London, 29 May 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook to negative from stable on the Government of
Botswana's issuer ratings and affirmed the A2 long-term local
and foreign currency issuer ratings.
The negative outlook reflects increasing risks to Botswana's fiscal strength
due to the severe shock to its growth and the government's revenue
resulting from the coronavirus pandemic impact on the economy and the
important diamond sector in particular. Significantly lower growth,
much weaker government revenues and higher borrowing requirements will
aggravate already deteriorating fiscal trends and risk accelerating the
erosion of fiscal buffers. Furthermore, the disruptions caused
by the coronavirus will likely slow progress in terms of fiscal consolidation
and economic diversification, which are key to preserve the fiscal
and external buffers in the longer term.
The coronavirus outbreak, deteriorating global economic outlook,
falling commodity prices, and financial market turmoil are creating
a severe and extensive economic and financial shock. Moody's regards
the coronavirus outbreak as a social risk under its ESG framework.
For Botswana, the shock transmits mainly through weaker growth and
the loss in government revenue and exports caused by the drop in the demand
for diamonds and cut in production in response. The government's
fiscal, external and liquidity positions risk deteriorating to a
level that would be consistent with a lower rating.
Botswana's A2 rating is supported by the government's still relatively
strong, albeit deteriorating, fiscal metrics, in particular
low debt level, high debt affordability and fiscal and external
liquidity buffers that help mitigate the impact of the coronavirus shock.
The current rating also reflects solid institutions and prudent policymaking
that support macroeconomic stability and limited susceptibility to event
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 CHANGE IN THE OUTLOOK TO NEGATIVE FROM STABLE
RISKS TO FISCAL STRENGTH HAVE INCREASED DUE TO THE CORONAVIRUS SHOCK AMID
ALREADY WEAKENING BUFFERS
The negative outlook reflects the risk that lower growth, higher
budget deficit and the resulting increasing borrowing requirements combined
with the challenges the government already faces in resuming fiscal consolidation
due to increased budget rigidity will result in fiscal metrics continuing
to deteriorate to a level which is no longer consistent with the current
The coronavirus shock has crystalized Botswana's vulnerabilities
arising from the limited economic diversification given its heavy reliance
on a single commodity for growth, exports and budget revenues,
slow progress towards economic transformation, and an increasingly
rigid expenditure structure in the budget.
Moody's expects real GDP to contract by around 7% in 2020,
due to the sharp slowdown in domestic demand and the disruptive impact
of the coronavirus on the mining sector (representing about 15%
of GDP), in particular on the demand for diamonds and the decline
in the tourism sector, which directly accounts for 4% of
GDP, hit by the travel restrictions. The growth downturn
is expected to be deeper compared to that experienced by most sovereigns
in Sub-Saharan Africa. The authorities are preparing a fiscal
stimulus package beyond the economic measures already announced to cushion
the impact of the coronavirus shock on growth, supporting a recovery
in activity later this year and next year as restrictive measures domestically
and abroad are gradually lifted and mining activity recovers.
The conditions in the diamonds markets due to the impact on the coronavirus
have deteriorated significantly compared to Moody's previous assumptions
for 2020, potentially magnifying some of the long-term challenges
already faced by the industry, and weighing on Botswana's already
weakening fiscal dynamics given the sovereign's high reliance on mineral
revenue (accounting for about 30% of total revenue in recent years),
which is expected to fall by about two thirds in fiscal 2020 that ends
in March 2021 compared to the budget estimate.
Moody's expects that lower mineral (and particularly diamond) and
non-mineral revenue and fiscal measures to contain the effect of
the pandemic will contribute to the fiscal deficit widening to close to
10% of GDP in fiscal 2020 from an estimated 4% in fiscal
2019 and remaining close to 6% of GDP in fiscal 2021 as the impact
of lower Southern African Customs Union (SACU) revenue materializes with
a one year lag. Moody's expects the large shock to the revenue
and stimulus policy response will lead a significant deterioration in
fiscal metrics, jeopardizing the government's medium term
fiscal consolidation plans and accelerating the already-evident
erosion of the sovereign wealth fund.
Moody's assumes that the deficit will be financed mainly via domestic
borrowing rather than through a drawdown of government fiscal reserves,
although the government could also approach multilateral development banks
for budgetary support as done in the past. While Botswana's
domestic banking system has comfortably met government issuance in previous
years, larger than projected government financing requirements in
2020 may pressure liquidity capacity within the relatively shallow system
to absorb larger issuance of government securities. The rigid structure
of the budget (particularly the large public sector wage bill) leaves
limited room to accommodate the anticipated fiscal response without a
significant increase in the deficit leading to higher government debt
and erosion in fiscal reserves. As a result, Moody's
projects government debt to increase to around 25% of GDP in 2020
from about 14% of GDP in 2019 and broadly stabilized thereafter.
External vulnerability risk is also increasing, albeit from a low
level, as Moody's projected current account deficit --
already exceeding 7.5% of GDP in 2019 -- will likely
widen due to the decline in diamond exports, leading to a further
weakening of the foreign currency reserves buffer.
RATIONALE FOR THE RATING AFFIRMATION
The affirmation of the A2 ratings reflects Botswana's fundamental credit
strengths including the government's still-strong fiscal metrics,
supported by fiscal buffers (albeit declining) and prudent fiscal policy.
Debt affordability metrics, with interest payments absorbing less
than 2% of revenue, and the government debt burden,
estimated at about 14% of GDP as of 2019, remain favorable
compared with the median of the sovereigns rated A2 (4% of government
revenue and 46% of GDP, respectively) although Moody's
projects that debt to revenue will double in 2020. Furthermore,
Botswana's sovereign wealth fund, the Pula Fund, at an estimated
size of 24% of GDP as of March 2020, continues to provide
a key fiscal and external buffer despite having weakened significantly
in recent years.
Botswana's robust institutions and prudent policymaking also supports
the current rating despite a mixed track record in terms of structural
reform implementation to improve the business environment and promote
economic diversification. The country ranks favorably according
to the Worldwide Governance Indicators, in particular adherence
to the rule of law and control of corruption, while a sound monetary
policy has been conducive to price stability although the institutions
and governance strength is weaker than the median of the A2-rated
The affirmation also reflects limited susceptibility to event risk given
a track record of political stability and contained government liquidity
and banking sector risks despite increasing (albeit from a low level)
external vulnerability risk. Despite being on a declining trend,
the reserves buffer remains solid - with foreign exchange reserves
amounting to $5.2 billion as of March 2020 or an estimated
32% of GDP, covering an estimated 9 months of imports of
goods and services, while public external debt remains low (at about
8% of GDP at end-2019).
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are relevant 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 0.53)
lags compared to Botswana's relatively strong economic performance,
in part reflecting dependence on the mining sector, limited private
sector job creation, and labor market distortions. Botswana
has a history of relatively peaceful elections and minimal social unrest.
Moody's regards the coronavirus pandemic as a social risk under its ESG
framework, given the substantial implications for public health
and safety. For Botswana, it mainly manifests in an economic
shock and revenue deterioration that exacerbates existing pressures on
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 physical infrastructure.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely in the foreseeable future given the negative outlook.
Moody's would likely change the outlook to stable if the rating agency
were to conclude that the deterioration of fiscal metrics caused by the
coronavirus shock will likely be stabilized by credible fiscal measures
aimed at rebuilding fiscal buffers in the long term and reduce fiscal
vulnerabilities posed by the rigid budget structure. The decision
to stabilize the outlook may also be supported by evidence of progress
in implementing growth-enhancing reforms targeting an improvement
in economic diversification and business environment.
Conversely, indications of challenges in halting the fiscal deterioration
after the severe but temporary coronavirus shock suggesting a durable
deterioration of fiscal strength will likely prompt a downgrade.
An increase in financial support to state-owned enterprises that
lead to a material weakening of the fiscal metrics would also likely result
in a lower rating. Any signs that susceptibility to event risk
has increased due to higher liquidity risk resulting from larger gross
borrowing requirements or a further deterioration of the external position
compared to current expectations will also increase the likelihood of
Given Botswana's strong dependency on the diamond industry for growth,
exports and budget revenues, the sovereign is more exposed than
peers at the current rating level to the risks associated with the coronavirus
shock, this event prompted the publication of this credit rating
action on a date that deviates from the previously scheduled release date
in the sovereign release calendar, published on www.moodys.com.
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 26 May 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
fiscal or financial strength, including its debt profile,
has not materially changed. The issuer has become increasingly
susceptible to event risks. Other views raised included:
The issuer's institutions and governance strength, have not materially
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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in relation to each rating of a subsequently issued bond or note of the
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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issued on a support provider, this announcement provides certain
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support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
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Regulatory disclosures contained in this press release apply to the credit
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
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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/Sub Sovereign
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