Botswana bounce-back puts in doubt rating downgrade


Jeremy Weltman
Published on:

S&P might be about to downgrade the issuer, but Euromoney’s experts say the risk situation is now improving.

Diamond in the rough: There are signs that Botswana remains an attractive
investment opportunity

Botswana’s risk score has been gradually falling since 2016 in response to a sluggish economic recovery, drought and electricity supply problems, and concerns about the fiscal deficit widening ahead of the next elections in 2019.

This will lead to more domestic borrowing and depletion of the Pula Fund, the government’s investment account held at the central bank.

The risk-score trend includes a very small downward adjustment in Q3 2017 caused mainly by downgraded economic factors outweighing upgraded political ones.

It has led to speculation that Standard & Poor’s (S&P) might be about to lower its A- sovereign rating on a negative outlook since April last year.

Holding back

Yet now might not be the time for S&P to action the change.

Botswana lies 47th in Euromoney’s global risk rankings of 186 countries, a tier-three sovereign in the middle of five categories into which all sovereign borrowers are distributed:


Its credit rating is broadly accurate. Tier-three issuers are normally BB+ to AA.

Moreover, experts taking part in Euromoney’s survey have become more confident since September, signalling Botswana’s risk score will soon improve.

“S&P might be concerned about the authorities’ fiscal position as the funding for the government’s stimulus programme draws down savings and crowds out the private sector in the domestic debt market,” says sub-Saharan expert Rafiq Raji, chief economist with Macroafricaintel.

“But the balance of risks does not warrant a downgrade.”

Raji says the risk situation is improving, as the drought has ended, and troubles at the Morupule B power station are resolved.

“With water and electricity shortages easing, GDP growth will accelerate,” he says.

This is borne out by forecasts just released by the IMF suggesting 4.5% growth this year, and 4.8% in 2018, compared with a 4.3% rise in 2016 and a brief recession in 2015.

Meanwhile, inflation is towards the lower end of the central bank’s 3% to 6% target band, coming in at a reduced 3.2% in September, after peaking at 3.5% earlier in the year.

Diamond mining

The current account is seen diminishing on strong import growth, but will likely remain in surplus as conditions in the diamond mining industry have improved.

The revenue from diamond mining is sustaining strong reserves, worth around 10 months of imports, and the fiscal situation has improved, narrowing the deficit from 4.6% of GDP in 2015/16 (to end-March) to 1% of GDP in 2016/17.

Isaac Matshego, an economist specializing in sovereign risk at Nedbank and another of Euromoney’s survey contributors, says: “Botswana’s long history of prudent fiscal management is the main credit positive.

“The sovereign’s finances are improving as revenue rebounds further from the sharp decline in 2015/16. The Pula Fund, the sovereign wealth fund, with a current value of $5.6 billion, also supports the sovereign’s financial position.”

He admits the economic base, and therefore the fiscal revenue base, will remain small as the government’s economic diversification efforts have led to limited results.

“Efforts to industrialize the economy have been set back by the liquidation of Pula Steel, while the development of the International Financial Services Centre has attracted fewer investors than initially anticipated.”

Still, most experts would agree Botswana remains an attractive investment opportunity, with its A-level ratings justified.

If S&P downgrades now, it could regret the decision.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.