Botswana | Moody’s affirms Botswana’s A2 government bond rating; outlook stable

Gaborone, Botswana, Capital Markets in Africa — Moody’s Investors Service (“Moody’s”) has today affirmed Botswana’s A2 long-term issuer and senior unsecured debt ratings. The outlook remains stable.

Moody’s analyzed Botswana’s credit profile in the context of the commodity price shock and its impact on the country’s economic and fiscal strength.

The affirmation reflects Moody’s view that despite pressure on some of the country’s credit metrics, the challenges that the current external environment poses for the country are appropriately captured by the A2 rating. The relatively less adverse global market conditions and more benign outlook for diamond prices — Botswana’s main commodity — in comparison to base metal prices are also credit supportive as they mitigate the magnitude of the commodity price shock on the economy and the government’s budgetary position. The country’s credit profile remains supported by a number of factors, especially its exceptional fiscal strength — and in particular well-managed sovereign wealth fund — relative to A-rated peers. The stable outlook reflects our expectation that Botswana’s track record of sound fiscal management and government effectiveness will ensure a gradual rebuilding of fiscal buffers that are now being used and will gradually also support transition to a more stable growth model.

The key factors for affirming the A2 rating and maintaining the stable outlook are:

1. Botswana’s continued exceptional fiscal resilience, supported by government fiscal reserves (subset of Pula fund) at almost 25% of GDP, low public debt and Moody’s expectation that the country’s track record of prudent fiscal policy over the medium term will continue.
2. The country’s sound institutional framework, with strong democratic institutions as well as credible and rule-based fiscal policy.

At the same time, Botswana’s rating remains constrained by the country’s high dependence on the diamond industry for economic growth, fiscal revenues and export proceeds. The ongoing commodity shock once again underscored this vulnerability.

Botswana’s long-term local-currency bond and deposit ceilings are unchanged at Aa3 and the long-term foreign-currency bond and deposit ceilings are unchanged at Aa3/A2 respectively. The short-term foreign currency bond and deposit ceilings are also unaffected and remain Prime-1 (P-1).

RATINGS RATIONALE

FIRST FACTOR: THE CURRENT RATING LEVEL REFLECTS STRONG FISCAL RESILIENCE, INCORPORATES VULNERABILITY TO COMMODITY SHOCKS

The first factor underpinning Moody’s decision to affirm Botswana’s A2 rating and to maintain the stable outlook is the government’s fiscal resilience, supported by Government’s large fiscal assets — which amounted to 25% of GDP in early 2016 — and the expectation that the track record of responsible fiscal policy will continue over the medium term.

In 2015, due to decline in demand for and prices of diamonds, Botswana’s real GDP declined by 0.3%, while the fiscal deficit reached almost 3% of GDP. To help stimulate growth in 2016 and to ease unemployment pressures, the 2016/17 budget will record a fiscal deficit of 3.8% of GDP(BWP 6,046 million). Since fiscal deficits in 2016/17 — 2018/19 are to be largely covered by drawing on the existing assets, Moody’s forecasts the government debt-to-GDP ratio to be only marginally increasing from its current 16% level. The fiscal reserves could fall to about 15% of GDP in 2018/19 — the level comparable to the aftermath of the global financial crisis in 2010.

In the recent past, Botswana has demonstrated its commitment to sound fiscal stance and reserve accumulation by having reversed expansionary fiscal policies applied during the global financial crisis and restoring budget balance or surpluses. As a result, low government debt and the large foreign asset positions of the Bank of Botswana put the sovereign in a strong net creditor position of about 40% of GDP at the end of 2015. The rating agency expects this track record of building buffers to continue as domestic and global conditions improve over the rating horizon.

The rating agency expects Botswana’s budget deficit to reach 3.8% of GDP this fiscal year and remain below 4% of GDP in 2017/18. After 2016/17, Moody’s expects the government to move towards its objective of reducing fiscal expenditures below 30% of GDP and tilt their composition towards growth-enhancing capital outlays.

The rating level also incorporates deterioration of credit metrics related to the ongoing commodity price shock. It is reflected in the country’s constrained economic strength — namely lack of diversification, and related high volatility of real GDP growth. While the production potential of the diamond mining sector has been extended for another 50 years, the mining comes at increased cost, eroding profit margins.

SECOND FACTOR: STRONG INSTITUTIONAL FRAMEWORK AND CONTINUOUSLY IMPROVING RULE-BASED FISCAL POLICY

The second factor supporting Moody’s decision to affirm Botswana’s A2 rating and to maintain the stable outlook relates to the government’s strong institutional framework. The rating agency expects the authorities to continue implement fiscal policies that not only allow the economy to adjust to lower diamond prices and other external shocks, but also rebuild reserves afterwards.

The government has recently introduced multi-year budgeting and a medium-term expenditure framework. By introducing the stimulus package against high fiscal buffers (high reserves and low debt), Botswana has regularly demonstrated ability to implement counter-cyclical fiscal policy without jeopardizing macroeconomic stability and debt sustainability. The new fiscal rule targeted at deficits is another step in the authorities’ continuous efforts to adjust policy framework to a changing context.

WHAT COULD CHANGE THE RATING UP/DOWN

Even more successful diamond beneficiation (e.g. value addition) and progress towards broader economic diversification over the medium term, combined with efficiency-enhancing public sector reforms could exert positive pressure on the rating. Lasting reduction in unemployment and inequality would also exert upward pressures on Botswana’s creditworthiness.

A further significant deterioration in the net asset position due expansionary fiscal policies exceeding the self-imposed deficit rule and leading to a marked reduction of fiscal reserves would put downward pressure on Botswana’s creditworthiness.