Tuesday, August 3, 2021

Moody’s downgrade: Central Bank says no need to panic

The central bank governor Moses Pelaelo and his team of economists at Bank of Botswana has made their thoughts regarding the country’s sovereign credit rating by international agency – Moody’s known.

Moody’s last week announced a downgrade of local bonds stripping the country of its A2 rating. This means that the country’s ability to repay debts has been dropped a notch down from grade A2 to A3, reflecting the deterioration in fiscal strength over the past few years.

International credit rating agencies like Moody’s are used by banks and investors to decide how much money to lend to particular borrowers including governments.

Following the downgrade of local bonds, central bankers in Botswana believe that the Moody’s decision constitutes an alert about the country’s weakened capacity to absorb shock but it is nothing to be dramatic about it.

Bank of Botswana governor – Moses Pelaelo told financial journalists shortly after the bank’s Monetary Policy Committee (MPC) meeting that the local economy is robust enough to withstand a credit rating downgrade such as the one announced by Moody’s last week. The Bank’s MPC took a decision to maintain the bank rate at 3.75 percent citing the possibility of the local economy to operate below capacity in the short to medium term.

“The Covid 19 pandemic has been devastating for everyone globally including us here in Botswana. But having come out of this a year later and still have financial strength, that makes us the best rated sovereign in Southern Africa – this must be a positive message for us”, Pelaelo stressed.

Pelaelo however admits that the good rating has to do with pre-existing conditions which he said were underpinned by a track record of prudent policy making by Botswana. Amongst the pre-existing conditions that Botswana had, Pelaelo list having a fiscus space particularly with respect to debt servicing capacity, sufficient government liquidity and the savings government had.

Pelaelo maintained that a movement from A2 to A3 with a stable outlook is still a strong rating. While he admits that the country’s capacity to absorb shocks has relatively weakened he pinned the country’s way out on the Economic Recovery and Transformation Plan (ERTP) first announced in 2020 by the government. Amongst other things, the ERTP is expected to provide direction on how to stimulate economic activities during and post Covid-19.

To implement the ERTP together with the remainder of the eleventh national development plan (NDP 11), the government said in 2020 that it will need no less than P40 billion, with more than half of the funds used for plugging budget deficits.

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