In the eye of the storm

Diamond mining conglomerate De Beers has said diamond sales are in decline because of the coronavirus (Covid- 19) outbreak in China, the largest consumer of Botswana diamonds. Botswana Tourism Organisation (BTO) has announced a travel plan ban. Botswana’s offshore investments in the Bank of Botswana’s (BoB) foreign reserves and pensioners’ money are taking a hit as global capital stocks plunge. With the two largest contributors to Botswana’s GDP, diamonds and tourism, facing what could be their most tumultuous headwinds ever, their underperformance could spell doom for the domestic economy. KEABETSWE NEWEL reports.

According to Rapaport Research Report, diamond trading declined sharply in February due to economic uncertainty surrounding the coronavirus. Manufacturers and dealers are facing a severe liquidity crunch as sales to China and Hong Kong have stopped. Diamond prices dropped as a result of the slowdown, with the RapNet Diamond Index (RAPI) for 1-carat diamonds down 1.6 percent in February. RAPI for 0.30-carat goods, a popular category in the Chinese market, fell 2.1 percent and continues to decline.

According to Rapaport, the downturn in China will have a broad impact on the industry. Major trade shows in Hong Kong, Brazil and Switzerland have been cancelled and buyer traffic in the bourses has declined, weighing heavily on prices and revenue prospects for diamond producers. With Chinese retail at a standstill, the slump in jewellery sales means stores have more inventory than usual for this time of year. Chinese buyers are not expected to return to the market in the coming months. That will result in a buildup of excess goods and a squeeze on liquidity among polished-diamond suppliers.

Meanwhile, rough demand has dropped as manufacturers maintain low polished production. De Beers is trying to support the market by letting sightholders refuse goods that would typically be destined for China. At a press briefing held by De Beers in Botswana last month, the group disclosed that the outbreak of Covid- 19 affected its rough sales in February, which plunged by 36 percent from January. In total, De Beers said US$355 million worth of rough diamonds was sold in the second cycle of the year, a major decline from US$551 million achieved in the first cycle of the year. De Beers said it deferred allocations due to the virus impact on Chinese focused customers.

Said the CEO of De Beers Group, Bruce Cleaver: “Following an improvement in demand for rough diamonds during the first sales cycle of 2020, we recognised the impact of COVID-19 on customers focused on supplying the Chinese market and put in place additional targeted flexibility to enable customers to defer allocations of the relevant rough diamonds.”

China accounts for about 14 percent of global consumption of polished gems, making it the biggest market outside the United States of America (USA), data from De Beers shows. De Beers, which sells diamonds to a handpicked group of about 80 buyers 10 times a year at events called sights, has reported sales of $906 million so far this year, the slowest start since it first released data on its sales in early 2016.

Seventy-five (75) percent of De Beers production comes from Botswana. The mining sector accounts for about 35 percent of GDP, with diamonds contributing about 94 percent of the total mining share in GDP. Botswana produces the world’s largest gem diamonds, with an output that represents about 40 percent of the total world output. At Motswedi Securities, head of research Garry Juma says a hit on the diamond sector heavily affects government revenue because of Botswana’s dependence on the precious stones.

Juma worries that a decline in diamond sales and revenue at De Beers will hugely impact on government revenue because still remains an important driver of economic growth, the largest single contributor to government revenues in most years and the source of 80 percent of goods export earnings. Finance minister Dr Thapelo Matsheka said in his budget speech last month that total revenues and grants for the 2020/2021 financial year amount to P62.39 billion, of which mineral revenue is estimated at P20.02 billion. A decline in mineral revenue will affect government revenue negatively.

The World Travel and Tourism Council (WTTC) says up to 50 million jobs could be lost because of the pandemic. According to its chief executive, Gloria Guevara, the outbreak “presents a significant threat to the industry”. New figures from WTTC suggest that the travel sector could shrink by up to 25 percent in 2020. Back home, the chief executive of Botswana Tourism Organisation (BTO), Myra Sekgororoane, told a media briefing in Gaborone recently that most international tourism events had been cancelled for the foreseeable future as a public health precautionary measure and that BTO may follow suit with the Khawa Dune Challenge, the Makgadikgadi Epic and the Toyota 1000 Desert Race if the pandemic did not subside. These are money spinning events for Botswana’s tourism industry. The CEO of Hospitality and Tourism Association of Botswana (HATAB), Lilly Rakorong, said although they remained optimistic, these were trying times for the tourism industry.

Bookings at luxury camps within the Okavango Delta and everywhere else in the country are already being cancelled because of travel bans. The cancellations mean that hospitality outfits will lose out on projected revenue. Botswana’s tourism sector remains a very significant economic contributor with at least 25 000 people employed in 2017, the World Travel and Tourism Council reveals in a research paper dubbed Travel & Tourism Economic Impact 2017 Botswana. The employment numbers could easily shrink if the sector takes a knock.

This includes employment by hotels, travel agents, airlines and other passenger transportation services (excluding commuter services). It also includes, for example, the activities of the restaurant and leisure industries directly supported by tourists. Rakorong and Sekgororoane agree that cancellation of events, travel bans and reduction of movement will badly impact hotels, restaurants and related businesses.

Economists fear that should such businesses record reduction in sales and bed nights sold, they may respond by cutting costs, which may affect employment. Tourism contribution to GDP has increased from 13 percent in 2008 to the current levels of 21 percent in 2017 and 19 percent for first quarter of 2018, second after the mining sector.

Kefilwe Kebafetotse, Public Relations and Communications Manager at Air Botswana, says in relation to the global business outlook, the International Air Transport Association (IATA) has significantly updated its forecast for global airline revenue losses stemming from the Covid-19 virus to between $US63 billion and $US113 billion, up from a previous estimate of about $US29 billion. “As with other airlines, Air Botswana anticipates adverse impact, given its feeder status and reliance on other airlines,” she has noted, adding that Air Botswana anticipates revenue losses because of loss of business.

She added that the situation for March is more along global trends, primarily owing to cancellations or postponement of travel by businesses, government sectors and traders as both Europe and the Middle East felt the impact of the virus.

Kebafetotse said cancellations of major events around the world continue and paint a bleak future in the short-term. In view of the depressed passenger travel patterns, she added, the Air Botswana’s schedule has been modified to reflect the impact of the pandemic in line with the low business activity that is currently being experienced.

According to CBS News, cumulative global stock market losses climbed past US$16 trillion on fears that the outbreak could lead to a worldwide recession.
These are markets in which Botswana is heavily invested and where the country has already registered losses as capital markets plunged. The Covid-19 places highly at risk billions of pula in Botswana investments made in Western markets, especially Europe and the USA . The Bank of Botswana (BoB) says Botswana has around P71 billion invested as foreign reserves, mostly in the UK and the USA. Further, pension funds like the Botswana Public Officers Pension Fund (BPOPF) and the Debswana Pension Fund have also invested pensioners’ money heavily.
Covid-19 has put pressure on global stocks which continue to decline, reducing the value of investment on the stocks.

Boitumelo Molefe, Principal Officer at BPOPF, says anyone who is invested in global and emerging markets will lose money. Molefe notes that BPOPF has investments in the US through 17 offshore fund managers but she declined to reveal names of the asset managers and the value of funds mandated to them.

However, BPOPF has over P65 billion in Assets Under Management (AUM), 65 percent of the money is invested offshore, mostly in the US. This means that over P35 billion belonging to BPOPF will for a fact lose value because of the declining global stocks. Debswana Pension Fund has over P7 billion in AUM and 35 percent of the money is invested offshore, especially in the USA.
At local asset management firm Kgori Capital, Portolio Manager Kwabena Antwi says if consumers in developed nations are uneasy about the future, they cut back their expenditure on luxury goods in order to preserve wealth. “This would be a negative development for Botswana as the country’s tourism products are considered luxury goods with bed night prices in the thousands of dollars. Secondly, diamonds are a luxury good and reduced demand would negatively affect diamond prices and production. The net effect of a slowdown in Botswana’s luxury tourism and diamond mining would be a negative knock-on effect on GDP growth,” Antwi said.

Tourism’s contribution to GDP has increased from 13 percent in 2008 to the current levels of 21 percent in 2017 and 19 percent for first quarter of 2018. The US market is one of the largest consumers of Botswana tourism. Further, China and the US are the largest markets for Botswana diamonds, which are the mainstay of the economy. If the US and China record declines in economic growth, they reduce their spend on diamonds and on Botswana tourism.