Outlook stable despite fading diamond sparkle-analysts

'The impact of the global downturn on Botswana's diamond exports and other commodities is in turn likely to have a significant effect on economic growth, fiscal outturns and external balances,' says Standard & Poor's credit analyst Remy Salters.
In its report released on Tuesday, S&P says it has affirmed its 'A/A-1' foreign currency and 'A+/A-1' local currency sovereign credit ratings on the Republic of Botswana and the outlook is stable.

'The affirmation reflects our expectation that the marked cyclical deterioration will be sufficiently contained to preserve comfortable net creditor positions on both the fiscal and external side,' Salters says.

Although the diamond sector could be more resilient than in past downturn episodes owing to structural changes, S&P still expects mining to be significantly hit by recession in developed markets and there is limited scope for offsetting growth in other sectors in the short-term.

As a result of the effect on the diamond industry, the company assumes real GDP contractions of 1.2 percent in both 2008/2009 and 2009/2010 (year ending June 30).
S&P also forecasts a general government deficit of 2 percent of GDP in 2008/2009, rising to 6 percent in 2009/2010 despite an assumption of flat expenditure growth.

 'Deficits of this magnitude would imply a fall in the government net asset position from 30 percent of GDP in 2007/2008 to 12 percent by 2011/2012,' Salters says.

There is a further downside risk to this forecast from the unusually deep global downturn and uncertainty as to the depth and breadth of the effects on diamond production and/or prices.This scenario implies a sharp drop in government revenue as mineral receipts accounted for 37 percent of the total in fiscal year ending March 31, 2008.

However, Salters says the effects of the downturn would be less pronounced if the government engineered a more significant expenditure retrenchment to offset revenue losses; but this is unlikely, given the country's significant infrastructure and social needs as well as the general elections due next year.

In parallel, S&P says it expects a decline of 30 percent of current account receipts (CARs) in the economy's narrow net external creditor position by 2011. Nevertheless, at 85 percent of CARs, the position will remain a rating strength, as will external liquidity, with gross external financing needs not exceeding 55 percent of CARs and usable reserves during the forecast period.The stable outlook reflects Botswana's still strong public sector balance sheet and external indicators under the country's scenario of cyclical economic and budgetary deterioration.

The ratings could come under pressure if the cyclical shock turned out to be more pronounced and/or if it was accompanied by a deeper-than-expected fiscal weakening, leading to greater dissipation of asset buffers. A reversal in the ongoing reform agenda aimed at diversification could also cause downward pressure.

'Provided the pending cyclical shock is adequately absorbed, Botswana's creditworthiness will be supported in the medium-term if reform implementation continues to improve, dependence on mining continues to decline, and private sector development broadens, paving the way for faster economic growth,' says Salters.