Moody's downgrades Botswana's ratings to A3, with stable outlook

Last week, Moody's made headlines by downgrading Botswana's long-term local and foreign currency issuer ratings from A2 to A3, while also shifting the outlook to stable from negative. This move has raised concerns and questions about Botswana's economic stability and fiscal health. To shed light on the reasons behind the downgrade and the future outlook for Botswana, Daniela Re Fraschini, an Analyst at Moody's, joined CNBC Africa for an in-depth discussion. Fraschini emphasized that the downgrade was a result of the deteriorating fiscal strength of Botswana, a trend that was exacerbated by the impact of the COVID-19 pandemic. The country's fiscal buffer has been on a downward trajectory in recent years, and the pandemic further accelerated this decline. The significant shock to revenue, primarily due to declining mineral revenue and increased expenditure in response to the pandemic, led to a fiscal deficit estimated at 9% of GDP for the last fiscal year. This marked a substantial increase from the previous year's deficit of 5.4% of GDP, with the deficit being financed through drawing down on fiscal reserves and domestic borrowing. While the increase in government debt has been moderate, there has been a notable decline in the government's fiscal reserves, exacerbating an existing downward trend. Despite the challenges posed by the pandemic and structural vulnerabilities in Botswana's economy, Moody's revised the outlook from negative to stable. Fraschini attributed this shift to the country's expected ability to maintain fiscal metrics consistent with its current rating level. Botswana's rating is underpinned by robust institutions and a sound macroeconomic framework, supporting a stable outlook. However, Fraschini also pointed out the risks that could hinder Botswana's economic recovery and fiscal stability. The country's heavy reliance on revenue from mineral and sacral industries, coupled with limited economic diversification, exposes Botswana to external shocks. The ongoing threat of the pandemic, including the potential for third waves and the pace of vaccine rollout, poses significant risks to Botswana's economic prospects. Despite projections of a rebound in economic growth, driven by an expected recovery in the diamond market, uncertainties loom large. The current commodity super cycle has buoyed metal prices and could potentially benefit the mining industry. However, the persistence of pandemic-related challenges adds a layer of unpredictability to Botswana's economic outlook. As the country navigates these uncertainties, the key to mitigating risks and ensuring a stable economic trajectory will lie in effective policy responses, sound fiscal management, and continued resilience in the face of global economic turmoil.