Moody’s downgrades Botswana to Baa1 on diamond industry woes

Investing.com -- Moody’s Ratings has downgraded Botswana’s long-term issuer ratings to Baa1 from A3 while maintaining a negative outlook, citing the government’s struggle to adapt to a structural downturn in the diamond industry.

The rating agency announced the downgrade on Friday, pointing to the diamond sector’s continued weakness, which has resulted in economic contraction, weakened external buffers, and rising government debt. Diamonds contribute approximately 30% of Botswana’s GDP and 90% of its goods exports.

Botswana’s economy contracted by 3% in 2024 and is expected to decline by an additional 6% in 2025 as it faces global demand shocks and disruption from lab-grown alternatives. Despite a 24% fall in mining output last year, diamond inventories have reached record highs.

The country’s financial buffers have been nearly depleted, with the Government Investment Account (GIA) repeatedly tapped to cover fiscal deficits. This has weakened Botswana’s ability to absorb shocks and exposed it to higher interest rates.

Moody’s expects government debt to peak at 40% of GDP over the medium term, assuming gradual implementation of reforms. However, the negative outlook reflects risks of sharper credit deterioration amid continued diamond sector weakness.

The rating agency also lowered Botswana’s local currency and foreign currency country ceilings to A1 and A2 from Aa3 and A1, respectively.

Botswana faces high unemployment—27.6% overall and 38.2% among youth—while public employment dominates formal jobs. The current account deficit has widened as diamond exports weaken, bringing foreign reserves to historic lows.

Moody’s noted that while authorities have committed to structural reforms and economic diversification, progress has been slow. Key initiatives face resistance from vested interests, and many reforms will take years to yield results.

A rating upgrade is unlikely in the near term, but stabilization could occur with a lasting recovery in global diamond demand or effective fiscal consolidation. Further deterioration in fiscal metrics, weaker growth outlook, or continued policy delays could trigger another downgrade.

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