Diamond slump: Budget likely to fall into deficit

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The prevailing weakness in the diamond market could potentially drag the 2015-2016 fiscal budget into a deficit.

Sluggish sentiment in the market has seen both De Beers and the Okavango Diamond Company (ODC) sales falling by over 20 percent in the first half of the year.

Backed by projections of a 10 percent growth in minerals revenues to P19 billion, Finance minister Kenneth Matambo in February, announced forecasts of a P1.23 billion 2015-2016-budget surplus.

But a sustained weakness of the diamond market throughout the year has seen diamond prices softening while annual output targets have been trimmed.

In the first six months of the year, De Beers’ sales fell 21 percent, which could crudely translate to a similar percentage drop in fiscal minerals revenues.

Government gets 80 thebe from every pula worth of diamonds that Debswana sells to De Beers and ODC.

On the other, De Beers has trimmed production targets for the remainder of the year, a situation that could potentially further dent government share of the diamond revenues.

Apart from a consecutive three-year period of deficits upto 2012 sparked by the 2008 financial crisis, Botswana has consistently posted budget surpluses adding credence to the country’s achievement of the best credit rating in Africa.

“It is very difficult to quantify the potential impact. But as a first stab at it, I would say that the decline in government revenues would be proportionate to the decline in sales, i.e. if diamond sales decline 20 percent year-on-year then government mineral revenues would fall by the same amount.

But this could be a big simplification – compensating measures may be taken (such as cutting costs) that would reduce the impact on revenues, and furthermore we do not know what assumptions underpinned the budget projections,” said economist, Keith Jefferis.

 Government has previously taken compensating measures following a diamond market downturn. In 2012, Debswana plucked P3.4bn from its capital reserves for distribution to shareholders.

Underspending by various ministries has also, in the past, proved to boost budget balances.

The diamond industry began to face pressures in the fourth quarter of 2014 as consumer demand growth was softer than expected leading to abnormally high pipeline inventories of polished diamonds at the start of 2015.

According to De Beers, growth in consumer demand has also been constrained in the first half of 2015 due to weakness in the macroeconomic environment and US dollar strength impacting demand in non-dollar denominated areas.

Reflecting the weak sentiment in the market, De Beers recorded its lowest sales since the 2009 financial crisis at last month’s sight held in Gaborone, as sightholders protested the ‘high’ prices of rough diamonds.

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