- Links its stable outlook to govt’s A3 sovereign rating and unwavering support
- Notes predicted 9% and 4.2% growth in Botswana’s real GDP for 2023 and 2024 respectively
- Credits new diamond deal that is projected to elevate fiscal revenues for anticipated real GDP growth
Botswana Development Corporation (BDC), the government’s main investment arm, has received a positive endorsement from Moody’s Investors Service.
The credit rating agency has reaffirmed BDC’s long-term issuer ratings at Baa3/Prime-3, while simultaneously affirming a b1 Baseline Credit Assessment (BCA). The most notable change comes in the form of a shift in BDC’s outlook from negative to stable. This alteration in outlook reflects the ongoing enhancement of operating conditions and an anticipation that the financial strain on BDC will continue to alleviate.
New Deal with De Beers
Moody’s predicts a healthy growth of 3.9 percent and 4.2 percent in Botswana’s real GDP for 2023 and 2024, respectively. A key contributing factor is the new agreement between the Government of Botswana and De Beers, set to amplify diamond production share and elevate fiscal revenues, subsequently stimulating economic activity.
This forecast for the operating environment is expected to bolster BDC’s financial performance, especially in terms of profitability and asset quality. Significantly, BDC’s consolidated profitability has already demonstrated signs of recovery in 2022, despite increased impairments from associate companies and elevated funding costs. The stable outlook for BDC also takes into account the stable projection of the government’s sovereign rating and its unwavering ability to extend support, if necessary.
Strong government support
The affirmation of BDC’s Baa3 long-term issuer ratings stems from a four-notch escalation from its b1 BCA. This elevation can be attributed to several factors. Firstly, the strong likelihood of government support backed by BDC’s complete government ownership, its pivotal policy role, and its significance as Botswana’s premier development finance institution.
Additionally, the Government of Botswana’s A3 long-term issuer rating serves as a foundation for potential assistance to BDC. Lastly, the very high default dependence underscores the substantial possibility that, in the event of a sovereign credit default, BDC could be significantly impacted.
Moody’s affirmation of the ratings signifies BDC’s positive trajectory in the post-pandemic economic contraction era, underscored by its robust capital and liquidity buffers. Notably, BDC’s tangible common equity remains solid at 35 percent of total managed assets, and its coverage ratio for one-year debt maturities was a reassuring 129 percent as of June 2022.
Increased impairments
Despite facing challenges such as increased impairments from associate companies and higher funding costs, BDC’s consolidated bottom-line profitability has shown signs of recuperation, supported by augmented revenues and improved operating conditions.
However, BDC’s operational cash flow continues to be a structural vulnerability, primarily due to its elevated leverage (debt to EBITDA) of 14.9x and a funds from operations to debt ratio of -1.0 percent as of June 2022. The company’s reliance on dividend income, characterised by high volatility and exclusion from operating cash flow, contributes to this weakness.
Additionally, BDC contends with elevated asset risk, driven by a high ratio of problem loans to gross loans and concentration risks within its equity and debt investment portfolios. Notably, the correlation between its debt and equity portfolios exposes BDC to added concentration risks affecting asset quality.
Diligent collection efforts
The legacy problem loans and those arising during the pandemic have continued to impact asset quality. However, Moody’s predicts that a more favourable operating environment will lead to fewer problem loans while diligent collection efforts will foster improvements in asset quality.
Looking ahead, certain factors could potentially influence an upgrade or downgrade of BDC’s ratings. An upgrade in the sovereign rating of the government could exert upward pressure on BDC’s issuer ratings, given its complete government ownership. Similarly, a positive trajectory in BDC’s BCA could result in upgraded issuer ratings, contingent upon its efforts to diversify its investment portfolio, reduce earnings volatility and non-performing loans, and sustain robust capital and liquidity buffers.
Resilience
Conversely, a downgrade could occur if BDC’s asset quality metrics and leverage worsen, coupled with a decline in its investment performance track record. Any weakening of the government’s willingness or capability to offer support, as indicated by a downgrade in the government’s sovereign rating, would also negatively impact BDC’s ratings.
BDC’s journey towards financial stability and growth, as validated by Moody’s outlook change and reaffirmed ratings, reflects both its resilience and responsiveness to evolving economic conditions. The Corporation’s strategic alignment with Botswana’s economic expansion plans positions it favourably to play a pivotal role in the nation’s development journey.
