Debswana prepares for possible economic recession
Mbongeni Mguni | Monday January 16, 2023 06:00
“The business has started preparations for recession planning in anticipation of a global recession in 2023 which will no doubt adversely affect the sales of diamonds in our major markets,” Debswana managing director, Andrew Motsomi said in a letter to employees, made public this week. “Updates on this exercise will be given across operations as the situation unfolds,” he said.
However, Motsomi did not provide further details of what the diamond giant intends to do should demand for rough diamonds drop and instead sought to rally his troops.
“I urge you all to continue pulling together, even in times such as this to ensure we create even more impact and shared value for our people, our business, our communities and our country in 2023 and beyond,” he said.
Motsomi, a Bank of Botswana veteran economist who took over the top post at Debswana last June, naturally has his eyes focused on the prevailing and forecast trends in the global economy, which are not looking promising.
Debswana has good reason to be concerned as all indicators from local and international experts point to the possibility of a global economic slowdown and with it, reduced demand for the rough stones upon which the country’s budget and its broader economic performance are largely reliant on.
The major drivers of the expected global recession include the fallout from Russia’s invasion of Ukraine, the effects of higher interest rates and the continuing impact of the COVID-19 pandemic.
The World Bank this week released a depressing update of its forecasts for the global economy, with particularly ominous warnings for countries that are dependent on commodities such as mining.
“Our latest forecasts indicate a sharp, long-lasting slowdown, with global growth declining to 1.7 percent in 2023 from 3.0 percent expected just six months ago,” World Bank president, David Malpass said on Wednesday. “The deterioration is broad-based and in virtually all regions of the world, per-capita income growth will be slower than it was during the decade before COVID-19,” said Malpass.
In its latest update, the World Bank has reduced its growth projections for economies that are key for Botswana such as the United States, the European Union and others.
US economic performance and more specifically, the appetite of the American consumer for diamonds, is crucial to Botswana’s economic fortunes. The US is the primary market for Botswana’s diamonds and also a major contributor to the local tourism sector.
Déjà vu
For Debswana and Motsomi, the darkening clouds on the horizon will trigger a sense of déjà vu. In 2009, as a result of the global recession, Debswana closed several mines and shed hundreds of jobs, after demand for its production slumped. The effects of that recession have echoed through the years as executives then adopted a policy of “mining to demand,” and avoiding stockpiling diamonds, a decision that has mean production has never again returned to the plus 30-million carats per year level. The total numbers of jobs or the density of workers required to keep the mines going have also similarly declined since 2009 in line with the post-recession push for a leaner, more flexible Debswana capable of withstanding knocks.
Besides the World Bank and Debswana, local technocrats are nervous about the economy this year, due to the possibility of a global recession. Finance Minister, Peggy Serame recently noted “rising economic stresses and risks globally”.
“Historically, when the global economy – and particularly the economy of the USA – slows down and even goes into recession, sales of diamonds, as a luxury good, typically fall sharply,” she said in August. “We saw this in 2008-2009 during the global financial crisis, and again in 2020 during the COVID-19 pandemic.Hence, we must be cautious, as we could face a drop in earnings from diamonds in the medium term,”Serame further said.
More recently, the Transitional National Development Plan (TNDP), adopted by Parliament last month, identifies a global slowdown as one of the major risks to the local economy in the next two fiscal years.
“As it stands, the USA and other western economies are facing potential stagflation (high inflation and slow growth, with tight monetary policy), while growth is slowing in China (the world’s second largest diamond market). “Given that diamond sales are highly dependent upon buoyant demand growth, the risks of a slowdown in the market are high,” the plan states.
For its part, the Bank of Botswana has been warning about the possibility of a global recession for most of last year, including it as one of the factors it is monitoring.
“The persistent geopolitical tensions and resultant spillovers entail significant threats to global economic growth in the immediate future and therefore, the demand for Botswana’s main exports, especially diamonds and tourism,” Bank of Botswana governor, Moses Pelaelo said previously.
Inconvenient troubles
For local technocrats, the timing of the potential recession could not be more inconvenient. The local economy has been in recovery mode from the pandemic slump, growing on a quarterly basis and returning to pre-pandemic or “normalised” levels.
In fact, the latest data available from the Finance Ministry suggests that growth for the fiscal year ending in March 31 could exceed the 4.2 percent expected by government.
“Overall, prospects for the remainder of the (2022-23 fiscal) year remain positive,” the Ministry said in a quarterly update released on Monday. “At a simple average growth of 6.3 percent for the first half of the year, growth could outperform the Ministry’s forecast of 4.2 percent for the year if the trend continues into the remaining quarters. “The positive performance could also be boosted by continued demand for rough diamonds due to ongoing sanctions against Russia’s diamonds.”
The budget as well is in recovery mode, recording a mining-powered surplus of nearly P600 million in the first half of the 2022-23 fiscal year, the first such performance since 2014-15. Technocrats who spoke to Mmegi this week said rather than the P7.7 billion deficit forecast for the fiscal year, Serame and her team now expect a surplus, which would be the first since 2016-17.
Inconveniently, the looming recession will not only upend the economy and fiscal recovery, but critically it comes at a time when government has been piling on both domestic and foreign-denominated debt and when its reserves, as housed in the Government Investment Account (GIA), are still below pre-pandemic levels.
Since the beginning of the financial year last April, the government raised P9.79 billion from the domestic capital market, with borrowing costs rising throughout the period. In the 2022 calendar year, the Finance Ministry also confirmed P2.8 billion in debt deals with the Japan International Cooperation Agency (JICA) and the OPEC Fund, with maturities of up to 17 years and four year grace periods.
Other deals announced last year include:
*African Development Bank, $179.7 million as the second tranche of a facility from 2021 *African Development Bank, $1.4 billion country strategy paper budget over two years also including technical assistance *Afreximbank, $1.5 billion economic support package over three years *World Bank, $150 million as the second tranche of a facility from 2021 *Africa 50, equity investment by Botswana which could yield funding arrangements from other development finance institutes
The funding was mainly supposed to support the expected P7.7 billion deficit, rebuilding of the GIA, as well as funding part of the P64 billion TNDP and other economic projects aligned to President Mokgweetsi Masisi’s transformation agenda.
The looming recession points to lower than forecast domestic resource mobilisation at a time when debt levels are rising to levels that technocrats are increasingly uncomfortable with.
“It will be critical to ensure fiscal sustainability during the TNDP and beyond, as it is a crucial part of the macroeconomic framework,” the TNDP reads. “If not attained, the result can be macroeconomic instability, for instance through excessive debt accumulation and debt servicing costs that undermine other objectives.”
Suffering households
The threat of a global recession this year will feel particularly unfair for ordinary Batswana.
While the economy enjoyed high growth rates in 2021 and into the first three quarters of the 2022 calendar year, ordinary consumers have laboured under escalating inflation and interest rates, stagnant job creation and negative real wage growth.
For citizens, the recovery from COVID-19 has been a technical affair tracked by economists, while the reality on the ground has been that there has been little change in circumstance between the 2009, 2015 and 2020 recessions, despite the respective rebounds.
In fact, a groundbreaking Statistics Botswana report earlier last year found that one in five households was ‘multidimensionally’ poor, lacking sufficient food, shelter, education, access to ICT and others. The data agency also reported that the unemployment rate for those aged 18 years and above rose from 21.9% in December 2019, before the pandemic, to 24.5% in December 2020 and then to 25.8% in December 2021.
Although inflation has declined from its peak of 14.6 percent last August, it remains at elevated levels, eroding disposable incomes at a time when higher interest rates and unemployment have ordinary Batswana on the ropes.
The prospects of another slowdown or possible recession is thus unpalatable to households, particularly as the current economic rebound is yet to spread broadly to more non-mining sectors and to other indicators such as employment.
Fiscal authorities, companies, economists and ordinary households will be hoping the global economy either completely avoids a recession, or at the very least, that any slowdown is not so sustained as to cause the hard shocks experienced in previous downturns.