Botswana has managed to retain its investment-grade rating, with S&P Global Ratings affirming the country's long-term sovereign rating at BBB- and its short-term rating at A-3. This rating is a testament to the country's stable institutions, robust banking system, and substantial foreign-exchange reserves. However, the outlook remains negative, indicating that the rating could come under pressure if the diamond market remains weak and the government fails to repair its finances.
The diamond market continues to pose significant challenges to Botswana's economy, with structural weakness in global diamond demand expected to restrain economic growth, exports, and government revenue. Diamonds have historically represented about 70 percent of Botswana's exports, one-third of its fiscal receipts, and roughly one-quarter of its economic output. The decline in diamond prices has already affected Botswana's budget, with the country's fiscal deficit narrowing to 6.2 percent of gross domestic product in the 2025 financial year.
S&P expects Botswana's fiscal deficit to widen to 8.9 percent of GDP in 2026 and 6.7 percent in 2027, before declining to an average of 4.3 percent in 2028 and 2029. The country's government is expected to move from a net asset position to net debt, with interest payments projected to consume 10.7 percent of fiscal revenue by 2029. This trajectory is jarring for a country known for its prudent management of diamond wealth.
The government has taken steps to secure its position in the traditional diamond business, signing a 10-year sales agreement with De Beers in February 2025. However, this agreement may not be enough to fully protect the country from the impact of weak diamond demand. The government is also pursuing economic diversification, with a focus on expanding services and attracting investment into areas such as tourism, financial services, and value-added manufacturing.
Botswana's external accounts have shown some improvement, with foreign-exchange reserves recovering by nearly $1.5 billion to reach about $4.8 billion by July 2026. However, this cushion is not a permanent solution, and the country's underlying vulnerability remains. The expected average reserve level of $4.5 billion from 2026 through 2029 is far below the country's historical peak of $7.5 billion in 2017.
The government's economic transformation program aims to reduce the economy's dependence on resources, but the timing is challenging. Diversification requires significant investments in infrastructure, skills, and private capital, which will cost money before generating tax revenue. In the near term, the government must finance the transition with a budget already strained by lower diamond receipts.
Despite these challenges, Botswana retains qualities that distinguish it from many emerging-market borrowers, including its stable institutions, robust banking sector, and peaceful transfer of power in November 2024. The country's banking sector remains profitable and well-capitalized, offering another line of defense against economic shocks.
Key points
- Botswana's investment-grade rating is affirmed, but the outlook remains negative due to the country's dependence on diamonds and weak market demand.
- The country's fiscal deficit is expected to widen in the next two years before declining.
- Botswana is pursuing economic diversification to reduce its dependence on diamonds.
