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Budget deficits expose Botswana to credit rating downgrade

BRIAN BENZA
Matambo sees expenditure outweighing revenues for the next three years
Analysts fear international ratings agency, Standards and Poorĺs (S&P) might this month downgrade Botswanaĺs sovereign credit ranking due to the countryĺs widening budget deficits that have potential to deplete government savings in the Pula Fund.

The Budget Strategy Paper for the 2018/19 financial year projects the budget deficit for the current financial year to increase from P2.35 billion announced by Finance Minister, Kenneth Matambo in February to P6.5 billion. 

The deficit is seen widening to P8 billion in the next financial year leading to cumulative budget gap of P15 billion by 2020, a development that is contrary to government’s commitment in NDP 11 to reign in budget deficits.

With the government having ruled out tax increases to finance the deficit, the shortfalls will likely be covered by a combination of borrowing on the domestic market as well as drawing down on the Pula Fund at the central bank.

Botswana has been running budget deficits in the last three financial years, which have been funded by a combination of drawing down on savings as well as issuance of Bonds and Treasury bills.

The drawdown on savings has led to a decline on the Government Investment Account (GIA) at the central bank from P35.5 billion in December 2015 to P30.6 billion in June 2017.

It is this declining position on Botswana net financial position that analysts fear might lead to ratings agencies downgrading Botswana, although the country might still retain its investment grade.

“Government savings at the Bank of Botswana have been declining in the past years due to ESP funding needs,” said an investment banker with a local financial institution, who declined to be named.

“The current levels are still adequate, but the continued drawdown will likely result in a downgrade soon.”    

S&P is expected to announce its ratings decision on Botswana before the end of October.

In the last decision on Botswana announced in April, S&P gave the country a negative outlook with an ‘A-’ rating for long-term bonds and ‘A-2’ for short-term bonds.

The agency however said the country’s sovereign credit rating is threatened by a possible persistence of underperformance of the diamond sector that could result in a weaker economic growth and worsening of the fiscal position over the next 12 months.

 According to fellow rating agency, Moody’s, the Pula Fund has been an important

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buffer against shocks and shortfalls and its accumulated assets are amongst the highest in sub-Saharan Africa but a significant deterioration in the country’s net asset position will put downward pressure on Botswana’s creditworthiness.

 The Economist Intelligence Unit (EIU) on the other hand gave Botswana an ‘A’ rating in August, on the back of favourable debt metrics, helped by currency appreciation but said they believed the past relaxation of fiscal rules on the size of deficit and a concomitant risk of a spending overshoot could put the rating under pressure.

Local economist, Keith Jefferis said the level of foreign reserves and cash balances remain high but at some point, large budget deficits could well lead to a downgrade.

To finance the expected budget deficits, the Strategy Paper says that government will be guided by the Medium Term Debt Management Strategy (2016/17- 2018/19), which outlines the options available in the event of government budget deficits.

“However, in the short-term, the options revolve around borrowing, either domestic or external, subject to the country’s borrowing limits, and drawing down on government cash balance held as part of the foreign exchange reserves. Each of these options has its own pros and cons,” reads the paper.

 On the option of drawing down on government cash balances at the Bank of Botswana (Pula Fund), the Ministry of Finance admits this could have the potential to jeopardise the country’s sovereign credit rating.

Fiscal authorities also acknowledge the decline in government’s net worth, as a result of the drawdown of cash balances to finance budget deficits will also have negative implications on the ability of the country to absorb major external shocks and cushion the domestic economy in case of financial crisis.

“In the event of the need to finance budget deficits by drawing down on government cash balances, there will be strict enforcement of current fiscal rules of withdrawals from the foreign exchange reserves to ensure the use of such funds are restricted to funding productive government spending priorities that benefit the country’s economic and social development in the long-term,” reads the Strategy Paper.



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