Botswana: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant natural resources (especially diamonds)
- A sustainable level of public and external debt
- Substantial currency reserves
- Political stability and level of governance, placing the country among the leading countries in Sub-Saharan Africa and in the international rankings of the business environment
- Member of SACU (Southern Africa Customs Union)
- Dependence on the diamond sector (more than 80% of exports)
- Insufficient infrastructure (production and distribution of water and electricity)
- Inequality and high unemployment
- Stagnation of poverty at a relatively high level
Consolidation of Growth Thanks to Diamonds
Constrained in 2017 by the cessation of activity at both the copper and nickel mine (BCL) and the Lerala diamond mine, growth should resume in 2018. The acceleration of the pace of growth will be supported by the extractive industries sector (20% of GDP). The demand for diamonds, which collapsed in 2015, should see a gradual recovery and thus support Botswana’s exports, with the latter also set to benefit from the first full year of production at the Mowana copper mine, which reopened in mid-2017.
Public investment carried out under the economic stimulus package (adopted in 2015), and the eleventh national development plan will also support activity, particularly in the services sector. In particular, tourism, financial services, education, and health are targeted to promote economic diversification, which has long been promised but slow to materialize. The construction sector should benefit from investment in infrastructure. In the short term, however, the program is expected to provide only modest support for household consumption, due to persistently high rates of poverty and unemployment. Industries will continue to suffer from unreliable water and electricity supplies, as well as a lack of skilled labor. Despite a slight rise, inflation should remain contained, reflecting moderate domestic demand.
Public and External Accounts Burned by Decreased SACU Revenues
The expansionary positioning of the 2018/2019 budget to support growth should continue to widen the deficit. Investment capital expenditures, particularly in water and transport infrastructure, are set to have a large impact on the budget. Military and defense spending
– defined as one of the government’s priorities for the fiscal year beginning on the 1st April 2018 – should also contribute to the widening of the deficit. In the run-up to the 2019 elections, allowances and subsidies to public companies have also been revised upwards. Tax incentives for companies setting up in the Selebi Phikwe region – the location of the BCL mine, and hit hard by its closure – are notably planned. Progress in domestic revenue mobilization and a likely increase in mining revenues will only partially offset the decline in SACU customs revenue.
The current account balance surplus is expected to continue to decline in the wake of deterioration in the transfers balance. Transfers from SACU would be the main contributors to this degradation. An increase in the price of diamond carats should support income from the export and re-export of diamonds. Close to non-existent after the closure of the BCL mine in the first half of 2017, exports of copper and nickel, bolstered by better prices of these base metals, should help maintain the trade surplus, while the services balance should benefit from a recovery of tourism.
Taking the external accounts situation into account, Botswana has comfortable foreign exchange reserves (more than ten months of imports of goods and services). The surplus reserves remaining after an assessment of the Central Bank are transferred to the Pula Fund, a sovereign fund created in 1994, which makes it possible to finance a large part of the budget deficit. In addition, recourse to domestic and external borrowing will remain limited: the debt should, therefore, remain low.
Ian Khama Hands Over the Reins
In keeping with Botswana’s political tradition, Ian Khama, re-elected president for a second term in 2014, is expected to resign in March 2018, and to hand over the reins to his Vice President, Mokgweetsi Masisi. After winning the presidential race of the Democratic Party of Botswana (BDP) in July 2017, he will assume the office of President until the general elections of 2019, when he will likely represent his party. In power since the independence of Botswana (1966), support for the BDP seems to have eroded in recent years: despite obtaining two-thirds of the seats, the party achieved only 47% of the popular vote recorded in 2014 – the weakest in its history, and for the first time below the symbolic 50% mark. Given the insufficient progress in economic diversification that could reduce unemployment, poverty, and inequality during Khama’s term, an erosion of support for the BDP could again be seen in 2019. However, the divisions of the opposition coalition, the Collective for Democratic Change (UDC), symbolized by the split of the Botswana Movement for Democracy (BMD) and the formation of the Alliance of Progressives in September 2017, could work in favor of the BDP.
Regularly positioned among its sub-Saharan African peers in international rankings, Botswana still has some progress to make to improve its business environment and support private sector development.