The FSC has sounded the alarm on growing vulnerabilities within the country’s financial system, highlighting how deepening ties between financial institutions and non-financial sectors, especially mining could elevate economic shocks to the upside. The Council is a multi-agency body responsible for assessing vulnerabilities that could affect the resilience and stability of the local financial system In its latest assessment released last month, the FSC warned that the country’s financial system is highly susceptible to spillover effects from the real economy, particularly during downturns in diamond exports--the mainstay of the country’s economy. “The interconnectedness of Botswana’s financial system entities amplifies systemic risks through the variety of interlinked transmission channels involving risk to overall stability,” the FSC noted.
According to the Council, a contraction in the mining sector, mainly driven by global diamond market fluctuations immediately impacts Non-Financial Corporations (NFCs), particularly mining firms. These shocks, it said, often trigger rising default risks, spilling over into the banking sector in the form of increasing non-performing loans (NPLs). “This stress is visible in the banking sector’s high funding and credit risks, which, in turn, potentially limits credit availability to NFCs and households, further depressing economic activity,” the FSC added. Households are also not spared. The Council said shrinking household incomes, especially during downturns, elevate credit risks for banks, as declining asset quality threatens to worsen financial sector stress. Amid these warnings, the FSC has urged Botswana to adopt what it calls a “multifaceted strategy” to address these systemic risks. Central to this approach is a long-standing policy goal: reducing the economy’s heavy dependence on diamond exports.
