Botswana's era of "fast economic growth" that lasted for a decade is probably over as a global economic recession cuts demand for diamonds and other commodities, says Moody's Investors Service.
The government's "financial strength" will underpin the country's A2 credit rating, even as growth slows, Kristin Lindow, senior vice president at Moody's sovereign risk team, said in a statement on Friday. Botswana, the world's biggest diamond producer, relies on exports of the gems for about two-thirds of government revenue.
The US and Japan, which are in their deepest recession period, account for the bulk of Botswana's diamonds."The recent collapse in commodity prices as a consequence of the onset of the global recession is likely to have a dampening effect on diamond as well as other resource exploration and development," Lindow says.
Botswana's economy grew on average 5.5 percent a year in the four years through 2007, according to the government. The International Monetary Fund estimates economic growth will slow to 4.6 percent in 2009 from an estimated 5.3 percent this year.
"The government has managed the income from the country's diamond riches with a view to long-term economic and social development as well as recognition of the need to diversify the economy towards other sources of growth given the finite nature of the diamond deposits," Lindow says.
Lindow says government's financial strength is the most important driver allowing it to achieve A1/A2 ratings, which are mid-level investment grade.
Still, she says the economy's small size and significant socio-economic challenges represent constraints on the ratings in spite of the government's healthy net asset position.
However, the likelihood that these risks would lead to multi-notch rating downgrades is seen as "low" because of the solid institutional underpinnings of the government as well as the popular consensus behind the
Moody's raised its outlook on Botswana's A2 foreign currency rating, the highest in Africa, in August last year, indicating it may increase the rating within the next two years.
The political and economic crisis in neighbouring Zimbabwe is one of the main risks to Botswana's credit rating, Moody's said today.Zimbabwe is in 10th year of recession and has the world's highest inflation rate of 231 million percent.
Last month, Standard & Poor's (S & P) also released the 2008 sovereign credit rating for the country. Botswana maintained "A/A-1" foreign currency and "A+/A-1" local currency ratings. The ratings meant that the outlook of the country remains stable.
The assessment by S & P in the context of the current global economic slowdown also reflected Botswana's continued strong financial position, together with a reputation for sound economic policies and prudent financial management.
In making the assessment, S & P anticipates a marked slowdown in economic growth in the next two years due, primarily, to a downturn in the mining sector.
This will, in turn, generate less revenue to fund government expenditure.
But it is recognised that there is limited scope for cutting spending programmes given the
significant needs for infrastructure development and social spending.
As a result, S & P expects a decline of the economy's net external assets from 115 percent to 85 percent of current account receipts.
Nevertheless, the net asset position, as well as ample external liquidity, remains positive factors in support of the rating, as they are sufficient to cover likely financing needs over the outlook period.