Botswana’s (A2 stable) credit profile balances the government’s strong balance sheet, net external creditor position and low debt burden against the country’s small and undiversified economy, Moody’s Investors Service recently said in its latest annual report.
The report, “Government of Botswana – A2 stable, Annual credit analysis”, is available on www.moodys.com. Moody’s subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.
“Botswana’s key credit strengths include the government’s large fiscal reserves and very low debt levels,” said Daniela Re Fraschini, a Moody’s Assistant Vice President-Analyst and co-author of the report.
“The country’s narrow economic base, with its heavy reliance on the diamond industry, remains a key credit constraint.”
Moody’s expects real GDP to expand by 4.5% on average in 2018-2019, supported by a recovery in the diamond sector and by an expansionary fiscal stance ahead of elections next year. Beyond the near-term recovery, growth in the mining sector is expected to be subdued, balancing the gradual expansion in diamond production against the closure of the BCL copper-nickel mine and delays in the construction of a new copper mine in northwest Botswana.
Botswana’s high institutional strength reflects its strong performance on the Worldwide Governance Indicators, particularly in terms of control of corruption. The country also pursues a monetary policy that is supported by a well-designed framework akin to inflation targeting, which has met its objective range over the past five years. The government has a transparent and rule-based fiscal policy.
Its fiscal strength is supported by a low debt stock, with a very small foreign-currency exposure and a strong government balance sheet. Moody’s expects general government debt to remain at around 16.0% of GDP by 2019, compared with a peak of 20.7% in 2011. The government’s cost of debt is likely to remain very low in the near term.
Botswana’s sound external position, modest government borrowing requirements, healthy banking system and overall stable political environment mean it has low susceptibility to event risk.
The stable rating outlook reflects Moody’s assessment of policymakers’ continued commitment to a prudent fiscal stance while utilizing some of the significant fiscal policy space. These credit strengths are balanced by medium- to long-term challenges to Botswana’s economic model, structural rigidities in the labour and product markets and weak governance of state-owned enterprises.
Over time, structural reforms that would significantly reduce rigidities in the labour and product markets, increase economic diversification and reduce inequality, boosting Botswana’s growth potential, would put upward pressure on the rating. A broadening of the tax base that reduces fiscal vulnerability to sudden declines in Southern African Customs Union revenue or mineral revenue would also be credit positive.
Conversely, the prospect of a significant and lasting erosion of fiscal reserves would put downward pressure on the rating. A lack of structural reforms that would weaken potential growth in the medium term would be also credit negative.