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Moody's changes outlook on Botswana's A2 ratings to negative

February 24, 2010 | Moody's Investors Service

London, 19 February 2010 -- Moody's Investors Service has today changed the outlook on Botswana's A2 government bond ratings to negative from stable, reflecting the continued strain on the country's finances imposed by the global economic crisis.

Moody's notes that Botswana's economy was hit especially hard at the beginning of the crisis, when worldwide demand for luxury goods such as diamonds literally collapsed and local producer Debswana (half-owned by the government) closed its mines for several months. Since diamonds regularly constitute 2/3 of export receipts and related taxes and royalties are a significant source of government revenue, the impact on the external and fiscal balances, as well as growth, was severe.

"The slump in diamond sales is likely to be prolonged, so the government's budget is likely to remain in deficit for at least a few years," says Kristin Lindow, Moody's Senior Vice President and Regional Credit Officer for Africa. "The government's strong net financial position would be jeopardized by an extended downturn in diamond output and/or the persistence of large ongoing budget deficits."

Lindow says the fiscal deficit will be particularly large again next year -- and perhaps beyond -- because of the completion of capital expenditure projects. These projects are designed to promote the diversification of the economy and the expansion of the private sector, and as such Moody's takes a constructive view on the decision to proceed. For example, the expansion of the Moropule power station will increase the electricity supply available in Botswana and reduce dependence on unreliable supplies from South Africa.

"The longstanding policy of the authorities to save its fiscal surpluses, using them to build liquid foreign and domestic assets, has stood the government in good stead during the last 18 months," explains the analyst. "The government deployed a portion of its accumulated savings to maintain spending, which mitigated some of the negative effects of the crisis on economic activity. In addition, the resumption of diamond production and exports in the second quarter of 2009 led to a much smaller contraction in GDP than originally feared. Government assets are already being reconstituted."

Lindow said the rating outlook would likely be moved back to stable should the government be able to compress its spending to a level more consistent with its ongoing revenue stream. Equally or more important will be successful implementation of economic diversification strategies.

On the other hand, Moody's said the government's ratings would likely be downgraded to A3 upon the failure to stem the deterioration in its net asset position over the medium term. The agency said that fiscal consolidation and economic diversification will be ever more vital to preserve the country's economic strength as the depletion of diamond resources approaches over the coming decades.

The last rating action for Botswana's government ratings was implemented on 12 March 2009, when Moody's changed the outlook to stable from positive on the A2 foreign currency bond rating of the government and the country ceiling for foreign currency bank deposits and also lowered the government's domestic currency bond rating to A2 from A1.

The principal methodology used in rating the government of Botswana is Moody's Sovereign Bond Methodology, published in September 2008, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Company: Botswana

Full company nameBotswana
Country of riskBotswana
Country of registrationBotswana

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