Moody’s Ratings has downgraded Botswana’s long-term issuer ratings to Baa1 from A3 on Friday, while maintaining a negative outlook, citing the government’s difficulty in adapting to a structural downturn in the global diamond industry.
The downgrade, reflects the growing pressure on Botswana’s public finances and economy due to the persistent weakness in the sector.
The diamond industry, which is a foundational pillar of Botswana’s economy, contributing approximately 30% of GDP and up to 90% of goods exports, is facing unprecedented challenges. Moody’s highlighted that the sector’s continued slump has led to economic contraction, a weakening of the country’s external buffers, and rising government debt.
“The global diamond downturn has continued and is unlikely to reverse.” Moody noted.
Botswana’s economy contracted by an estimated 3% in 2024 and is projected to decline by a further 6% in 2025, marking a second successive year of negative growth.
Years of fiscal deficits have forced the government to repeatedly tap into its financial reserves, such as the Government Investment Account (GIA), which has significantly weakened the country’s ability to absorb economic shocks.
Moody’s expects government debt to peak at 40% of GDP over the medium term, a notable increase from historically low levels, further exposing the country to higher interest rates.
The rating agency noted that while authorities have committed to structural reforms and economic diversification, progress has been slow, leaving the economy vulnerable to the diamond market’s volatility.
Moody’s sees a significant risk of further credit deterioration if the diamond sector’s weakness persists or if the government’s fiscal consolidation and diversification efforts fail to gain traction.
“The negative outlook reflects the risk of a sharper credit deterioration than we currently expect, amid continued weakness in the diamond sector and its difficult replacement as an engine of economic activity and foreign exchange earnings.” Moody said.,
Meanwhile, the downgrade follows a similar move by S&P Global Ratings last month, which lowered Botswana’s sovereign rating to ‘BBB’. The concerted actions by major rating agencies will increase the cost of borrowing for the Botswana government and could deter foreign investment, complicating efforts to stabilise the economy.
The financial strain is already manifesting in the country, which is also grappling with high unemployment, particularly among the youth, and public health challenges. The government’s immediate focus will be on implementing effective fiscal and structural reforms to mitigate the effects of the diamond slump and safeguard its economic stability.
