Leading global agency, Standard & Poor's, downgraded the country's sovereign credit rating over the weekend, the first such move in 11 years, as concerns grow about the country’s budget outlook.
When S&P’s last downgraded Botswana in 2009, the country was wrestling with a collapse of diamond revenues due to the global recession. This time, having emerged from a year of weaker diamond revenues, analysts at S&P’s said their projection was that the country would face continuing pressure on its budget in the “next few years”.
At their essence, sovereign credit ratings are ‘scores’ assigned to countries’ ability to repay debts. Low credit ratings mean countries pay higher interest rates and have lower ability to attract investors, who would worry about raising affordable capital from within such countries.
Despite the downgrade, Botswana rating of BBB is still amongst the highest in Africa.
“A prolonged weaker diamond export market will likely continue to undermine Botswana’s export and fiscal revenues,” the ratings agency stated. “In addition, expenditure pressures are rising from the increasing public sector wage bill and are likely to delay fiscal consolidation in the near term. “We therefore expect that, over the next few years, Botswana will run twin deficits that gradually drain its traditionally strong savings.” Traditionally, government covers its deficits
The latter action, however, has concerned S&P’s as well as the IMF as it involves lowering the country’s fiscal buffers. Government’s own forecasts from last October show deficits in the current financial year and 2020-2021 before a P490 million surplus in 2022-2023. However, last year’s weaker diamond performance, coupled with the unexpected impact of the coronavirus, mean a substantial revision of budgets towards greater deficits.
“We could lower our ratings on Botswana if prolonged weaker diamond demand and prices alongside mounting spending pressure cause a deterioration of the country’s fiscal and external metrics beyond our current assumptions,” S&P’s analysts indicated. “This could in turn lead to debilitated growth prospects, which would constrain Botswana’s credit quality.”
On the other end, the credit ratings agency says it could upgrade its assessment of Botswana’s ratings if the country’s policy reforms generate “sufficient external buffers, supported by a broader export base, to maintain fiscal and external balances over our forecast horizon for 2020-2022”. “An upgrade is unlikely over the next two years,” the agency stated.