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International rating agencies remain cautiously optimistic about Botswana’s economic outlook

Released on:2020-05-09 Views:

Moody's and S&P Global Ratings have recently confirmed Botswana's sovereign credit rating and future outlook. Considering the current extremely severe external economic environment, the rating results show that the international community has confidence in Botswana's economic prospects. The long-term favorable balance of trade has accumulated abundant foreign exchange reserves for Botswana, making the government have sufficient fiscal and monetary policy space to cope with short-term external shocks. Also, the sustained and steady development plan has laid the foundation for the sustainable development of Botswana.


Botswana has consistently had the highest sovereign credit rating in Africa. It is a landlocked country with a relatively stable political situation and a favorable economic situation in southern Africa. It has long been at the forefront in Africa in terms of international reputation. On March 6, 2020, Moody's affirmed the Government of Botswana's A2 long-term local and foreign currency issuer ratings. The outlook remains stable. The affirmation reflects Botswana is in good financial standing. The low debt burden and a sizable sovereign wealth fund continue to support local currency stability, while political stability supports the orderly implementation of all policies. Although another rating agency S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings in 2020 on Botswana to "BBB+" from "A-" considering the decrease in external demand caused by the global economic recession, it affirmed its short-term ratings on Botswana at "A-2". The outlook is stable.


Manageable short-term economic risks


Botswana was once one of the least developed countries. Since diamond exploration in 1967, Botswana has achieved rapid economic growth aided by the export of rough diamonds. At present, the diamond industry still contributes to about 1/3 of Botswana's GDP, and more than half of Botswana's government revenue comes from diamond exports. Years of trade surplus has accumulated abundant foreign exchange reserves for Botswana whose foreign exchange reserves accumulated in recent years can support it to have enough foreign exchange for imports for more than 10 months, greatly exceeding the amount specified in international safety standards. The Pula Fund launched by the government of Botswana is an important sovereign wealth fund in the world, also accounting for a part of its total foreign exchange reserves. According to Botswana's latest financial schedule, 40% of its mineral revenues are managed by the Pula Fund, which can maintain sufficient liquidity while maximizing foreign exchange earnings. At present, Botswana has a low debt burden, with the three major debt indicators, namely debt service, loan-to-value and debt-to-income ratios. All shows sound performance and the exchange rate remains stable for a long time. Its consistent sound economic performance and relatively high sovereign credit rating have facilitated its international financing.


The demand for diamonds in the international market significantly shrinks in 2020, posing challenges to Botswana's economic development. However, compared with most mineral products, diamonds are more widely used and show lower price elasticity. Therefore, among resource-dependent economies, Botswana is less vulnerable to the impact of the global economic recession. At present, Botswana still has adequate fiscal and monetary policy space to cope with the impact of the harsh economic environment. Moreover, its relatively high per capita income level has also enabled the possibility for consumption to drive economic growth. Overall, it has a resilient economy.


Promising long-term economic development


Botswana has established a relatively perfect market economy system and its business environment has long been among the best in Africa. Most of the wealth gained from diamond exports is used to upgrade the country's infrastructure, and its administrative efficiency and Corruption Perceptions Index show competitive advantages in the region. In addition, Botswana is hardly threatened by terrorism and there are few political violence or civil strife in the country. In the past 30 years, its average real GDP growth rate has been close to 10%. The Government of Botswana has set long-term goals to achieve development. Now the country is in the 11th National Development Plan period (April 2017-March 2023), with the theme of "Inclusive Growth for the Realization of Sustainable Employment Creation and Poverty Eradication". According to the plan, the GDP growth rate of 4.4% per year should be maintained at this stage. In order to solve the problem of a single economic structure, Botswana has actively carried out the diversified economic pattern, with remarkable results achieved. On the one hand, Botswana focuses on improving the development quality of pillar industries and increasing investment in diamond processing, manufacturing and trade to strengthen its voice in the market. On the other hand, Botswana has achieved remarkable results in the development of coal mining and tourism according to local conditions. In addition, it has also made great achievements in manufacturing and financial services. According to IHS forecasts, Botswana is expected to achieve an average annual economic growth rate of 3.5% to 3.8% from 2024 to 2050.


Source: official website of China Export & Credit Insurance Corporation