Standard & Poor’s Ratings Services said today it affirmed its ‘A/A-1’ foreign currency and ‘A+/A-1’ local currency ratings on the Republic of Botswana. The outlook is stable.
“The ratings on Botswana remain underpinned by the strength of the public sector balance sheet, prudent economic policies, and the stable political environment,” says Standard & Poor’s credit analyst Konrad Reuss.
Public sector net external assets, at about 130% of current account receipts in 2003, provide the government with significant flexibility to absorb economic shocks. Fiscal deficits since 2001/02, mainly due to cyclical factors, do not reflect a change from the government’s policy of sustainable budgets, and the general government is projected to return to broad balance this year.
“Looking ahead, the HIV/Aids epidemic could require additional health and social spending of 3-4% of GDP annually,” notes Reuss. “However, the government, which has built a track record of prudent fiscal policies, is expected to curb spending growth in other areas in the years ahead, to secure budget outcomes at least close to balance.”
Botswana produces about one-third of the world’s gem diamonds. High returns on investment, competitive mining laws, and political stability have underpinned a long record of economic development, with real per capita GDP growth averaging more than 7% over the past 30 years. In the medium term, Botswana’s stable and market-friendly environment, sound macroeconomic policies, and investment in education and infrastructure should help it attract the investment needed to secure real GDP growth of 3-4%.
The ratings on Botswana remain constrained by the narrowness of its economy, and the challenges posed by the HIV/Aids epidemic. Per capita GDP, at about US$3,500, is the lowest among ‘A’-rated sovereigns. With the diamond sector accounting for more than one third of GDP and 70% of exports, Botswana remains heavily dependent on the performance of the global diamond market. Moreover, diamond production, the driving force behind past growth and budget surpluses, is reaching a plateau. As a result, future income growth will largely rest on the performance of the non-mineral sector, which, however, will be particularly affected by the HIV/Aids epidemic. With about one-third of the adult population estimated to be infected by HIV, Aids cases are rising sharply, and will increasingly affect GDP growth, domestic savings, and public finances over this decade.
The stable outlook balances Botswana’s strong public sector net asset position against the challenges of its development needs and the Aids crisis.
“The ratings could improve in the medium term if economic diversification progresses, and if the government is successful in controlling non-health spending, broadening its revenue base, and thereby keeping budgets close to balance,” says Reuss. “Conversely, the ratings would come under pressure if fiscal discipline was lost.”