Moody’s weekend decision follows a similar assessment by S&P Global Ratings last month. Moody’s and S&P are two of the three main credit ratings agencies whose opinions determine government’s cost of borrowing, as well as the country’s attractiveness to investors. The other ratings agency is Fitch.
Moody’s researchers said the affirmation of the sovereign credit rating was based on the country’s credit strengths, including “its still moderate debt burden and its track record of managing economic and fiscal shocks”. The researchers also highlighted the peaceful transition of power in last year’s general election and the potential that the new government has the “mandate and political capital” to make difficult choices for fiscal stability.
“The current government has the mandate and political capital to implement fiscal consolidation measures, including a reduction in development spending as well as controlling growth in the wage bill and rationalising transfers to state-owned enterprises,” Moody’s researchers said. “The government also has space to increase tax revenues to levels closer to regional peers. “These measures could support a stronger-than-expected fiscal consolidation and help stabilise Botswana's debt burden.”
The researchers added: “Furthermore, the administration has committed to implement economic reforms to reduce reliance on the volatile diamond sector and support private sector-led growth, raising the possibility of lower deficits and stronger long-term growth potential than we currently expect.”
Moody’s however said its downgrade of the outlook from stable to negative was based on the prolonged downturn in the diamond sector and the pressure the situation was exerting on the country’s economic growth prospects, exports, and government revenues.
“Despite Botswana's history of managing diamond sector volatility, the government has nearly depleted its fiscal reserves, making the credit profile more vulnerable to ongoing weakness in the diamond sector. “We expect large fiscal deficits to persist due to the decline in mineral revenue, mainly from diamonds,” the researchers said.
The researchers noted that in the absence of a fiscal buffer, the government intends to rely on a combination of domestic and external financing sources to meet its financing needs. However, they noted that the government had a limited track record of mobilising large-scale financing from domestic or external sources, which increased the risk to liquidity and debt affordability.
“We also see risks to the timely and adequate disbursement of concessional external financing for general budget purposes, as this financing often involves long timelines before disbursement and restrictions on how funds can be used. “Any shortfalls in external concessional financing, along with potential constraints in scaling up domestic financing, would likely increase the government's reliance on external commercial borrowing. “This shift in financing would contribute to a more rapid deterioration in Botswana's debt affordability than currently envisioned,” Moody’s researchers said.
Moody’s last downgraded Botswana sovereign credit ratings in April 2021, reflecting the impact on the economy and public finances of the COVID-19 pandemic.
