Dagong Maintains the Sovereign Credit Ratings of the Republic of Botswana with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
March 10, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain both the local and foreign currency sovereign credit ratings of the Republic of Botswana (“Botswana”) at A, each with a stable outlook. Botswana's political environment is basically stable. The banking system remains stable. The economy is growing moderately. The low government debt burden, net creditor status and ample foreign exchange reserves should guarantee the stability of government solvency in terms of both local and foreign currency.
The primary reasons for maintaining the sovereign credit ratings of Botswana are as follows:
1. The debt repayment environment remains fundamentally stable. Although the main opposition parties have formed a coalition to challenge the ruling Botswana Democratic Party (BDP) in the upcoming 2019 elections, the political situation will remain stable in the short-term. The BDP government is actively promoting the 11th National Development Plan and has adopted an Economic Stimulus Programme to increase government investment in areas such as infrastructure, agriculture and services. This is aimed at promoting economic diversification and employment growth. However, progress has been slow due to the low quality of the labor force and the stagnation of the privatization process. The Bank of Botswana will continue to maintain its accommodative monetary policy in order to achieve a medium-term objective inflation range and stimulate economic growth. Although asset quality has deteriorated due to business closures in the mining sector (copper and nickel), the banking system remains generally sound.
2. In the short term, improvements in domestic and external demand will speed up economic growth, but structural problems will constrain long-term economic growth. In the short term, the government will increase capital investment in agriculture, tourism, manufacturing, education and health care and promote household income growth. At the same time, the economic recovery in the EU is expected to increase diamond exports. It is expected that Botswana’s economic growth will rise to 4.2% and 4.3%in 2017 and 2018, respectively. In the medium and long terms, the 11th National Development Plan and the "2036 Vision" implemented by the government will effectively promote economic growth. But frequent droughts, a lack of professionals in the workforce, a high HIV infection rate and the stalled privatization of state-owned enterprises and other issues will pose a challenge to Botswana’s economic development. It is expected that the country's average economic growth rate will be 4.4% in the medium and long terms.
3. The government’s fiscal deficit will widen slightly in the short term, but the government’s debt repayment sources remain stable. Given the facts that the Economic Stimulus Programme will increase government expenditure, it is expected that the general government’s fiscal deficit will expand to 2.0% in 2017 and 2018. The higher net interest income in the short term will partially offset the primary fiscal deficit. It is expected that the financing needs of the general government will be 2.6% and 3.4% of GDP respectively in 2017 and 2018, which remains small in scale. Coupled with rich sovereign wealth funds and smooth multilateral and bilateral financing channels, the government’s debt repayment sources will remain stable.
4. The government’s debt burden rose slightly over the recent short term, but its solvency remains stable. Because of the Economic Stimulus Programme, it is expected that Botswana’s general government debt burden will increase to 20.0% in 2017 and 20.3% in 2018, and decline slowly from 2019 onwards. A low government debt burden, good fiscal buffers and net creditor status ensure government solvency in the local currency. Botswana's external debt burden rate was only 16.7% at the end of 2016. Ample foreign exchange reserves and massive foreign assets will guarantee stable government solvency in foreign currency.
In the short-term, Botswana’s economy will pick up thanks to the government's Economic Stimulus Programme and increased international demand for luxury products. Although the fiscal deficit will widen due to an expansion in government spending, the low government debt burden, net creditor status, ample sovereign wealth funds and foreign exchange reserves will ensure stable government solvency. Therefore, Dagong has decided to maintain a stable outlook for both the local and foreign currency sovereign credit ratings of Botswana for the next one to two years.