuters reported Friday that France, Italy, Spain and Belgium banned short-selling of some of their stocks from Friday to limit volatility and improve the mood on markets hit recently by a flurry of rumours about banking problems, all of which have been denied.
Oil prices fell, with Brent crude pushing 1 percent lower on the day and reversing gains made in the last two days as concerns about dwindling demand from industrialized nations put some commodities selling pressure.