Moody’s flags dominant public sector, weak private sector

Moody’s has raised concerns about Botswana’s private sector, describing it as “uncompetitive and subject to distortions.” This characterisation stems from the growing influence of the public sector and the inefficiencies plaguing state-owned enterprises within the nation. As Botswana grapples with this challenge, questions are being raised about the future of its economic landscape. As a result, Moody’s says Botswana's economy remains exposed to developments in the volatile mining sector, notably to global diamond demand. Real GDP contracted 8.7 percent in 2020 due to a pandemic-induced collapse in diamond sales, followed by [ihc-hide-content ihc_mb_type="show" ihc_mb_who="2,1,3,4" ihc_mb_template="3" ] a growth rebound of 11.9 percent in 2021 reflecting strong global diamond demand and high household policy support. Growth reached 5.8 percent in 2022 despite inflationary pressures following Russia's invasion of Ukraine, through continued demand for rough diamonds, as well as increased copper production and a partial recovery in tourism exports. Moody’s says the global diamond industry is facing both a cyclical slowdown due to a deteriorating growth outlook in developed market economies and rising cost of living pressures, as well as structural threats from synthetic diamond producers. Despite these pressures, the rating agency says the government's fiscal space gives it the flexibility to support economic diversification efforts and respond to any fiscal shocks. “Botswana's latest infrastructure and economic diversification drive would support its credit profile if successful in developing a dynamic and competitive private sector,” Moody’s says noting that spending priorities include the construction of infrastructure to move water from the north of the country to the more populated and dryer southern regions, the construction of healthcare and education facilities, and increasing electricity generation capacity and improving reliability. “These spending priorities aim to increase resilience to climate shocks, address social risks, support economic diversification and private sector development, and improve access to reliable energy.” During the State of Nation Address (SONA), President Mokgweetsi Masisi said Botswana continues to invest significantly, in strategic infrastructure to support the growth and competitiveness of the country, given its strategic geographic location at the center of Southern Africa. To accelerate the investment agenda, he said they have adopted a new approach known as the Development Manager Model. “This is expected to expedite timely delivery of quality projects and reduce financial and economic risk to Government,” Masisi said. Amongst the projects covered under the Development Manager Model, are the construction of roads, schools, hospitals and clinics across the length and breadth of this country. The financing of these projects will be sourced from the Domestic Development Fund, Masisi said. “The DM Model will be used for the efficient and effective implementation of one hundred and forty-three (143) projects across the country, with a budget allocation of over Thirteen Billion Pula (P13 Billion), mainly for development in rural areas.” Moody’s says government liquidity risks are contained due to the government's low borrowing needs and available pool of domestic savings, despite underdeveloped domestic capital markets and small domestic banking sector. “External risks are mostly related to the challenges in the global diamond industry, but Botswana's very small external debt level and adequate (albeit reduced) level of reserves mitigates risks associated with any potential balance of payments shock,” the rating agency says. “If needed, Moody's anticipates Botswana could access more concessional and non-concessional debt to meet external obligations or boost foreign reserve levels if required.” Moody’s notes that Botswana's debt level- at 18 percent of GDP at end-2022- is very low relative to A-rated peers and remains a key credit strength. Botswana posted a roughly balanced budget in 2021-22 against a forecast 2 percent deficit following a surge in mineral revenue by an estimated 143 percent in 2022-23 from the pandemic-induced lows in 2020-21. Moody's expects the fiscal balance to remain in deficit until 2025-26, driven by a significant increase in development spending designed to lift Botswana from "upper-middle income" to "high income" by 2036 and a normalisation of mining revenues following the post-pandemic surge. “Downside risks to the budget forecast are significant given the government's continued reliance on volatile revenue sources, namely mining revenues and proceeds from the Southern African Customs Union (SACU).” Botswana's fiscal buffers were being reduced in the years leading up to the pandemic and were nearly depleted during the government's fiscal response to the pandemic - a key factor in Moody's 2021 decision to position the rating at A3 from A2. Fiscal buffers have recovered slightly from the pandemic lows, but Moody's expects they will remain low relative to past levels given the government's decision to increase development spending. “Given Botswana's dependence on volatile revenue sources such as mineral and customs revenues from the SACU, the government's fiscal profile remains vulnerable to shocks.” [/ihc-hide-content]

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Moody’s flags dominant public sector, weak private sector

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