Botswana: Risk Assessment

Country Rating¹

Rating: A4

Business Climate Rating¹

Rating: A3

Risk Assessment²

Strong recovery, but continued dependence on the diamond sector
The financial crisis resulted in an economic downturn in 2009 triggered by the fall of global demand for diamonds for both industry and jewellery. GDP growth rebounded sharply in 2010 thanks to the rise of prices and production in the mining sector (up 20%). Large investment projects have moreover been undertaken to increase the operating capacity of copper and coal mines. And uranium deposits have been discovered.
GDP growth is expected to sag in 2011 with domestic demand limited by the fiscal consolidation process that has succeeded the government's expansionary policy during the crisis. Diamond production will continue to drive the economy. But there are nonetheless persistent risks. Growth is largely subject to the economic trends prevailing in diamond importing countries. Development of the non-mining sector remains hampered by the lack of skilled workers, the high cost of labor (driven up by the mining sector), and a very narrow domestic market. A lack of infrastructure continues moreover to limit Botswana's growth potential in the medium term. With the country notably importing 80% of its electricity, its capacity for increasing national production is uncertain.

Economic stimulus policy gives way to fiscal consolidation
Thanks to the overhaul of public sector finances before the onset of the crisis, the government was able to implement counter-cyclical policies and limit the ensuing recession. After reaching almost 15% of GDP in 2009, the public sector deficit declined sharply in 2010. Completion of many projects undertaken during the crisis in conjunction with a freeze on civil service wages enabled a reduction in spending while the increase in the VAT rate and the growth of revenues from the diamond sector paved the way for an increase in fiscal revenues. The government will likely maintain its conservative policies in 2011. Although the National Development Plan launched in 2010 calls for a 15% reduction in spending, it could, however, be called into question as a result of pressure exerted by unions.
After deteriorating during the crisis, the current account was virtually in balance in 2010 and will likely go back into surplus in 2011 thanks to the rebound of raw material exports. Tourism, meanwhile, has been a source of regular and large inflows of foreign exchange, which are expected to accelerate. Imports mainly comprise goods and services associated with infrastructure development and large investment projects in the mining sector. Foreign debt has remained very limited and will be unlikely to grow in coming years.

Political stability and satisfactory governance
Botswana's political stability constitutes an undeniable asset in attracting investment. President Ian Khama's Democratic Party of Botswana will likely continue to dominate the political scene until the next elections, scheduled in 2014, notwithstanding the creation in April 2010 of the opposition party, the Botswana Movement for Democracy. The county has moreover maintained good relations with international institutions and continued to make overtures to a number of countries (Japan, China). Compared to its neighbor, Botswana boast good governance indicators, particularly in the campaign against corruption and the quality of regulations.

Strengths

• Abundant and diversified natural resources (diamonds, copper, coal)
• Satisfactory business environment
• Rigorous management of public finances   
• Leading African destination for foreign direct investment in the mining sector   
• Sustainable public and foreign debt

Weaknesses

• Dependence on the diamond sector (60% of exports and 35% of fiscal revenues)
• AIDS prevalence rate among the world's highest
• Poverty and many inequalities