Economic observers insist that the slowdown in China has made investors to lose confidence in emerging markets. Over the last few weeks, capital outflows from China have reached $190 billion as a result of the Chinese central bank, People’s Bank of China (PBoC) decision to ease the Yuan currency peg to the US dollar.
As much as the money is flowing out of China, implications will be felt in other economies, including Botswana as the Chinese economy is viewed by markets as growing at a slower pace.
Analysts say markets viewed the move as a sign that the world’s second largest economy is growing at a slower pace than expected. “This has resulted in global growth estimates being revised downwards,” said Kwabena Antwi, an Investment Analyst at Afena Capital.
Antwi explained that the downwards revisions in global growth have led to lower commodity prices which will directly impact Botswana as commodities such as rough diamonds and copper are significant contributors to the country’s economic growth.
Already, the local economic growth rate has also been revised to 2.6 percent against the expected decrease in demand for diamonds in the global market.
Observers say the disturbances in China come at a time when markets are already bracing for the first interest rate by the US Federal Reserve in eight years, a move that threatens to tighten the noose on over-stretched Emerging Markets (EM) and the commodity tie.
“Oil prices have also fallen due to reduced global economic growth forecasts and this will provide downward pressure to inflation as transport accounts for a significant portion of the consumer basket used to determine inflation,” said Antwi.
The annual inflation rate stood at 3.1 percent in June 2015, which was lower than the 4.6 percent record of June last year. The decline was mainly attributed to the decrease in prices of commodities in the main component of Transport, whose index dropped by 5.6 percent.
Th drop in Transport group index is said to have been as a result of reduction in retail pump prices of petrol and diesel.
The government through the Ministry of Minerals, Energy and Water Resources (MMEWR) recently announced a further reduction in retail pump prices for petrol, diesel and illuminating paraffin. The decrease according to the statement from the ministry was caused by decrease in crude oil prices internationally.
The statement says the recent decline in crude oil prices has been attributed to concerns of over supply resulting from an increase in the US crude oil stockpiles as well as the slowdown of the Chinese economy.
International crude oil prices averaged US$46.58 per barrel in August 2015.
Similarly, with regards to rough diamonds, De Beers which is the world largest rough diamond it has cut its full year production goal to 29 million carats from an earlier target of 30 million to 32 million carats. Reports have also emerged that De Beers have also reduced its rough diamond prices by nearly 10 percent after cuts to production failed to support demand.
Head of Research at Motswedi Securities, Garry Juma, said the developments taking place in China are worrisome.
“We are already feeling the heat because China is the world’s major commodity consumer and during the first quarter there has been a decline consumer commodity prices,” said Juma in an interview. He said Botswana, which relies mostly on sale of commodities such as diamonds and copper has started to realise the effects from the economy slowdown.
Juma said companies such as BCL and African Copper have been the mostly affected as commodity prices threatens to reach all time low and the developments will impact directly on the local economy which is mostly commodity revenue based.
Secondly, Juma said the slowdown in China has resulted in investors losing confidence in emerging markets as they have been losing ground in the last few weeks.
“The Rand has been losing ground against the US dollar and the Pula domination has also weakened against the dollar,” said Juma explaining that the weakening of the South African Rand negatively impacts on Botswana.
This, he says, is because Botswana imports most of consumer commodities from South Africa, and due the weakening currencies, it means the country is importing at inflation.