Botswana Vulnerable to Weak Diamond Market

Gaborone: Standard & Poor’s (S&P) maintained its negative outlook for Botswana last week due to the country’s continued reliance on the diamond sector.

While diamonds account for approximately 80% of Botswana’s total exports and about one-third of its gross domestic product, the economy remains vulnerable to a weak performance in the sector, the financial-services company said Friday.

“The negative outlook reflects our view that economic growth performance and fiscal outcomes could be weaker than we currently expect over the next 12 months, barring a structural improvement in international diamond prices to support higher production levels,” S&P wrote. “The ratings are constrained by the country’s narrow economic base, which relies heavily on the diamond sector and is vulnerable to external shocks, despite efforts to diversify.”

Botswana is the world’s second-largest diamond producer, behind Russia, according to Kimberley Process data for 2015. More than two-thirds of De Beers’ supply is recovered in the country through Debswana, the company’s joint mining venture with the government. De Beers also moved its sorting and sales operations from London to Gaborone in 2013, and approximately 20 manufacturing units currently operate there – all part of the government’s effort to diversify the sector and the economy at large.

S&P noted an improvement in the fourth fiscal quarter that ended March 31, as Debswana sold off inventory due to strong rough diamond demand. That helped make Botswana’s deficit for the fiscal year narrower than S&P had previously expected, the analysts explained.

However, lower production at Debswana — from 23 million carats in 2014 to 20.5 million carats last year — has weighed on growth. So have weaker diamond prices, with Debswana’s average price declining 15% year on year to $152 per carat in 2016, S&P said.

The analysts expect Botswana’s economy to grow 3% in 2017 — similar to 2016 — supported by strength in the service and construction sectors, while heavy rainfall could give agriculture a boost.

The country’s sturdy institutions, strong external balance sheet, well-managed minerals and long track record of political stability also helped lift S&P’s outlook for the country.