Botswana’s economic outlook downgraded to negative by Moody’s Ratings

Investing.com -- Moody’s Ratings has revised the economic outlook of Botswana from stable to negative while maintaining its long-term issuer ratings for local and foreign currency at A3. The shift to a negative outlook is due to increased risks to the country’s credit profile from a prolonged downturn in the diamond industry, a critical part of the economy. The downturn is expected to impact government revenue and deplete fiscal reserves, leading to a quick rise in government debt and a weakening of debt affordability.

The government is anticipated to respond by implementing fiscal consolidation measures and improving its borrowing access by better leveraging the large pool of domestic savings in Botswana. However, previous attempts to diversify the economy and revenue base have yielded mixed results. Any delay in policy response could lead to continuous debt increases in the future.

Despite the negative outlook, the affirmation of the A3 ratings is supported by Botswana’s still moderate debt burden and strong debt affordability, as well as low susceptibility to event risks. Domestic political and geopolitical risks are very low, as demonstrated by the peaceful power transition following the 2024 election, the first transition in Botswana’s history. High domestic savings provide the government with sufficient financing options to limit the deterioration in debt affordability even as the debt rises.

Botswana’s local currency (LC) and foreign currency (FC) country ceilings remain unchanged at Aa3 and A1, respectively. The three-notch LC ceiling gap to the sovereign rating reflects predictable institutions and government actions, low political risk and external imbalances against the government’s significant footprint in the economy and reliance on a single revenue source. The one-notch gap between the FC ceiling and the LC ceiling reflects moderate policy effectiveness and low external indebtedness that point to limited transfer and convertibility risks.

The prolonged downturn in the diamond sector is exerting pressure on Botswana’s economic growth prospects, exports and government revenues. Despite Botswana’s history of managing diamond sector volatility, the government has nearly depleted its fiscal reserves, making the credit profile more vulnerable to ongoing weakness in the diamond sector. As a result, the government debt burden is forecasted to increase to 40% of GDP at the end of 2025/26 from 27% at the end of 2024.

The affirmation of the A3 rating is supported by Botswana’s credit strengths, including its still moderate debt burden and its track record of managing economic and fiscal shocks. The peaceful transition of power following the October 2024 election reinforces confidence in the country’s governance and political institutions. The current government has the mandate and political capital to implement fiscal consolidation measures, which could support a stronger-than-expected fiscal consolidation and help stabilize Botswana’s debt burden. Furthermore, the administration has committed to implement economic reforms to reduce reliance on the volatile diamond sector and support private sector-led growth.

Botswana’s credit profile also benefits from low susceptibility to event risks. Geopolitical risks are very low relative to A3-rated peers and foreign exchange reserves, while declining, remain sufficient to meet the government’s very low external debt service obligations and support the foreign exchange regime. Botswana’s sizeable positive net international investment position reflects high domestic savings, which have been invested abroad, mitigating external vulnerability risk.

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