London, 06 March 2020 -- Moody's Investors Service, ("Moody's") has
today affirmed the Government of Botswana's A2 long-term local
and foreign currency issuer ratings. The outlook remains stable.
The affirmation reflects Botswana's credit strengths and challenges
captured at the A2 rating level. The low debt burden, strong
debt affordability indicators and a sizeable sovereign wealth fund continue
to support fiscal strength, despite the gradual erosion of fiscal
buffers, while solid institutions and prudent policymaking support
macroeconomic stability. A track record of political stability
and modest government liquidity and banking sector risks limit event risk.
Nevertheless, the economy's small size, slow progress
towards diversification and long term structural challenges constrain
economic strength, while a large public sector, heavy reliance
on a single commodity for growth, exports and budget revenues,
and an increasingly rigid expenditure structure, constrain fiscal
The stable outlook reflects Moody's view that the balance of risks
is unlikely to change over the next 12-18 months. Still-strong
fiscal metrics underpinned by a sizeable sovereign wealth fund more than
adequate to cover outstanding debt and prudent policies should help weather
near-term uncertainties associated with potential global growth
disruptions and any adverse impact on consumer demand for Botswana's
diamond exports. Nevertheless, the slow progress in terms
of fiscal consolidation and economic diversification risks eroding fiscal
and external buffers over the longer term.
Botswana's local currency bond and deposit ceilings remain at Aa3,
foreign currency deposit ceiling at A2/P-1, and foreign-currency
bond ceiling at Aa3/P-1, all unchanged.
RATIONALE FOR THE AFFIRMATION
LOW DEBT BURDEN, STRONG DEBT AFFORDABILITY AND A SIZEABLE SOVEREIGN
WEALTH FUND SUPPORT FISCAL STRENGTH, DESPITE GRADUAL EROSION OF
Botswana's fiscal strength assessment reflects the government's
strong fiscal metrics and fiscal resilience, supported by large
fiscal buffers and prudent fiscal policy. Government debt affordability
metrics, with interest payments accounting for less than 2%
of revenue, and the government debt burden, estimated at about
14% of GDP as of 2019, are stronger than the A-rated
median (4% of government revenue and 38% of GDP, respectively).
Furthermore, Botswana's sovereign wealth fund, the Pula
Fund, which accounts for an estimated 27% of GDP as of the
end of November 2019, remains a key buffer against potential shocks
in government revenue.
While the availability of large sovereign wealth fund resources has provided
the government with flexibility to implement moderately expansionary fiscal
policy over the recent years, fiscal space has gradually narrowed
and the government is now pursuing a gradual fiscal consolidation targeting
a budget surplus in the medium term.
Moody's expects Botswana's budget deficit to narrow to 2.8%
of GDP in 2020/21 from an estimated 3.9% of GDP in 2019/20
and gradually decline thereafter. The fiscal adjustment will occur
through lower development expenditure while recurrent expenditure is expected
to continue to increase. The government is adopting measures to
improve the efficiency of development spending by enhancing public investment
management. While the planned reduction in capital spending reflects
the government's efficiency considerations, the resulting
increase in budget rigidity reduces fiscal flexibility. It also
poses a risk to the achievement of the envisaged deficit reduction,
should mineral revenues underperform due to challenging conditions in
the diamond industry and/or if lower than expected Southern African Customs
Union (SACU) receipts materialize due to continuing weak economic performance
in South Africa.
SOLID INSTITUTIONS AND PRUDENT POLICYMAKING SUPPORT MACROECONOMIC STABILITY
Botswana's solid institutions and governance strength supports the A2
rating. The country performs strongly in Worldwide Governance Indicators,
in particular adherence to the rule of law and control of corruption,
robust monetary policy framework delivering price stability, and
prudent policymaking that has resulted in a sound management of the country's
These positive attributes of Botswana's institutional profile are
balanced by capacity constraints that have resulted in a mixed track record
in terms of structural reform implementation. For example,
progress introducing reforms to improve the business environment and enable
economic diversification has been very gradual, while public investment
management and governance of state-owned enterprises (SOEs) continue
to face challenges.
SMALL ECONOMIC SIZE, LOW DIVERSIFICATION AND LONG TERM STRUCTURAL
CHALLENGES CONSTRAIN ECONOMIC STRENGTH
Botswana's A2 rating balances the relatively solid, albeit volatile,
growth performance and its high per capita income with its relatively
narrow economic base, heavy reliance on the diamond industry and
on a large public sector. Despite diversification efforts,
the mining sector, and in particular the diamond sector, remains
a key growth driver and accounts for the vast majority of export proceeds,
and more than one third of government revenue.
Moody's expects real GDP to grow by 3.9% in 2020,
after expanding by an estimated 3.6% in 2019, driven
mainly by the recovery of mining activity and improvement in the non-mining
sectors supported by the accommodative monetary conditions and gradual
reform progress to improve the business environment. However,
risks to the growth outlook are tilted to the downside due to the challenging
external environment, including sluggish growth in South Africa
and risks to global consumer demand for diamonds associated with the increasingly
challenging global conditions. Over the longer term, more
expensive extraction of diamond resources and potential structural changes
in the industry will challenge Botswana's growth model without material
progress in economic diversification. The large public sector displays
low efficiency levels and creates labour market distortions, while
high unemployment and inequality pose additional structural challenges.
LIMITED SUSCEPTIBILITY TO EVENT RISK, GIVEN THE TRACK RECORD OF
POLITICAL STABILITY AND MODEST GOVERNMENT LIQUIDITY AND BANKING SECTOR
RISKS, AND STRONG, ALBEIT WEAKENING, EXTERNAL POSITION
Moody's decision to affirm Botswana's rating also reflects limited susceptibility
to event risk due to its stable political system, modest government
borrowing requirements, healthy banking system and the country's
strong, albeit weakening, external position.
The re-election of the Botswana Democratic Party (BDP) --
the ruling party since independence -- under the leadership of President
Masisi with a comfortable margin in October 2019 gives the new administration
a strong mandate to deliver on economic transformation, and reconfirmed
Botswana's track record of political stability. Moody's
expects robust political institutions to continue to underpin its assessment
of political risk.
Government liquidity risk is modest, reflecting low gross borrowing
requirements and the government's reliable access to domestic capital
markets to absorb local currency-denominated debt.
Botswana's banking system's financial profile is sound.
Banks are on average well capitalized and the level of non-performing
loans as a percentage of gross loans remains contained, at about
5% at the end of 2019.
External vulnerability has increased as the current account balance has
shifted into deficit in 2019 and Moody's expects it to remain in
negative territory in 2020 and 2021. However, the reserves
position remains solid - with foreign-exchange reserves
(excluding gold and special drawing rights) amounting to $6.4
billion as of November 2019 or an estimated 34% of GDP -
and public external debt is low, mitigating risks from external
shocks stemming from the high reliance on the diamond industry.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects broadly balanced risks at this rating level.
Moody's expects Botswana to embark on a fiscal consolidation path
in the next fiscal year while fiscal and external buffers will support
its shock absorption capacity. Moody's expects progress on
economic transformation to continue, albeit at a gradual pace.
Botswana's credit profile continues to balance sound fiscal metrics and
prudent policies delivering macroeconomic stability with the challenges
posed by the country's economic model reliant on the diamond industry
and on the large role of the public sector. These challenges risk
eroding its credit strengths over the longer term in the absence of material
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E), social
(S), and governance (G) factors when assessing sovereign issuers'
economic, institutional and fiscal strength and their susceptibility
to event risk. In the case of Botswana, the materiality of
ESG to the credit profile is as follows:
Environmental considerations are somewhat material to Botswana's credit
profile because the country is affected by water scarcity and vulnerable
to recurrent droughts, despite relatively low economic reliance
on agriculture compared to other Sub-Saharan African sovereigns.
Social considerations are relevant to Botswana's credit profile.
Progress in reducing high unemployment, in particular among the
youth, and high income inequality (with a Gini coefficient of 0.52)
lags compared to Botswana's relatively strong economic performance,
in part reflecting dependence on the mining sector, limited private
sector job creation, and labour market distortions. Botswana
has a history of relatively peaceful elections and minimal social unrest.
Governance considerations are material to Botswana's rating.
Botswana performs strongly on the Worldwide Governance Indicators,
and ranks highly among African countries according to the 2018 Ibrahim
Index of African Governance as well as sound management of natural resources
income, which it has invested to expand the country's social and
WHAT COULD CHANGE THE RATING UP
Upward pressure would arise in the presence of (i) structural reforms
leading to tangible results in terms of business environment improvements
and higher economic diversification, boosting Botswana's growth
potential and (ii) an improvement in the composition and efficiency of
expenditure that reduces fiscal vulnerability to sudden declines in SACU
revenues and/or mineral revenues.
WHAT COULD CHANGE THE RATING DOWN
Conversely, downward rating pressure would likely develop due to
limited fiscal consolidation, inability to contain recurrent expenditure
and in the event of a negative shock to government revenue resulting in
a significant erosion of fiscal reserves. A material increase in
financial support to state-owned enterprises would also erode Botswana's
fiscal buffers and put negative pressure on the rating. Lack of
progress in terms of economic diversification, over the long term,
would also exert downward pressure on the rating.
GDP per capita (PPP basis, US$): 17,948 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.5% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.5%
Gen. Gov. Financial Balance/GDP: -4.6%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2.1% (2018 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 03 March 2020, a rating committee was called to discuss the rating
of the Government of Botswana. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutions and governance strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
have not materially changed. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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provides certain regulatory disclosures in relation to the provisional
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Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Moody's Investors Service Ltd.
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454