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Botswana 'A-' Foreign Currency Rating Affirmed On Revised Methodology; Local Currency Rating Cut To 'A-'; Outlook Stable

November 23, 2011 | Standard & Poor's

In our view, Botswana's fiscal balance sheet is still strong despite recent deterioration, its minerals-based economy is well managed, and it has a long track record of political stability. We are therefore affirming our foreign currency sovereign ratings on Botswana at 'A-/A-2'. Our new sovereign criteria put more weight on the exchange rate regime in determining local currency creditworthiness. We are therefore equalizing the local and foreign currency ratings because Botswana relies on a crawling peg and because the sovereign's monetary flexibility is limited, in our view. The stable outlook balances our view of the government's demonstrated commitment to prudent economic policies against the risks stemming from a narrow economic structure.

LONDON (Standard & Poor's) Nov. 23, 2011-- Standard & Poor's Ratings Services said today it affirmed its foreign currency long- and short-term sovereign credit ratings on the Republic of Botswana at 'A-/A-2'. At the same time, we lowered our local currency long- and short-term sovereign ratings on Botswana to 'A-/A-2' from 'A/A-1'. The outlook is stable. Our transfer and convertibility (T&C) assessment for Botswana remains 'A+'.

We have equalized our local currency ratings with the foreign currency ratings because we consider that Botswana's monetary policy options, which could underpin a sovereign's greater flexibility in its own currency, are constrained by Botswana's crawling peg and relatively underdeveloped domestic debt market.

The sovereign credit ratings on Botswana are supported by the government's balance sheet, which we still consider to be strong despite recent deterioration, its well-managed minerals-based economy, and a long track record of political stability. The ratings are constrained by Botswana's economic base, which we consider to be narrow and vulnerable to shocks, its heavy reliance on the performance of the diamond sector despite diversification efforts, fiscal challenges, and still significant development needs.

As the world's top producer of gem diamonds, Botswana's economic locomotive is the diamond industry, which contributes about one-third of GDP. Abundant diamond resources, their well-managed exploitation, and a social democratic-style welfare state, have helped Botswana to develop from one of the world's poorest countries to a middle-income country with GDP per capita of an estimated $7,700 in 2011. Mining accounts for more than two-thirds of exports and has increased to close to about 40% of government revenues, although this is still below pre-crisis levels.

The global downturn hit Botswana severely but since mid-2010 the market has rebounded. Real GDP per capita contracted by 6.3% in 2009, but rebounded by an estimated 5.7% in 2010. According to our projections, per capita GDP should grow fairly strongly, by more than 4% annually in 2011 and 2012, provided that the recovery in the global demand for diamonds continues.

We estimate that a rebound in revenues will result in the fiscal deficit falling to an estimated 6.5% of GDP in fiscal year ending March 31, 2012. We anticipate that consolidation will continue over the medium term and that the deficit could be close to balance in fiscal 2013, if reasonably strong diamond demand underpins robust GDP and revenue growth and if the government moderates spending significantly.

The stable outlook balances our view of the fiscal challenges the government faces with still strong government and external balance sheets. We believe the ratings could come under pressure if fiscal deficits do not continue to narrow. This could arise, for example, from spending pressures or a weaker than anticipated recovery in revenues from diamond and mineral exports, which could lead to greater and more rapid dissipation of asset buffers.

Company: Botswana

Full company nameBotswana
Country of riskBotswana
Country of registrationBotswana


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