Botswana’s A2 government bond rating is affirmed; outlook stable — Moody’s

Gaborone, Botswana, Capital Markets in Africa — Moody’s Investors Service (“Moody’s”) has today affirmed Botswana’s A2 government bond and issuer ratings. The outlook remains stable.

Botswana’s local currency bond and deposit ceilings remain at Aa3, foreign currency deposit ceiling at A2/P-1, and foreign-currency bond ceiling at Aa3/P-1, unchanged.

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

Fiscal Resilience Supported by large assets and low debt: 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 the Pula Fund’s large assets — which amounted to more than US$5 billion (or 36.9% of GDP forecast for 2015) at end-September 2015 — and the expectation that the track record of responsible fiscal policy will continue. In this context, Moody’s expects that the economic stimulus package the government considers will be limited in size and hence will neither significantly reduce the Pula Funds’s large assets, nor raise Botswana’s government debt-to-GDP ratio.

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 by restoring budget balance or surpluses. Public debt has benefited strongly from this policy. Low government debt and the large foreign asset positions of the Bank of Botswana (BoB) put the sovereign in a strong net creditor position of about 40% of GDP at the end of 2014. In 2014, the Pula Fund’s foreign assets were twice as high as the government’s outstanding debt.

The rating agency expects Botswana’s budget deficit to reach 2.7% of GDP this fiscal year and remain below 3% of GDP in 2016/17. As most of these deficits are expected to be covered by drawing on the existing assets, Moody’s forecasts government debt-to-GDP ratio to remain broadly stable. Looking beyond 2016/17, Moody’s expects the government to reach its objective of reducing fiscal expenditures below 30% and tilt their composition towards growth-enhancing outlays.

Strong Institutional Framework, including rule-based fiscal policy and transparent monetary 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 implement fiscal and monetary policies that allow the economy to adjust to lower diamond prices and other external shocks.

The government has also recently introduced multi-year budgeting and is in the process of adopting a medium-term expenditure framework. The ability to use Botswana’s high level of sovereign wealth fund assets as a cushion together with policy credibility give the government enough space to implement counter-cyclical fiscal and monetary policy without jeopardizing macroeconomic stability and debt sustainability.

The A2 government bond rating also captures Botswana’s adherence to the rule of law and progress with respect to control of corruption. The main area of concern regarding the institutional strength is the lack of government effectiveness, with a large — albeit declining — public sector that deliver social outcomes (health, education indicators) below those typical for an upper-middle income country.

Constraints to economic strength due to lack of diversification and structural deficiencies: The third factor behind Moody’s decision to affirm Botswana’s A2 rating and to maintain the stable outlook is the country’s constrained economic strength — namely in light of a lack of diversification, a slowing real GDP trend growth, and the absence of a vibrant private sector that would drive growth and generate jobs. The economy relies on a ‘natural resource-public sector’ growth model, which induces constraints. The production potential of the diamond mining sector has been extended, but at increased cost, eroding profit margins.

Botswana is also grappling with persistently high unemployment, wide income inequality, high child and maternal mortality, and one of the highest HIV rates in the world, which together reduce the country’s productive capacity.

What could change the rating up/down
A successful 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 significant deterioration in the net asset position as well as the lack of structural reforms and diversification would exert downward pressure on the rating over the medium term. In the near term, expansionary fiscal policies that would lead to marked reduction of foreign exchange reserves would also put downward pressure on Botswana’s creditworthiness.

Some key economic statistics
— GDP per capita (PPP basis, US$): 17,050 (2014 Actual) (also known as Per Capita Income)
— Real GDP growth (% change): 4.4% (2014 Actual) (also known as GDP Growth)
— Inflation Rate (CPI, % change Dec/Dec): 3.7% (2014 Actual)
— Gen. Gov. Financial Balance/GDP: 3.7% (2014 Actual) (also known as Fiscal Balance)
— Current Account Balance/GDP: 16.1% (2014 Actual) (also known as External Balance)
— External debt/GDP: 18.3%
— Level of economic development: Moderate level of economic resilience
— Default history: No default events (on bonds or loans) have been recorded since 1983

Source:  Moody’s Investors Service website