Botswana’s Outlook Revised To Negative

International credit ratings firm, S&P Global Ratings, expects Botswana’s GDP to contract by around 10 percent in 2020 because of the adverse impact of the COVID-19 pandemic, compounded by weaker diamond exports.

In a research update on Botswana released on 18 September 2020, S&P Global Ratings says the fallout from current pressures could delay medium-term fiscal consolidation and further erode Botswana’s external buffers. “We are revising our outlook on Botswana to negative from stable and affirming our ‘BBB+/A-2’ ratings,” the update says.

At the same time, S&P affirmed Botswana’s BBB+/A-2 long- and short-term foreign and local currency sovereign credit ratings. The firm also affirmed its BBB+/A-2 long- and short-term foreign and local currency sovereign credit ratings on the Bank of Botswana because it equalises them with their ratings on the sovereign. “The negative outlook reflects our view of anticipated higher pressures on Botswana’s economic, external and fiscal performance over the next two years, stemming from the impact of the global notably on diamond exports,” the agency says.

On a downside scenario, S&P says it could lower its ratings on Botswana if the fiscal trajectory remained weak beyond the initial impact of the pandemic. “This could happen if diamond prices and demand failed to recover in the next two years,” says the update. “In such a case, ongoing spending pressures could derail fiscal adjustments, and the current account deficit could widen beyond our current assumptions, potentially leading to gross external financing needs exceeding 100 percent of current account receipts (CARs) and usable reserves.”

On an upside scenario, the agency says it could revise the outlook to stable if Botswana is able to restore its fiscal balance to more manageable levels through fiscal discipline and an upturn in the global diamond market. “If Botswana manages to prevent a further decline of external buffers, that could also support the ratings at their current levels and a stable outlook,” it notes.

The economic lockdown has had material impact on economic activity, with diamond third and fourth sightholder sales being cancelled because of global travel restrictions. Similar to many African countries, Botswana introduced fiscal and monetary relief measures to mitigate the impact. The Bank of Botswana (BoB) cut its benchmark rate and injected P1.6 billion (about US$140 million) into the banking sector by reducing reserve requirements.

S&P says as a result of the combined effects of the economic meltdown and collapse of diamond demand, prices and production in 2020, fiscal and external balances are weaker than it had anticipated in its previous forecasts. “We now forecast that the economic contraction will be close to 10 percent in 2020, reflecting the past lockdowns and potential future intermittent lockdowns in the capital city for the remainder of 2020,” S&P says. “We consider 2020 economic underperformance as a one-off event, and we project an economic rebound of 6 percent in 2021.”

The aggregate diamond industry accounts for about a quarter of Botswana’s GDP, which makes its economy highly susceptible to external shocks. Diamond production at Debswana came to a standstill for a month earlier this year while very low global demand is unlikely to sustainably change the dynamics in 2020 despite some signs of recovery in diamond demand in China and the US. “We forecast diamond production will contract by 25 percent in 2020 after an already challenging 2019,” the S&P update notes. “Although the banking sector accounts for about 50 percent (by total assets) of the country’s GDP, we project credit growth will be moderate at about 5 percent in 2020.”

According to the credit rating agency, Botswana is set to post twin deficits in the next two years. It has posted fiscal deficits since 2017. S&P initially projected a 2.5 percent fiscal deficit for 2020-2021 on the back of muted but positive real GDP growth of 2.6 percent prior to the pandemic’s onset.

It also expects the tourism sector to take longer to recover from the pandemic. Further, S&P expects that the twin deficits will continue to reduce the country’s traditionally strong fiscal and external buffers over the medium-term.