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Heavy reliance on diamonds backfires as Botswana rating drops

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The COVID-19 global pandemic which put the world to stand still for 2 months, has delivered some of the worst catastrophic shocks to global economies in history. In sub Saharan Africa, corona virus landed the region into its worst economic recession since 1970, in what the International Monetary Fund – Africa Department calls an “Unprecedented threat to Development”.

What economists and leading minds projected when COVID-19 intensified in March, was that resource based economies would be hard hit by this pandemic compared to non –resource intensive countries. This according to leading minds would be due to restricted international travels, curtailed trade and movement of goods as well as halt in productivity as factories closed worldwide.

Botswana stands out as one of those countries in Africa and by extension the whole world, that depend heavily on resource anchored revenue for government budget and economic activity, worse enough, a finite resource!
The country’s leading economic sectors can somewhat be referred to as industries dependent on consumers luxury spending. At the first sign of COVID19 escalation, these sectors, being mining and tourism started receiving blows, heavy blows far worse than those experienced during the 2008/09 global financial crisis.

The mining sector started receiving a sharp decline in demand of rough diamonds as a result of cautious spending by traders because inventories were getting filled up without downstream uptake. The closing of cutting and polishing firms in China and India exacerbated the situation as wholesale financiers held onto their cash; the crisis was further worsened by closing of jewelry outlets in United States as the country went on lockdown.

Travel restrictions to curb the spread of the virus finished off the industry, sealing the crisis into what will clearly be terrible year for the multibillion dollar luxurious money spinner. For the tourism industry which is Botswana’s second largest contributor to GDP, travel restrictions straight way delivered a heavy blow of completely zero revenue. Safaris, hotels and lodges closed for over 2 months, activities within the sector are unlikely to resume into full peak anytime soon.

According to Moody’s Investor Services, an international rating agency and global think tank, corona virus has only amplified Botswana‘s already risky and vulnerable economic setup. The London based finance and economic minds said the corona virus shock has crystallized Botswana’s vulnerabilities arising from the limited economic diversification given its heavy reliance on a single commodity for growth, exports and budget revenues, slow progress towards economic transformation, and an increasingly rigid expenditure structure in the budget.

Last week on Friday 29th May 2020, the agency released rating action for Botswana, maintaining the A2 long-term local and foreign currency issuer ratings. A2 rating is the sixth highest rating in Moody’s Long-term sovereign ratings. Countries rated A2 are considered to be of upper-medium grade and are subject to low credit risk.

This rating is within the High credit quality bracket, which boasts of strong capacity for timely fulfillment of financial obligations. Possesses many favorable credit characteristics but may be slightly vulnerable to adverse changes in business, economic and financial conditions. Moody’s has however changed the outlook from stable to negative, meaning the rating can go down anytime within a period of six months to two years.

The negative outlook according to the statement reflects increasing risks to Botswana’s fiscal strength due to the severe shock to its growth and the government’s revenue resulting from the corona virus pandemic impact on the economy and the important diamond sector in particular. “Significantly lower growth, much weaker government revenues and higher borrowing requirements will aggravate already deteriorating fiscal trends and risk accelerating the erosion of fiscal buffers,” reads the statement from London.

Furthermore, Moody’s says the disruptions caused by the corona virus will likely slow progress in terms of fiscal consolidation and economic diversification, which are key to preserve the fiscal and external buffers in the longer term. Against a projected GDP growth of about 4 % by local forecasts, COVID 19 has overturned Botswana’s growth prospects to a 13 % decline in economy during the year 2020. Against initial projected revenue of P62.4 billion, Botswana‘s economy is only expected to generate revenue of about P48 billion.

Government has trimmed its budget from P67.6 billion to P59.6 billion. Budget deficit will now shoot up from initial P5.2 billion, 2.4 % GDP to over P10 billion which will now be over 5 % of GDP, well over government threshold of 4%. The decline in government revenue will be attributable to a massive reduction in Mining & Mineral revenue which is anticipated to shrink by over 33 %. The decline in mining and mineral revenue is predominately as a result of halt in rough diamond sales due to travel restriction and stand still in trading across the industry.

The diamond industry is Botswana‘s key foreign income earner and largest contributor to GDP. It was projected that diamond revenue will bring to the table a total of P20 billion, however Government now experts revenue from mineral revenue to only be around P6 billion. Trade & Hotels revenue will go down over 32 %. Manufacturing will go down by 10 %, Transport and communication will decline by over 4 %.Non Mineral tax revenue will shrink by P2 billion from initial projection of P14 billion to P12 billion. Revenue from Value Added Tax (VAT) will go down from P8.6 billion to P7.6 billion.

Moody’s says an upgrade in Botswana’s rating in the foreseeable future is very unlikely given the negative outlook. Botswana ‘s outlook would only change back to stable according to the agency if the current wave of deteriorating fiscal metrics would be countered by credible fiscal measures aimed at rebuilding fiscal buffers in the long term and reduce fiscal vulnerabilities posed by the rigid budget structure.

“The decision to stabilize the outlook may also be supported by evidence of progress in implementing growth-enhancing reforms targeting an improvement in economic diversification and business environment,” says the London based economic think tank. Conversely, indications of challenges in halting the fiscal deterioration after the severe but temporary corona virus shock suggesting a durable deterioration of fiscal strength will likely prompt a downgrade.

Furthermore an increase in financial support to state-owned enterprises that lead to a material weakening of the fiscal metrics would also likely result in a lower rating. Any signs that susceptibility to event risk has increased due to higher liquidity risk resulting from larger gross borrowing requirements or a further deterioration of the external position compared to current expectations will also increase the likelihood of a downgrade.

Moody’s says given Botswana’s strong dependency on the diamond industry for growth, exports and budget revenues, the country is more exposed than peers at the current rating level to the risks associated with the corona virus shock.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

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.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

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.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

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”

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