Botswana discoloured by weak metrics

Botswana’s outlook has been dropped from stable to negative by Moody’s, on deteriorating fiscal metrics, on the back of the coronavirus disease 2019 (COVID-19) crisis.

The rating agency has however maintained Botswana’s long-term local and foreign currency issuer ratings at A2, due to its low debt levels – on the back of strong governance.

Moody’s expects real gross domestic product (GDP) to contract by around 7% in 2020, due to the sharp slowdown in domestic demand.

This is also due to the impact of the coronavirus on the mining sector, which represents about 15% of GDP, in particular on the demand for diamonds.

The conditions in the diamonds markets due to the coronavirus have deteriorated significantly compared to Moody’s previous assumptions for 2020.

This weighs on Botswana’s already weakening fiscal metrics given the country’s high reliance on mineral revenue – accounting for about 30% of total revenue in recent years.

Mineral revenue is expected to fall by about two thirds in the 2020 fiscal year compared to the budget estimate.

The tourism sector which directly accounts for 4% of GDP has also been hit by travel restrictions.

Lower mineral 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 2020. This is from an estimated 4% in the 2019 fiscal year and remaining close to 6% of GDP in 2021, according to Moody’s.

Moody’s assumes that the deficit will be financed mainly via domestic borrowing rather than through a drawdown of government fiscal reserves.

The rating agency also expects the government to approach multilateral development banks for budgetary support as done in the past.

As a result, Moody’s projects government debt to rise to around 25% of GDP in 2020, from about 14% of GDP in 2019.

External vulnerability risk is also slowly increasing from a low level.  Moody’s expects current account deficit – already exceeding 7.5% of GDP in 2019 to likely widen due to the decline in diamond exports. This will lead to a further weakening of the foreign currency reserves buffer.

On the upside, Botswana’s debt affordability metrics, with interest payments absorbing less than 2% of revenue remain favourable. The government debt burden, estimated at about 14% of GDP as of 2019, also remains favourable.

This is compared with the median of the countries rated A2 of 4% of government revenue and 46% of GDP, respectively.

Furthermore, Botswana’s sovereign wealth fund, the Pula Fund, at an estimated size of 24% of GDP as of March, continues to provide a key fiscal and external buffer.

Despite being on a declining trend, the reserves buffer also remains solid – with foreign exchange reserves amounting to $5.2 billion as of March 2020 or an estimated 32% of GDP. These cover an estimated 9 months of imports of goods and services, while public external debt remains low at about 8% of GDP at the end of 2019.

Moody’s would consider changing the outlook to stable if the deterioration of fiscal metrics caused by the coronavirus shock is likely to be stabilised by credible fiscal measures.

The rating agency may also stabilise the outlook if there is evidence of progress in implementing growth-enhancing reforms targeting an improvement in economic diversification and business environment.

Moody’s would consider downgrading the rating there are indications of challenges in halting the fiscal deterioration after the severe but temporary coronavirus shock.

An increase in financial support to state-owned companies that lead to a material weakening of the fiscal metrics would also result to a downgrade of the rating.

Meanwhile, Moody’s has also maintained Botswana’s local currency bond and deposit ceilings at Aa3, foreign currency deposit ceiling at A2/P-1 – and foreign-currency bond ceiling at Aa3/P-1.

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