Turbulence continued in Botswana following Moody’s downgrade of sovereign debt last week from stable to negative.  The ratings service projected a prolonged decline in demand for diamonds and thus continued pressure on the state’s coffers.  Botswana will run a deficit of  12.2 percent of GDP in 2010/11, per its Finance Minister Kenneth Matambo.  To that extent, the firm warned that “the government’s ratings would likely be downgraded to A3 upon the failure to stem the deterioration in its net asset position over the medium term,” and that “fiscal consolidation and economic diversification will be ever more vital to preserve the country’s economic strength as the depletion of diamond resources approaches over the coming decades.” 

Diamonds once accounted for over $3b (roughly 50%) of annual revenue for the country, with the U.S. and Japan demanding the lion’s share of product.  While analysts predict the demand for luxury goods will be restored (though likely aided by an increase in demand from emerging countries rather than a complete bounceback from developed ones), the recovery will take time.  Furthermore, Botswana’s government admits that its gem production capabilities may only have another ten years or so of viability.  In the meantime, the government is looking to diversify its economy while concurrently attempting to realize growth.  Its central bank left benchmark rates unchanged, stating that its four interest-rate cuts last year were adequate to spur economic growth and that forward-looking inflationary pressures were benign.

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