Sovereign downgrade worsens public finance outlook
Mbongeni Mguni | Monday September 22, 2025 10:44
The global ratings agency announced its decision over the weekend, marking the first downgrade since March 2020 when the country’s economy was clouded by COVID-19.
S&P said the downgrade was due to the deterioration of public finances, due largely to the prolonged downturn in diamonds, and the low hopes for a recovery in the short term. A sovereign credit ratings downgrade directly impacts the country’s cost of borrowing, whilst also having wide-ranging negative effects on investor attraction, confidence and generally pressures foreign exchange reserves, amongst others.
“The downgrade reflects our view that weak global diamond demand and prices will keep Botswana's external and fiscal flow positions are weak,” the ratings agency’s researchers said. “Absent a significant policy adjustment, the country's net government debt will continue trending up, albeit from a low level, and its foreign currency reserves will remain under pressure.”
S&P researchers added: “Botswana is the world's second-largest producer of natural rough diamonds, with the diamond sector having historically represented about 70% of exports, approximately one-third of the government's fiscal receipts, and about one-quarter of GDP; but since late 2023, the diamond sector has been under pressure with global prices and volume demand having fallen sharply.”
The ratings agency also maintained a negative outlook on the economy, saying the view was informed by the expectation that weak global demand for diamonds and depressed prices will likely keep Botswana's exports and fiscal revenue subdued government's fiscal consolidation agenda.
Government is funding much of the forecast P22 billion deficit for this financial year from the domestic market, where rates have been climbing at the monthly auctions, due to credit risk perceptions and liquidity challenges in the market.
The ratings downgrade will likely lead to demands for even higher returns by the local market, while the impact on the cost of external borrowing will also likely be immediate. Typically, a downgrade will affect both new and existing debt, meaning the recent uptick in government’s hard currency borrowing will be made more painful for public funds.
S&P researchers, however, maintained a positive outlook on the government’s cost of debt.
“The high volume of government debt issuances in the domestic market will continue to increase the government's interest burden, but the overall effective interest rate, whilst rising, will remain broadly contained. “As a share of fiscal revenue, the government's interest bill will average seven percent in 2025–2028, up from a historical average of only two percent. “This contained increase is partly due to the share of external concessional debt in the debt mix, but also because of demand for domestic issuances from Botswana pension funds that have increased the domestic component of their funds, as they repatriate funds.”
Earlier this year, the Permanent Secretary in the Finance ministry, Tshokologo Kganetsano, said that government was close to reaching the statutory ceiling for domestic debt, implying more debt would have to be sourced externally.
Under its own statutory rules, government constrains its debt to 20% of GDP for domestic funding and 20% of GDP for external funding.
However, government, through the Bank of Botswana, has been on a flurry of debt-raising activities in recent years, as the prolonged diamond downturn has eaten into public revenues, whilst commitments such as salaries and outstanding invoices have pressured the public purse.