Moody's cuts Botswana rating again as diamond slump weighs on economy

On Friday, the ratings agency Moody's downgraded Botswana's long-term issuer ratings for both domestic and foreign currency to Baa2 from Baa1, citing a projected decline in the country's public finances. This marks Botswana's second downgrade by Moody's in less than a year, leaving the nation just two notches above junk status. The downgrade comes after Finance Minister Ndaba Gaolathe had previously stated that Botswana anticipates a significantly smaller budget deficit in the current fiscal year, thanks to higher-than-expected revenue from the central bank and efforts to curb spending.

Botswana's economy, often hailed as an African success story, has been severely impacted by a prolonged downturn in the global diamond market. This downturn has been fueled by economic uncertainty and the increasing popularity of lab-grown diamonds. Diamonds typically contribute to about one-third of Botswana's national revenue and three-quarters of its foreign exchange earnings.

Moody's attributed the weakened fiscal position to lower-than-expected receipts from the Southern African Customs Union (SACU), a primary source of government income, as well as disappointing proceeds from newly introduced tax measures. The agency also cautioned that it could further downgrade Botswana's rating if the nation were to significantly increase its investment in De Beers through debt-financed transactions.

The sale, which an Anglo American company is aiming to finalize in the last quarter of the year, could exacerbate the situation.

Despite the downgrade, Moody's has maintained a stable outlook, citing a stronger fiscal policy response and the potential for a more sustained recovery in diamond revenue to slow the pace of debt accumulation.