Botswana: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant natural resources (especially diamonds)
- Low public and external debt
- Substantial foreign exchange reserves
- Political stability and the level of governance put the country among the top sub-Saharan African countries in international business environment rankings
- Member of the Southern African Customs Union (SACU)
- Dependent on the diamond sector (over 90% of exports)
- Inadequate infrastructure (production and distribution of water and electricity)
- High inequality and unemployment, poverty stuck at a relatively high level
A deep recession in 2020, brisk growth set to return in 2021
The COVID-19 crisis plunged Botswana into a deep recession in 2020. However, a sustained growth rate is expected for 2021. Private consumption, which contributes 56% of GDP, declined in 2020 because of lockdown measures and lower household incomes. It should pick up again in 2021 (+5.5%) if lockdown measures are not as strict as in 2020. Investment fell in 2020 but an accommodative monetary policy – the central bank set its policy rate at a record low 3.75% at the end of 2020 – and a low borrowing rate will drive private foreign investment projects in the mining sector in the coming months. Public spending will also support private investment. In April 2020, the state announced the implementation of a BWP 2 billion stimulus plan, i.e. 1.1% of GDP, aimed at partially offsetting the drop in income of employees due to the recession, helping struggling companies (state-backed loans, partial tax deferral in particular) and financing public investment in agriculture, health, and transport.
Agriculture, which accounts for only a small share of GDP (2%), was only mildly affected by the crisis in 2020 and is expected to stay on the same growth rate (around 1.5%) in 2021. Conversely, the mining sector, which accounts for a quarter of GDP, and more particularly the diamond industry, fell sharply in 2020, notably due to the collapse in the world diamond price (-25% between February and April, followed by a slow rise of 15% between May and the end of 2020) and higher production costs, not just in diamond mines, but also in copper and nickel mines. After a 25% drop in activity in the first half of 2020 and although a slight recovery is expected, services will probably continue to suffer in 2021 from the collapse of tourism following border closures, since the sector accounts for 14% of GDP and 10% of jobs. These sector developments negatively affected foreign trade, as 90% of the country's exports depend on the primary sector (diamonds and minerals) and tourism.
Public and current accounts show substantial deficits
The stimulus package announced in April 2020 is larger than the average African stimulus package. Implementation of the plan, coupled with a fall in mineral tax revenues (which account for a quarter of total revenues), necessarily widened the public deficit for FY2020-2021. However, the deficit should narrow over FY2021-2022 as the government reduces subsidies and tax revenues return to pre-COVID levels. Consequently, public debt increased as well, but its level remains low.
The current account deficit widened again in 2020 but should narrow slightly in 2021. Despite a decline in imports due in particular to the reduction in the oil bill, exports of goods (90% of which are minerals) fell in 2020. Services experienced a similar trend, driven by the steep fall in tourism (70% decrease in tourism revenues in 2020). However, the country's trade deficit is expected to shrink in 2021 as the international luxury goods market strengthens and the situation on the diamond market improves in the United States, China, and Belgium. Transfers from SACU (8.5% of GDP) decreased in 2020, particularly following the collapse of activity in South Africa. Financing the current account deficit will be straightforward for the country, which has substantial foreign exchange reserves (eight months of imports). Meanwhile, external debt, although on the rise, remains relatively low (21% of GDP).
The stable political situation, but a weak financial system
The Botswana Democratic Party (BDP), which has been in power since the country's independence in 1966, won 56% of the vote in the October 2019 parliamentary elections. The incumbent president, Mokgweetsi Masisi, therefore remained in power. The government has to address high poverty and unemployment (almost 20% of the labor force in 2020), both of which were increased by COVID-19. It also needs to remedy the economy’s under-diversification as well as persistent social inequalities, since Botswana is ranked the tenth most unequal country in the world according to the World Bank.
Consistently well-positioned among its sub-Saharan African peers in international rankings, Botswana still has some way to go to improve its business environment and support private sector development (87th out of 190 in the Doing Business 2020 ranking). In addition, the country is on the FATF's grey list of countries with weak AML/CFT regulations and was added to the European Commission's grey list in May 2020 for the same reasons. As a result, financial transactions between Botswana and foreign entities will be subject to enhanced due diligence.