Credit ratings slip a notch

MBONGENI MGUNI
Staff Writer | Wednesday February 17, 2010 00:00

From a deficit of P13.48 billion in the current financial year, government will need to sustain another P12.1 billion deficit in the 2010/11 period, arising from an unprecedented drop in government revenues paired against the need to finance economic imperatives such as health, education and development.

On Monday, Standard & Poor's announced that Botswana's expansionary fiscal policy and running deficits had contributed to the downgrading of its credit rating.

'We believe that the government's expansionary fiscal policy, which will translate into large fiscal deficits over the coming two years, will lead to a rapid weakening of Botswana's fiscal net creditor position.

'We are lowering our long-term sovereign credit rating on the Republic of Botswana to A- from A. The stable outlook reflects a still strong public sector external balance sheet offset by significant economic and fiscal challenges,' the ratings agency said.

Moody's, another global rating agency, rates Botswana's credit risk as A2, having revised its outlook for Botswana from positive to stable early last year. Moody's based its decision on 'a potentially lengthy downturn in the diamond industry.'

Analysts expect that Standard & Poor's assessment will not drastically affect Botswana's external risk status. This is in line with a study released last Thursday showing that since 1975, only 1.1 percent of countries rated BBB and above have defaulted on their foreign currency obligations. Botswana is still ranked within the investment-grade category, which ranges from AAA, AA, A and -A.

Standard & Poor's downgrading could however be a slight hindrance to government's ability to negotiate cheap credit on the global market. Fiscal authorities will take courage from their decision to finance the deficit largely through drawing down on cash balances and capital market borrowings. However, government could come under pressure in the external financing of huge infrastructural projects.

Foreseeing the threat to credit risk of running deficits, Finance and Development Minister, Kenneth Matambo, recently sought to allay fears that government spending and its debt were spiralling out of control.

'The commitment to restoring sustainability in our public finances over the medium term, is critical if government is to maintain its credibility with those who will be asked to finance the deficit, namely domestic and international lenders, and with international investors who are considering investment in the country.

'If there is any hint that government is running a cumulative deficit that cannot be financed comfortably over the medium term, then the cost of financing in the form of interest payments - which become a first call on government's spending - would rise substantially,' Matambo said in his Budget presentation.

From zero percent growth in 2009/10, government expects the local economy to rebound by five percent in 2010/11 as diamond sales recover, supported by growth in other mining and the non-mining sector. The Finance Ministry has predicted a deficit of P7.7 billion for 2011/12 and a balanced budget by 2012/13.

During the years of rapid economic growth prior to the recession, Botswana enjoyed top-notch sovereign credit ratings from both Standard & Poor's as well as Moody's.