Diamonds: The crack in the economy
Lewanika Timothy | Monday August 12, 2024 09:54
Diamond industry woes are the talk of the economy this year, for obvious reasons that need no mention in a diamond dependent country. The issue is the extent to which the pinch of the diamond woes will be felt by Botswana’s purse and the tough decisions that have to be made in the wake of these difficulties.
Economists at economic consultancy firm, Econsult, in their second quarter review have sounded more alarms for Botswana’s economy as diamond sales continue to plummet.
According to the economists, the deepening downswing in the diamond market is raising questions whether the trend is short term market turbulence or a long term market disruption that will mark the world’s gradual move away from natural diamonds.
“A critical question from a policy point of view is whether the current set of problems afflicting the diamond market is adjudged to be the result of short-term volatility or long-term structural change.
“If it is short-term volatility, then accumulated financial buffers can be used to smooth and offset the broader macroeconomic impact,” the economists said
Market cycles of booms and busts are normal in every industry like how the financial services industry had its meltdown in 2008 and 2016. The problem is when the down cycles last too long and dampen investor confidence harming market valuations and possibly scaring away investors.
Econsult economists further warned that the tendency by government to cash in fiscal buffers when the diamond market plummets, will not be sustainable as a long-term solution has to be found if the diamond down cycle turns out to be structural..
“If the problems are a result of long-term structural change, then running down financial buffers is not a sustainable option instead, adjustment to the new reality is required.”
The decline in diamond exports has had a serious impact on government finances, given that income from mineral taxes, royalties and dividends is usually the largest single source of government revenues. The culmination of lower mineral revenues, combined with highly expansionary budgets in 2023/24 and the current 2024/25 financial year have had a huge negative impact on the sustainability and implementation of such budgets amid a year soiled by so many uncertainties.
A recent country report from the International Monetary Fund (IMF) forecasts that Botswana’s economy will face a sharp deceleration this year, growing by only one percent compared to a previous estimate of 3.6 percent. This is mainly due to declining mineral revenues, particularly in the diamond sector.
“Botswana’s economic growth decelerated from 5.5 percent in 2022 to 2.7 percent in 2023, below the long-run potential growth of four percent,” said an IMF team in a report after a visit to the country.
A sharp decline in diamond trading and mining activities was the main contributor to the slowdown, as global demand for rough diamonds decreased.
During the posting of its half year results, De Beers Vice President Paul Rowley said that the company expects a market bounce back from the fourth quarter of 2024 going into 2025. However, De Beers has been expecting this rebound since last year, giving the economy even more reason to be worried.
Meanwhile, diamond industry expert, Martin Rapaport, in his latest industry update, says he expects synthetics to continue to take market share from natural diamonds. Rapaport expects De Beers’ revenue to continue to decline in 2024 due to competition from synthetics.
Rapaport believes synthetics will dominate the US bridal segment in 2024, accounting for over 50% of engagement-ring purchases. However, he also forecasts that the synthetic bridal market will collapse in 2025 as their very low prices will make them unsuitable for engagement rings.
According to Rapaport natural diamond demand will come back strongly as consumers return to traditional engagement rings whose value is appropriate for the gift of marital commitment. For Botswana's diamond-reliant economy, the constrained diamond market is expected to raise the country’s fiscal deficit from the Ministry of Finance's projected P8.7 billion initially forecast for the 2024–2025 financial year.
The American economy, which is one of the primary markets for the diamond industry is expected to support sales going into the coming holiday season. The Federal Reserve maintained interest rates this week against, but sent out signals that a cut was around the corner, possible in September, which would lift consumer confidence and demand.
The diamond industry woes, meanwhile, are expected to harm Botswana's economy, shrinking reserves while at the same time expanding the deficit.