Lack of diversification constrains Botswana ratings
Brian Benza | Tuesday May 20, 2014 15:14
Last week, S&P released the results of the first of the two annual reviews of Botswana’s sovereign credit rating for 2014, and affirmed the ‘A-’and ‘A-2’ for the long-term and short-term ratings, respectively.
The ‘stable’ economic outlook has also been retained. However, S&P say that the ratings are constrained by the country’s narrow economic base, despite efforts towards diversification.
The agency also warned that the ratings could come under pressure if economic growth was to falter or if the country’s fiscal or external positions were to deteriorate. “Conversely, a successful broadening of private sector development, that could boost GDP growth relative to other middle-income countries, and reduced dependence on mining could lead to a possible ratings upgrade,” said S&P.
S&P say that the ratings are supported by the strong external and fiscal balance sheets, robust institutions underpinning a well-managed economy and a long record of political stability.
“The stable outlook reflects expectations of resilient economic growth and a return to fiscal surpluses,” read the S&P statement.
In November last year, fellow ratings agency, Moody’s Investors Service said that Botswana’s heavy reliance on the diamond industry is a key credit weakness. As a result of this narrow economic base, Moody’s said that the economy is highly susceptible to shocks, as reflected in the 7.8 percent contraction in GDP during the global financial crisis in 2009.
Moody’s noted that upward pressure on Botswana’s A2 rating could develop as a result of a successful implementation of the economic diversification strategies over the medium term, coupled with the accumulation of an even larger net financial position.
“In turn, a large deterioration in its net asset position over the medium term could exert downward pressure on the ratings, given that the country’s financial buffer was more than halved during the global financial crisis. Moody’s expects to see fiscal consolidation and economic diversification becoming more crucial to preserving the country’s economic strength given that its diamond mine resources will begin to deplete in 2030,” said the agency.
Like any other middle-income country in Sub Saharan, maintaining strong growth has become a challenge for Botswana in recent years. The IMF has advised that for Botswana to return to an era of strong growth a set of reform-oriented, innovative policies to reinvigorate total factor productivity would need to be put in place.
The reforms include increasing the quality of public spending, improving the efficiency and effectiveness of the tax system, reducing the costs of doing business, and diversifying the economy.
The nature of Botswana’s resource rich and landlocked economy has also been identified as an obstacle to diversification, and the IMF has previously advised Botswana to leverage its strong physical capital and institutions to improve diversification prospects.
The authorities have also been urged to improve the skills base of the labour force to explore knowledge-based service sectors, a strategy that was pursued by Chile and other successful diversification cases.