Reliance on single commodity, heavy public sector limit fiscal flexibility
International rating agency, Moody’s Investor Services has noted that Botswana’s small economy, slow progress towards diversification and long-term structural challenges constrain economic strength.
The rating agency, in its latest ratings for the country has affirmed Botswana’s long-term local and foreign currency issuer outlook as stable.
This stable outlook is said to be a reflection of Botswana’s credit strengths with low level debt burden, strong debt affordability indicators and a sizeable sovereign wealth fund which continue to support fiscal strength despite the erosion of buffers.
However, despite giving the country’s stable outlook, Moody’s has raised concern over the composition of the economy.
In addition to slow progress towards diversification, it has been noted that a large public sector, heavy reliance on a single commodity for growth, exports and budget revenue, and an increasingly rigid expenditure and structure constrain fiscal flexibility.
While efforts have been and continue to be made towards diversifying exports, the mining sector, diamonds in particular, remain a key growth driver and accounts for the vast majority of export proceeds and more than one third of government revenue.
In 2020, Moody’s says it expects Botswana’s GDP to grow 3.9 percent following an estimated growth of 3.6 percent last year following the recovery in mining activity and improvement in the non-mining sectors.
Still, it is reported that risks to growth outlook are tilted to the downside due to the challenging external environment, including sluggish growth in South Africa and risks to global consumer demand for diamonds.
Over the long-term, it has been observed that expensive extraction of diamond resources and potential structural changes in the industry will challenge the country’s growth model without material progress in economic diversification.
The rating agency is of the view that a large public sector displays low-efficiency levels and creates labour market distortions, while high unemployment and inequality pose additional structural challenges.
While Moody’s has raised these concerns, it has, however, given the country a thumbs up on a number of issues like the soundness of the country’s financial system as it says banks here are well capitalized and the level on non-performing loans as a percentage of gross loans remains contained and stood at 5 percent by end of last year.
It has also been noted that government liquidity risk is modest, reflecting low borrowing requirements and the government’s reliable access to domestic capital markets to absorb local currency denominated debt.