Tando's Financial Analysis Portfolio

Market Outlook 4

—

by

Tando Saubi
in

Introduction

Welcome to this week’s Market Outlook!

In this edition, we analyse the evolving dynamics of the diamond industry and the implications of the global decline in organic diamond demand on Botswana’s economic growth and fiscal stability. Additionally, we examine domestic interest rates, with a particular focus on the Monetary Policy Rate (MoPR) and its broader implications.

Inflation remains a key economic indicator; therefore, we shall analyse the factors influencing current price levels and their implications for households and investors. Lastly, we will investigate unemployment in frontier markets such as Botswana, not solely the statistics, but also the tangible consequences on development and stability.

As always, we’ll wrap up with an economic calendar highlighting what’s ahead for May and June, so you stay informed and prepared.

Botswana’s Macroeconomic Outlook

They say diamonds are made under pressure—but as global markets turn up the heat, the real question is: can Botswana withstand the pressure, or risk cracking under its own economic weight? In this week’s outlook, we direct our focus toward the central pillar of Botswana’s economy: the diamond industry. Once regarded as a symbol of resilience and prosperity, this sector now confronts an escalating challenge as global demand transitions from rough, organic diamonds to more affordable, lab-grown alternatives. This transformation is sending shockwaves through international markets and adversely affecting Botswana’s export revenues and fiscal stability. We will examine the evolving dynamics of both the global and local diamond markets, assess the economic implications for Botswana, and unpack the government’s strategic responses—from restructuring its partnership with De Beers to investing in downstream processing and pursuing long-term diversification. Given the heightened stakes, the forthcoming actions of President Duma Boko and his administration could profoundly influence not only the future of the diamond industry but also the broader economic trajectory of the nation.

Since late 2022, there has been a notable decline in the demand for organic diamonds. Indeed, in 2020, the International Monetary Fund (IMF) identified shifts in consumer preferences toward synthetic diamonds as a potential risk to Botswana’s economic outlook. This decline has continued throughout 2023 and into 2024, propelled by several factors, including intensified competition from synthetic diamonds and the rough diamond industry’s struggle to adapt to their increasing market share. 

In response to the diminished demand, leading diamond producers have adjusted their operations. De Beers, for example, reported a 22% decrease in rough diamond production in 2024, reducing output from 31.9 million carats in 2023 to 24.7 million carats.

Conversely, the synthetic diamond market has significantly increased its market share in recent years. In February 2020, this segment represented approximately 11% of the diamond market; by February 2024, this figure escalated to over 50% in certain categories, as reported by Gordon Brothers. Furthermore, in 2024, the global synthetic diamond market was valued at approximately USD 25.9 billion and is anticipated to continue its growth at a compound annual growth rate (CAGR) of 5.1% from 2025 to 2034, with data sourced directly from Global Market Insights.

The pivotal question then becomes, what implications do these developments hold for Batswana and our nation’s economy? The response to this question was extensively discussed in my previous market outlook post. I strongly encourage you to review it for a comprehensive understanding of the implications stemming from the global decrease in demand for organic diamonds.

In light of the diminishing global demand for natural diamonds and the increasing prevalence of synthetic alternatives, the Government of Botswana has instituted a series of strategic initiatives aimed at protecting its economy and adapting to the diamond industry’s transforming landscape.

The most notable strategic initiative implemented by the Government of Botswana was the finalisation of a new 10-year sales agreement with De Beers (February 2025), which includes the potential for a five-year extension. Under this agreement, the state-owned Okavango Diamond Company (ODC) of Botswana will experience an increase in its share of Debswana’s rough diamond production from 25% to 30% immediately, a proportion that will be maintained for the initial five years of the contract. Subsequently, ODC’s share will increase to 40%, a rate that will be upheld for the remaining five years. Conditional upon the fulfilment of specific conditions, both ODC and De Beers will subsequently hold an equal share of 50/50 in Debswana’s rough diamond production during the potential five-year extension period.

Additionally, the new sales agreement has resulted in the formation of the “Diamonds for Development Fund,” which aims to promote economic growth, diversification, and job creation in Botswana. De Beers has pledged (to the fund) an initial investment of BWP 1.0 billion, in addition to ongoing annual contributions derived from its dividends from Debswana, contingent upon Debswana’s performance.

There’s more. The Government of Botswana is implementing a comprehensive beneficiation strategy, endorsed by De Beers, Debswana, and the Diamond Trading Company Botswana (DTCB). This strategy is designed to promote the cutting and polishing of diamonds within the nation. The initiative encompasses the allocation of a predetermined quantity of rough diamonds to cutting and polishing companies based in Botswana, with the objective of extracting greater value from the diamond industry and generating employment opportunities for Batswana. 

In alignment with Botswana’s strategic direction, De Beers has announced its intention to cease operations of its synthetic diamond-producing division, Lightbox. This decision reflects a mutual understanding between De Beers and the Government of Botswana to concentrate on natural diamonds and to support the nation’s economic objectives.

It is clear that the government is engaged in a challenging struggle; however, it continues to fulfil its responsibilities. Although the nation stands to gain significantly from these developments, our efforts have primarily focused on securing a larger share of what appears to be a declining market. The principal concern endures: diversification. The government recognises this issue as one that requires serious attention and action. Consequently, a series of initiatives have been launched, along with plans for additional initiatives to be implemented in the future, in order to address this issue. This will serve as the focal point in the forthcoming edition of Botswana’s macroeconomic outlook. 

Interest Rates

Recently, I engaged in a discussion regarding the probability of a reduction in interest rates attributable to the observed decline in the inflation rate. This prediction was not founded on extensive analysis, a point of which I was acutely aware. Consequently, I felt compelled to pause and contemplate the various factors that influence the decisions of the Monetary Policy Committee (MPC) in terms of either easing or tightening their monetary policy stance. This will serve as the primary focus of today’s discussion, and I hope that by the conclusion, we will have synthesised all relevant information to formulate a more informed estimate concerning the actions the Monetary Policy Committee is likely to undertake when they convene next month on June 19th.

A multitude of factors will be examined by central banks when reaching a conclusion regarding the establishment of the central bank rate. This analysis will concentrate on what we believe to be the primary factors influencing their decisions. The factors we will focus on today will include inflation control, and economic growth and employment. While there are other significant factors, such as financial stability, exchange rate management and agent expectations management, these will not be addressed in this discussion. 

Inflation control. According to the Bank of Botswana, a central bank’s principal objective must be to maintain the purchasing power of the currency. They go on to define this as keeping inflation within a medium-term objective range of 3% to 6%. The Bank of Botswana also states that maintaining inflation within this range supports effective savings mobilisation, productive investment, and international competitiveness of domestic producers, contributing to sustainable economic development and employment creation. 

The relationship between the Monetary Policy Rate (MoPR) and inflation is straightforward. When inflation increases, prices rise, leading to a decrease in demand. To address this issue, the MoPR is raised to curtail spending and investment while promoting savings over consumption. Consequently, this approach will further diminish demand, subsequently resulting in lower prices and inflation. Conversely, the opposite holds true.   

The Consumer Price Index (CPI) for April was released on May 15th (Statistics Botswana), indicating a decline in the annual inflation rate by 50 basis points, from 2.80% in March to 2.30%, drifting away from the Bank of Botswana’s target range of 3.0% to 6.0%. Consequently, it is anticipated that interest rates will either be maintained at the current Monetary Policy Rate (MoPR) or reduced during the forthcoming meeting of the Monetary Policy Committee in June.

Economic growth and employment. In addition to achieving its primary mandate of price stability, the Bank of Botswana aims to support economic growth and employment. This mechanism can be broken down as follows. 

In periods characterised by sluggish or no growth, as evident in our current macroeconomic environment, consumption and investment trends generally experience a decline. This may result in an increase in unemployment rates or a decrease in inflation levels (sound familiar?). In response to these challenges, the central bank undertakes measures such as lowering interest rates to foster borrowing and spending, thereby supporting businesses and job creation, and, in turn, stimulating the broader economy.

Both these factors indicate a potential interest rate reduction in the upcoming month; however, we are awaiting the decision from the Monetary Policy Committee.

While short-term predictions are great, the capacity to forecast long-term interest rate developments remains ultimately the more meaningful skill. This will be the focal point of our market outlook for the upcoming week. I must admit that, for the majority of that journey, I will embark on it independently; however, I am committed to commencing this journey here with you next week!

Inflation

As far as inflation is concerned, the April CPI came out yesterday (Statistics Botswana), and the annual headline inflation rate dropped by 50 basis points, from 2.80% in March to 2.30% in April, drifting away from the Bank of Botswana’s target range of 3.0% to 6.0%. Statistics Botswana also reports that the Food and Non-Alcoholic Beverages and the Miscellaneous Goods and Services groups were the most significant contributors to headline inflation.

Inflation appears to be the one aspect of the macroeconomic landscape that has not experienced significant turmoil. Consequently, there is limited information to report regarding this matter. However, my forthcoming outlook post will explore a more nuanced perspective on inflation and its potential implications for the economy.

Unemployment

As of the first quarter of 2024, Botswana’s unemployment rate stood at 27.6%, indicating persistent labour market challenges despite the country’s historical economic growth.

Unemployment statistics are still challenging to obtain, making it difficult to analyse them over time to monitor their progress effectively. In response to this issue, while awaiting the release of additional statistics, I will endeavour to apply various macroeconomic theories to the unemployment dilemma in Botswana. This approach seeks to uncover the underlying causes of the challenges we face, ultimately facilitating the best strategies to tackle the high unemployment rate that many in Botswana are currently experiencing. 

Economic Calender

We conclude our market outlook by presenting a structured overview of forthcoming economic data releases, policy decisions, and events that significantly influence the financial markets. For the time being, we will focus exclusively on data releases from the Bank of Botswana and Statistics Botswana. As we gain a deeper understanding of the landscape, we will commence providing a more comprehensive economic calendar. We shall also maintain the economic calendar for the current month at the time of reporting, as well as for the subsequent month. 

May 2025

  • 23 May: Publication of International Merchandise Trade Statistics for March 2025. (Statistics Botswana)

June 2025

  • 13 June: Release of the Consumer Price Index (CPI) for May 2025. (Statistics Botswana)
  • 19 June: Monetary Policy Committee (MPC) meeting by the Bank of Botswana. (Bank of Botswana)
  • 25 June: Publication of International Merchandise Trade Statistics for April 2025. (Statistics Botswana)
  • 26 June: Government securities auction conducted by the Bank of Botswana. (Bank of Botswana)

We have numerous upcoming events over the next month and a half that warrant our attention. We will provide concise reports on these significant economic events and data releases. Therefore, if you wish to obtain a quick summary of these occurrences, you are in the right place.

(Disclaimer: The Opinions Expressed In This Post Are My Solely My Own)

Sources and References

Comments

Leave a comment