Botswanaâ€™s projected P4 billion budget deficit for the 2015/16 financial year could turn out to be much larger due to the downturn in the diamond market, credit rating agency, Moodyâ€™s says.
The 2016-2017 Budget Strategy Paper (BSP) released by the finance ministry last week, estimates the economy to grow by 2.6 percent while the budget balance is now seen posting a deficit of P4.03 billion or 2.6 percent of GDP.
In February, finance minister Kenneth Matambo announced a growth target of 4.9 percent for 2015, while the budget was seen posting a surplus of P1.23 billion or 0.8 percent of GDP. The revision of the 2015/16 budget outrun was largely attributed to a P3 billion fall in SACU revenues, which are paid in advance for the 2015, from the original estimate of P16.34 billion (29.5 percent of GDP) to P13.75 (26.6 percent of GDP).
In a rating brief released yesterday, Moody’s said the reduction of growth forecast reflects the diminishing sparkle in diamonds as both diamond prices and demand for the gemstone have slumped.
Diamonds account for almost 40% of Botswana’s budgetary revenue, around 85% of exports in dollar terms and about 25% of gross value added.
“The ministry of Finance also projects that the government budget will register a deficit of about 2.6% of GDP instead of the small fiscal surplus factored into the earlier adopted budget. “We see risks for an even more pronounced deficit because of a prolonged downturn in world diamond demand specifically tied to China’s economic rebalancing and lower luxury spending,” Moody’s said.
Sluggish sentiment in the market has seen sales of both of Debswana’s clients, De Beers and the Okavango Diamond Company (ODC) falling by over 20 percent in the first half of the year. Government gets 80 thebe from every pula worth of diamonds that Debswana sells to De Beers and ODC. The agency also said the lower diamond revenues in 2015/16 financial year would add to existing pressures on the government budget including drought-relief expenditures and higher-than-budgeted outlays on public-sector wages. “The new numbers confirm that the impact of weakness in the commodities market and in particular diamonds market is quite serious. This means government would have to draw down on its foreign reserves to finance the deficit. But the situation is not unique to Botswana. This is happening to Zambia, Brazil, Chile and all other commodity driven economies,” said economist, Keith Jefferis.
During the global financial crisis in 2009, the country’s main diamond producer Debswana, a 50/50 joint venture between De Beers and the government, closed its biggest mine, Jwaneng, which contributes 60%-70% of Debswana’s revenues for several months. In 2009, Botswana offset most of the budget revenue losses with drawdowns from its sovereign wealth fund as well as a $1.5 billion budgetary support from the African Development Bank to allow for a counter-cyclical response. Notwithstanding Botswana’s notable strengths such as its sound balance sheet and macroeconomic management, its narrow economic base that is heavily dependent on diamonds for fiscal and foreign exchange revenues remain its key credit weakness, noted Moody’s.
“Vulnerability to external shocks is exacerbated by the high geographical concentration of exports, as reflected in the Herfindahl-Hirschmann Index, a measure of the degree of export market concentration normalised from zero to one,” added the ratings agency. The European Union accounted for almost 66 percent of Botswana’s total exports in 2013 and South Africa about 13 percent, according to the World Trade Organisation.