It could be a while before Botswana hits the ‘high’ mark under the Moody’s sovereign credit rankings, as the country retained the A2 rating for both foreign and domestic bonds together with the stable outlook in 2015.
The rating is based on the assessment that weighs the Government’s relatively strong balance sheet, net external creditor position and low public debt against potential challenges associated with the middle income status and a small economy.
The ratings agency notes that the key factor affirming Botswana’s rating is the fiscal resilience, supported by the sovereign wealth fund’s large net assets, at more than 35% of GDP, low and declining public debt currently at 15% of GDP.
“Government's fiscal resilience, supported by the Pula Fund's large assets which amounted to more than US$5 billion (or 36.9% of GDP forecast for 2015) at end-September 2015 — and the expectation that the track record of responsible fiscal policy will continue. In this context, Moody's expects that the economic stimulus package the government considers will be limited in size and hence will neither significantly reduce the Pula Funds's large assets, nor raise Botswana's government debt-to-GDP ratio”.
The country's strong institutional framework, with forward-looking and transparent monetary policy as well as credible and rule-based fiscal policy is another factor that impelled the ratings agency to maintain the A2 rating.
The government has also recently introduced multi-year budgeting and is in the process of adopting a medium-term expenditure framework. “The ability to use Botswana's high level of sovereign wealth fund assets as a cushion together with policy credibility give the government enough space to implement counter-cyclical fiscal and monetary policy without jeopardizing macroeconomic stability and debt sustainability,” stated the Agency.
Moody’s added that the A2 government bond rating also captures Botswana's adherence to the rule of law and progress with respect to control of corruption.
The third factor behind Moody's decision to affirm Botswana's A2 rating and to maintain the stable outlook is the country's constrained economic strength namely in light of a lack of diversification, a slowing real GDP trend growth, and the absence of a vibrant private sector that would drive growth and generate jobs.
“The economy relies on a 'natural resource-public sector' growth model, which induces constraints. The production potential of the diamond mining sector has been extended, but at increased cost, eroding profit margins,” stated the report.
Botswana is also grappling with persistently high unemployment, wide income inequality, high child and maternal mortality, and one of the highest HIV rates in the world, which together reduce the country's productive capacity.
Nonetheless, the ratings agency has bemoaned Botswana’s constrained ratings prompted by its low economic strength and especially by its high dependence on the diamond industry for economic growth, fiscal revenues and export proceeds.
“The country's economic strength is further diminished by very high unemployment, inequality and HIV rates”.
“The main area of concern regarding the institutional strength is the lack of government effectiveness, with a large albeit declining public sector that deliver social outcomes health, education indicators below those typical for an upper-middle income country,” the agency noted.
Botswana's local currency bond and deposit ceilings remain at Aa3, foreign currency deposit ceiling at A2/P-1, and foreign-currency bond ceiling at Aa3/P-1, unchanged.
The economy’s heavy reliance on the dominant diamond industry and the relatively slow pace of economic diversification remain key weaknesses for the rating over the long term. As in previous years, Moody’s noted that, given the healthy financial position and the stable political and financial environment, the risks that could put renewed pressure on the ratings are judged to be low.
In order to change the rating upwards, Moody’s has advised that successful economic diversification over the medium term, combined with efficiencyenhancing public sector reforms could exert positive pressure on the rating. Lasting reduction in unemployment and inequality would also exert upward pressures on Botswana's creditworthiness.
The agency warned that a significant deterioration in the net asset position as well as the lack of structural reforms and diversification would exert downward pressure on the rating over the medium term. In the near term, expansionary fiscal policies that would lead to marked reduction of foreign exchange reserves would also put downward pressure on Botswana's creditworthiness.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”