European firm downgrades Botswana

But says Botswana remains among the best-classified countries Botswana benefits from strong governance Banks demonstrate robust financial health European credit insurance group Credendo has downgraded Botswana’s short-term political risk rating from 1/7 to 2/7, citing mounting economic pressures driven by a prolonged slump in the diamond market and weakening export performance. Credendo, which assesses political risk on a scale of 1 (lowest risk) to 7 (highest), said the downgrade reflects the country's growing vulnerability amid deteriorating global diamond demand and trade challenges. Botswana, which depends on diamonds for approximately 86 percent of its export revenues, has been severely impacted by a global contraction in diamond demand since 2022. The downturn has been largely fuelled by a consumer shift toward more affordable, lab-grown diamonds, which has sharply depressed demand and prices for natural stones. “A shift in consumer preference towards cheaper lab-grown diamonds is the main driver behind the crisis,” Credendo stated. Headquartered in Brussels and present in 15 countries, Credendo is a European credit insurance group that offers tailored solutions for insurance, reinsurance, guarantees, surety, and trade finance. The diamond slump has had wide-ranging economic consequences for Botswana. According to Credendo’s latest analysis, the country’s current account deficit widened substantially in 2024, while foreign exchange reserves declined by around 30 percent. Economic pressures have been further compounded by geopolitical headwinds, notably trade tariffs introduced under former U.S. President Donald Trump. These measures have hindered Botswana’s access to a key export destination—the United States, which accounts for approximately 12 percent of the country’s total goods exports. “Trump’s trade tariffs have further worsened prospects as about 12 percent of Botswana’s total goods exports are directed to the U.S. market,” Credendo said. As a result, Botswana is now expected to experience a second consecutive year of economic contraction in 2025—a rare reversal for a nation long celebrated for its macroeconomic stability and prudent fiscal management. Despite the downgrade, Credendo highlighted several enduring strengths that continue to support Botswana’s outlook, including sizable liquidity buffers, a strong financial sector, effective policymaking, and political stability. “The country’s large liquidity buffers, together with strong governance and policymaking credentials, a sound financial sector, solid institutions and a stable political climate are essential building blocks that should enable Botswana to cope with today’s headwinds,” Credendo noted. Banks’ Demonstrate Robust Financial Health According to the latest financial stability report by the Bank of Botswana (BoB), Botswana banking sector continues to demonstrate robust financial health and a proactive approach to adapting to the evolving financial landscape. “Capital adequacy ratios remain strong across the sector, indicating a healthy level of capitalisation and resilience to absorb potential losses, the BoB wrote adding that analysis of recent financial reports shows an active adoption of digital technologies, and a commitment to customer-centricity. Credendo’s downgrade comes as policymakers in Gaborone confront mounting pressure to diversify the economy and reduce its reliance on diamond exports. Analysts increasingly argue that long-term resilience will depend on accelerating structural reforms and expanding into non-mineral sectors. In its latest risk outlook, Credendo also emphasized that “Botswana remains among the best-classified countries in the region despite the downgrade.” “On the positive side, Botswana benefits from strong governance, demonstrated by a peaceful 2024 election transition and a history of prudent resource management,” BoB wrote in the financial stability report. In terms of credit ratings, Moody’s assigned a A3, negative outlook while S&P assigned BBB+, negative outlook in 2025. These affirm its investment-grade status although the related commentary highlights escalating fiscal and financial risks. The rating agencies noted that the country is grappling with a widening fiscal deficit, which was projected at 9 percent of GDP for the 2024/25 fiscal year, and a rising debt burden, expected to climb from 28 percent to 40 percent of GDP by 2025/26, largely due to declining diamond revenue. According to information by Bank of Botswana (BoB), the negative outlook signals that without swift fiscal consolidation – through measures like rationalisation and prioritisation of spending cuts, expansion of tax coverage and collection, and wage bill restraint – Botswana faces the threat of a downgrade, which would increase borrowing costs and deepen financial strain. Compounding these challenges, depleted fiscal reserves have pushed the government toward untested domestic and external borrowing. This shift raises concerns about liquidity pressures and debt affordability, especially if reliance on costlier commercial loans grows, further jeopardising fiscal stability. BoB said a stress test revealed that while banks can withstand a moderate decline in diamond revenues, a severe and prolonged downturn could push some institutions below regulatory capital requirements.

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𝐃𝐞𝐛𝐬𝐰𝐚𝐧𝐚 𝐑𝐞𝐜𝐨𝐠𝐧𝐢𝐬𝐞𝐝 𝐨𝐧 𝐈𝐧𝐭𝐞𝐫𝐧𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐬𝐭𝐚𝐠𝐞 𝐰𝐢𝐭𝐡 𝐀𝐔𝐒𝐂 𝐦𝐞𝐝𝐚𝐥 𝐨𝐟 𝐇𝐨𝐧𝐨𝐮𝐫

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European firm downgrades Botswana

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