At a time when ratings for many countries around the world have deteriorated because of the current financial crisis, Botswana has been given good rating by international rating agencies although they warned that the economy will be battered by the credit crunch if it persists.
This week, rating agency Standard & Poor’s (S & P) released the 2008 sovereign credit rating for Botswana and affirmed the country’s “A/A-1” foreign currency and “A+/A-1” local currency with the outlook remaining stable.
“The assessment by S & P in the context of the current global economic slowdown reflects Botswana’s continued strong financial position, together with a reputation for sound economic policies and prudent financial management”, the rating agency concluded.
However, S & P warned that in making the assessment, S & P anticipates a marked slowdown in economic growth in the next two years due, primarily, to a downturn in the mining sector.
Like the rest of the commodity producing countries, Botswana has fell victim of the crisis as the US, which accounts for over 45 percent of the global diamond market, has gone into recession while China’s economy is slowing after hosting of the summer Olympics.
The US’s trade relations with Botswana stern across textiles sector under AGOA and diamonds which falls on Hollywood celebrities’ fingers and the newly wed. Other key markets for Botswana diamonds are Japan, India, China and European Union (EU).
Dr Keith Jefferis, Managing Director of Econsult, warned during the 2008/09 budget speech that if the US goes under recession, Botswana will be forced to stockpile its diamonds.
“Any slowdown there (in the US) would undoubtedly lead to lower sales, or reduced prices, or both resulting in reduced diamond earnings and possible stockpiling if production levels are maintained”.
China buys most of the raw materials produced by BCL and Tati and the two companies are on the verge of retrenching staff in response to collapsing demand. General Manager of BCL Montwedi Mphathi says under the current situation, no company can rule out the possibility of reducing staff to save the company.
This week the financial crisis awakened government from slumber, with the Minister for Finance and Development Planning, Baledzi Gaolathe, telling parliament that mineral export, especially diamonds, started falling in November. Already, the deficit for 2008/09 has been revised to be P5 billion, which might force government to recall its foreign reserves.
“In addition, there has been a sharp decline in commodity prices in the past three months for other minerals like copper, nickel and gold,” Gaolathe told parliament.
S & P observed that this will, in turn, generate less revenue to fund government expenditure but adding that “it is recognised that there is limited scope for cutting spending programmes given the significant needs for infrastructure development and social spending”.
“As a result, S & P expect a decline of the economy’s net external assets from 115 percent to 85 percent of current account receipts. Nevertheless, the net asset position, as well as ample external liquidity, remains positive factors in support of the rating, as they are sufficient to cover likely financing needs over the outlook period”, the rating agency warned.
S & P, however, said that the stable outlook is a reflection of the strength of the public sector balance sheet even under the assumed scenario of cyclical deterioration in the economy and the government budget.
“However, this is contingent on the global economic downturn not being more severe than currently anticipated. S & P further notes that it is important to continue to make progress with relevant reforms that will support diversification of the economy away from mining towards more broadly based private sector development”, it added.