The ongoing anti-government protests at the major market for diamonds, Hong Kong, can be felt breathing heavily on De Beers as the giant diamond company is now putting a more cautious approach by further scaling back production.
When presenting interim financial results for the first half of 2019(H1 2019) at the De Beers Global Sightholder Sales in Botswana, De Beers Executive Vice President – Diamond Trading Paul Rowley acknowledged the pinch that the company is feeling from the Hong Kong anti-government protests, saying this will affect diamond sales as the country is a larger market for the precious stones. He said some of these challenges have led to consumer reluctance in buying diamonds.
“There are challenging conditions for rough diamond sales due to a combination of cyclical and macroeconomic challenges. There is also a lower holiday season demand, tight liquidity, trade tensions and protests in Hong Kong which have led to a more cautious buying approach,” said Rowley. Rowley said despite these challenges, the diamond company has decided to do equilibrium of production and demand. He said De Beers will have an agile approach to the market and make few adjustments.
According to De Beers H1 interim financial results, De Beers EBITDA decreased by 27 percent but still achieved profitability of P5.2 billion ($518 million) due to the challenging midstream trading environment and slowing consumer demand growth. The financial results further states that De Beers total revenue decreased by 17 percent to P26 billion ($2.6 billion), with rough diamond sales declining by 21 percent to P23 billion ($2.3 billion).
The Consolidated rough diamond sales volumes decreased by 13 percent to 15.5 million carats, while the average rough price index decreased by 4 percent, according to De Beers. Also, average realised rough diamond price decreased by 7 percent to $151/carat and this is due to the reduction in the average rough diamond price index and a change in the sales mix due to weaker market conditions in certain segments.
The H1 2019 production decreased by 11 percent to 15.6 million carats and this is credited to a reduction in Botswana and South Africa. According to Anglo American’s Production Report for the second quarter ended 30 June 2019, the Debswana production decreased by 9 percent to 5.7 Million carats. This was driven by a decrease at Orapa of 23 percent to 2.5 Million carats following a planned plant shut down brought forward from H2 2019, which impacted production in late Quarter 1 and early quarter 2. Production at Jwaneng increased by 7 percent to 3.2 Million carats, driven by an increase in tonnes treated.
Anglo American Chief Executive, Mark Cutifani shares the same sentiments with Rowley on his view on the current diamond market as he said, “De Beers, in view of prevailing market conditions, will continue to produce to market demand for the year. “ In an interview with Euronews on Thursday, De Beers CEO was approached on the external factors affecting the diamond market like the trade tensions between big players in the diamond industry China and the US, the U.S. government shut-down that ended in January and Hong Kong anti-government protests, he compared this situation as that of 2014/15. In 2014/15 the diamond market was weak amidst the deep commodity price fall linked to declining Chinese demand for raw materials.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”