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Moody’s highlights Botswana’s credit constraints

Publishing Date : 15 October, 2018

Author : REARABILWE RAMAPHANE

Botswana’s heavy dependence on a single commodity as a key economic driver coupled with unexplored and narrow economic base continues to feature in the country’s financial trends and analysis as a major credit constraint.


This has once again been reiterated by international finance and economic commentator and rating agency, Moody’s in their annual report released this week. Botswana is currently heavily reliant on the mining sector as the main foreign income earner and key fiscal revenue window predominantly the diamond industry.


The country’s flagship diamond company, Debswana, a 50-50 venture between global diamond giants De Beers is the largest private sector employer, only the Government of Botswana employs more people than Debswana. The mining sector accounts for almost a quarter of the national Gross Domestic Product (GDP).


This according to Moody’s and many other global finance and economic observers signals a ticking time bomb and continues to pose a threat to the country future as diamonds and minerals are finite and also vulnerable to global economic uncertainties in terms of fluctuating commodity prices.


Moody's Corporation, an American business and financial services company on an annual basis releases credit rating reports zooming into world economies and analysing global financial trends through its rating subsidiary Moody's Investors Service (MIS). In this latest report, Moody’s says Botswana's key credit strengths includes the government's large fiscal reserves and very low debt levels, “Botswana’s credit profile balances the government's strong balance sheet, net external creditor position and low debt burden against the country's small and undiversified economy”, highlights the report.


Noting in the annual credit analysis Daniela Re Fraschini, Moody's Assistant Vice President underscored that, "Botswana’s narrow economic base, with its heavy reliance on the diamond industry, remains a key credit constraint”. By the end of 2017, the mining industry’s share of nominal GDP remained high at around 18%, while diamond revenue accounted for close to 90% of export proceeds and around 35% of fiscal revenue.


“The large public sector, which has relatively weak social outcomes, and high poverty, unemployment and inequality are additional credit constraints”, submits the Moody’s Analyst. MIS estimates Botswana’s real GDP to expand by 4.5% on average in 2018-2019, supported by a recovery in the diamond sector and by an expansionary fiscal stance ahead of elections next year. Beyond the near-term recovery, growth in the mining sector is expected to be subdued, balancing the gradual expansion in diamond production against the closure of the BCL copper-nickel mine and delays in the construction of a new copper mines.


According to Re-Fraschini, Botswana's high institutional strength reflects its strong performance on the Worldwide Governance Indicators, particularly in terms of control of corruption. “Botswana pursues a monetary policy that is supported by a well-designed framework akin to inflation targeting, which has met its objective range over the past five years. The government has a transparent and rule-based fiscal policy which is commendable,” he said.


Botswana’s fiscal strength is supported by a low debt stock, with a very small foreign-currency exposure and a strong government balance sheet. According to Moody’s, general government debt is projected to remain at around 16.0% of GDP by 2019, compared with a peak of 20.7% in 2011. “The government's cost of debt is likely to remain very low in the near term”.


Moody’s also underscored other positives such as Botswana's sound external position, modest government borrowing requirements, healthy banking system and overall stable political environment with low susceptibility to event risk. The stable rating outlook reflects Moody's assessment of policymakers' continued commitment to a prudent fiscal stance while utilizing some of the significant fiscal policy space.


On key challenges, the American based rating organisation notes that Botswana‘s credit strengths are however balanced by medium- to long-term challenges to the country 's economic model, structural rigidities in the labour and product markets and weak governance of state-owned enterprises. State owned enterprises have over the years continued to remain a worrisome factor with government recapitalizing some with hundreds of millions  of pulas from time to time in a bid to sustain the enterprises while containing and managing job shedding.


Moody’s notes that poor management of State owned enterprises and weak corporate governance contributes to credit constraints that continue to limit Botswana ‘s economic expansion efforts. The Government of Botswana over the years adopted various initiatives to diversify the economy beyond diamond production, Moody’s decry limited success and little return on investment from these efforts.


“While the services sectors' share of GDP has increased, the share of manufacturing, a key source of productive employment, has remained limited. A vibrant private sector with high value-adding jobs remains underdeveloped,” underscores the report. The international rating agency recommends that structural reforms that would significantly reduce rigidities in the labour and product markets, increase economic diversification and reduce inequality, boosting Botswana's growth potential, would put upward pressure on the rating.


“A broadening of the tax base that reduces fiscal vulnerability to sudden declines in Southern African Customs Union (SACU) revenue or mineral revenue would also be credit positive,” adds Daniela Re Fraschini, Moody's Assistant Vice President.
“Conversely, the prospect of a significant and lasting erosion of fiscal reserves would put downward pressure on the rating. A lack of structural reforms that would weaken potential growth in the medium term would be also credit negative,” he said

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