S&P’s Negative Outlook for Botswana Cites Dependence on Diamonds

Mining and Exploration
01/05/2017 11:43

Standard and Poor's has reiterated its negative outlook rating for Botswana as a result of, "The country's narrow economic base, which relies heavily on the diamond sector and is vulnerable to external shocks, despite efforts to diversify." Diamonds account for approximately 80% of Botswana’s total exports and about one-third of its gross domestic product, and "remains its main economic locomotive". The good news is that Government fiscal deficits are narrowing as diamond revenues have temporarily increased owing to higher diamond sales from Debswana selling off inventory amidst stronger demand. S&P also assumes Botswana's economic growth performance will remain stable, at least at 3% of GDP over the medium term, supported by a stable diamond sector, strong growth prospects in service sectors, construction, and an improving agriculture sector.

Nonetheless, "We are affirming our ratings on Botswana at 'A-/A-2'" writes S&P, noting that the continuing negative outlook reflects our view that over the next 12 months economic growth performance and fiscal outcomes could be weaker than we currently expect if the diamond sector were to underperform. The assessment also notes that prudent fiscal management, strong external balance sheet, robust institutional framework and a long-track record of political stability continue to reinforce the ratings. The retention of the negative outlook reflects the downside risks stemming from the possibility of a persistent commodity price shock, particularly in the diamond markets. Nevertheless, the country’s sound fiscal position strengthens its resilience to external shocks.

The outlook could be revised upwards from ‘negative’ to ‘stable’ should more favourable developments emerge in the diamond sector, including a significant improvement in the fiscal position and an emergence of a broad-based private sector participation in the domestic economy. On the contrary, the country’s sovereign credit rating is threatened by a possible persistence of underperformance of the diamond sector that could result in a weaker economic growth and worsening of the fiscal position over the next 12 months.