Moody's Ratings (Moody's) has changed the outlook on the Government of Botswana to negative from stable, citing the country's riskier profile due to a prolonged downturn in the diamond industry.
This comes after S&P Global Ratings also revised Botswana’s economic outlook from stable to negative in March.
A negative outlook is a warning signal from Moody's, suggesting that the agency sees factors or risks that could lead to a lower credit rating in the future. It can lead to increased borrowing costs for the issuer, as investors demand higher yields to compensate for the perceived higher risk.
However, the good news is that Moody's affirmed the local and foreign currency long-term issuer ratings at A3 due to still moderate debt burden and strong debt affordability, as well as low susceptibility to event risks.
"At 27% of GDP at the end of 2024, Botswana's debt burden remains lower than most other A3-rated peers," Moody's said.
S&P Global Ratings also affirmed Botswana’s sovereign credit rating at 'BBB+' long-term and 'A-2' short-term, keeping the country in investment-grade territory.
"Despite Botswana's history of managing diamond sector volatility, the government has nearly depleted its fiscal reserves, making the credit profile more vulnerable to ongoing weakness in the diamond sector. We expect large fiscal deficits to persist due to the decline in mineral revenue, mainly from diamonds," Moody's said.
"In the absence of a fiscal buffer, the government intends to rely on a combination of domestic and external financing sources to meet its gross financing needs, which we estimate at 13.4% of GDP in 2025/26. However, the government's limited track record in mobilizing large-scale financing from domestic or external sources increases risks to the government's liquidity and debt affordability."
Most recently, the government has taken several measures to raise domestic funding including boosting income and corporate tax by 1.5% as well as reportely looking to borrow from the Botswana Public Officers Pension Fund (BPOF), the country's largest pension fund.
Interestingly, Moody's said that the government still had wiggle room to increase taxes further as they are still relatively lower than regional peers. Other recommended measures include controlling growth in the wage bill and rationalizing transfers to state-owned enterprises.