19 Mar 2025

Standard and Poor’s (S&P) has revised Botswana’s credit outlook from stable to negative as the country continues to face external and fiscal pressures.

The international agency notes that with subdued diamond demand, it projects Botswana’s fiscal consolidation efforts to remain challenging.

“We forecast government debt, net liquid assets, to rise to 19 per cent of GDP by 2028 from three per cent in 2024,” the agency said as it affirmed its ‘BBB+/A-2’ long and short-term sovereign credit rating.

Ratings are used to evaluate credit risk enabling the government to raise money in the capital markets instead of taking a loan from a bank. A ‘BBB+’ credit rating shows good credit quality, classified as ‘investment grade’, it means the country has adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

S&P states that the negative outlook reflects its views that weak global demand for diamonds and depressed prices will likely keep Botswana’s export and fiscal flows subdued, complicating the government’s fiscal consolidation agenda.

“The negative outlook also reflects that Botswana’s external and public balance sheets could erode further,” S&P notes in its latest report released this week.

Botswana’s credit rating could be lowered further if its fiscal and external performance proved weaker than the S&P’s forecast. The agency notes that this could happen if diamond demand and GDP growth do not recover from their current lows, leading to further weakening of Botswana’s fiscal and external buffers. Further, the outlook could be revised to stable if global demand and prices rebound, substantially improve Botswana’s fiscal and external flows.

“Longer-term upside could also stem from a policy effort to diversify Botswana’s commodity-concentrated export and tax base,” states S&P.

GDP grew by 3.2 per cent in 2023 and the economy is estimated to have contracted by 3.3 per cent in 2024, primarily due to a significant drop in diamond demand and prices. The economy contracted by 3.3 per cent in the first three quarters of 2024 driven by a steep 23.4 per cent decline in diamond trading and mining activities amid weakened Chinese demand and increasing competition from lab-grown diamonds.

“This was despite continued growth of Botswana’s non-diamond sector, which expanded by an estimated 3.7 per cent in the first three quarters of the year,” reads the report.

S&P estimates that a sizeable deficit of nine per cent of GDP for the 2024/25 financial year due to GDP contraction and sharp fall in diamond taxes and royalties alongside sizeable spending in the run up to elections.

“Despite a very conservative spending growth target of four per cent, the budget unveiled by the new government for fiscal 2025-2026 in February 2025 plans for a still-sizable overall deficit of about 7.6 per cent of GDP,” S&P states.

Botswana has over the years built surpluses which enabled the country to build fiscal buffers and maintain a net asset position. This, however, has been eroded over the years with government moving from a net asset position of six per cent of GDP in 2023 to a net debt position of three per cent of GDP in 2024 and S&P forecast net debt to rise to 19 per cent of GDP by 2028.

“Despite its ambitious agenda, government is targeting broad fiscal consolidation. However, if the external environment remains weak, downsizing fiscal deficits is likely to prove challenging. Sizeable public assets are also important for Botswana’s crawling pegged exchange-rate regime,” reads the report.

Meanwhile, S&P notes that its ratings on Botswana are supported by the country’s strong institutional framework, which has underpinned the prudent management of the country’s natural wealth over the years; its strong external balance sheet; and comparatively low, albeit rising, government debt burden.

“The ratings are constrained by the country’s narrow economic base – it still relies on the diamond sector and is therefore vulnerable to fiscal and external shocks,” the report adds. ENDS