IN the field of economics and finance, a sovereign credit rating is a label assigned by expert international institutions to describe the ability of a particular government to repay its current and future loans.
Typically, the highest credit rating carries the label “AAA”, which serves to inform potential lenders that such a government is highly creditworthy. In simple terms, a “AAA” rating signals that a government is extremely unlikely to default on its debt obligations.
As a result of this high level of confidence, lenders are more willing to extend credit to such governments at some of the lowest interest rates available in international markets. This is because lenders bear minimal risk when investing in, or lending to, a government with strong repayment capacity.
From “AAA”, sovereign credit ratings progressively deteriorate in the following order: “AA”, “A”, “BBB”, “BB”, “CCC”, “C” and finally “D”. Ratings within the “A” to “B” range generally reflect low to medium risk, while grades from “C” to “D” indicate high risk and speculative lending.
A “D” rating typically signals that a government is already in default on its debt obligations. As a rule, the lower the credit rating, the more difficult it becomes for a government to access affordable financing.
Botswana’s downgrade explained
In October 2025, the international ratings agency Moody’s downgraded Botswana’s sovereign credit rating from “A3” to “BAA1”. This downgrade signals that lending to the Government of Botswana is now considered riskier than before.
Importantly, the downgrade applies to both local and foreign debt issued by the Botswana government.
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In practical terms, this means that both domestic and international institutional investors, such as pension funds, asset managers and insurance companies, as well as individual lenders, are now less likely to lend to Botswana at the lowest possible interest rates.
Credit ratings are a critical tool used by lenders to balance risk and reward when allocating capital to sovereign borrowers.
Why Moody’s downgrade
Ratings agencies have increasingly viewed Botswana as carrying higher default risk, largely due to sustained weakness in the global diamond market.
Prices of natural diamonds have fallen by between 26% and 40% from 2022 to 2025. Botswana, the world’s largest producer of diamonds by value, has been particularly exposed due to its reliance on high-quality natural gems.
This decline has been driven mainly by increased competition from lab-grown diamonds and weakening global demand for natural diamonds.
The downturn, which began in 2023, persisted through 2025 and exposed the limited effectiveness of Botswana’s long-standing efforts to diversify its economy away from diamonds.
Diamond mining output fell by as much as 24% in 2024. The difficulty of replacing diamonds as the primary engine of economic activity has reinforced concerns that the current slump in the global diamond market may be structural rather than temporary.
Diamond mining and processing account for approximately 30% of Botswana’s GDP and about 90% of its export earnings. As of 2024, the government derived around 30% of its revenues from diamonds, down significantly from historical peaks of between 50% and 66% in earlier years.
Contraction, fiscal pressure
As a result of these shocks, Botswana’s economy contracted by 3% in 2024. Moody’s expects a deeper contraction of around 6% in 2025. This implies further erosion of government revenues, since public finances are largely derived from taxes on economic activity.
Consequently, government borrowing is expected to rise as the state attempts to cover widening fiscal shortfalls.
Compounding these pressures was the withdrawal of the United States Agency for International Development (USAid) support in the health sector, which left funding gaps and placed additional strain on the government’s ability to deliver essential services.
Debt, external buffers
Despite these challenges, Botswana still retains some important strengths. Overall public debt remains modest, at around 30% of GDP.
This is relatively low by regional standards; for instance, South Africa’s public debt-to-GDP ratio has exceeded 75% for several years. Moody’s expects Botswana’s debt ratio to peak at about 40% in the medium term.
Foreign debt is also limited, at approximately 11,9% of GDP. This reduces the likelihood of a severe foreign exchange crisis arising from debt repayments amid falling export revenues.
However, foreign currency reserves have declined. Should the downturn in the diamond sector persist, Botswana’s ability to support the pula through reserve sales would be constrained, increasing the risk of sharp currency depreciation.
Governance, institutional capacity
Historically, Botswana has been distinguished by professional governance across politics, the civil service and the private sector. Independent and competent institutions, minimal political interference and relatively low corruption levels have supported strong credit ratings over many years.
Yet in the current downturn, the government has demonstrated limited preparedness and weak coordination in responding to the crisis.
Previous diversification policies have failed to deliver tangible results, while inter-ministerial coordination under the current administration has been poor. This has resulted in a slow and ineffective policy response.
Moody’s explicitly cited weak responsiveness and delayed implementation of Botswana’s National Development Plan (NDP 12) as contributing factors to the downgrade.
These shortcomings have undermined medium-term growth prospects and raised doubts about the resilience of Botswana’s once-lauded governance framework.
Labour market, social risks
Unemployment stands at 27,6% overall, with youth unemployment at a troubling 38,%. This indicates significant underutilisation of labour and heightens the risk of social unrest. Such conditions further weaken economic prospects and weigh on sovereign credit ratings.
Public employment dominates formal sector jobs and household consumption. Given fiscal constraints, this reliance on government employment represents a structural rigidity that dampens economic dynamism.
Fiscal pressure also limits the government’s ability to invest in high-return infrastructure projects that could stimulate growth. Additionally, Botswana remains vulnerable to water scarcity, droughts and climate-related shocks.
Inequality, efficiency concerns
Although Botswana has moderate wealth among its middle and upper classes, inequality remains severe. It ranks among the 30 most unequal countries globally.
High inequality suppresses consumption, the largest driver of economic growth, and reduces overall economic resilience.
While diamond revenues have been managed professionally and largely insulated from corruption, spending efficiency has been problematic. Public procurement, in particular, has been plagued by inflated contract costs.
Given these challenges, a further credit rating downgrade is still possible if Botswana fails to arrest economic deterioration. Conversely, meaningful reforms and improved policy coordination could support a future upgrade.
Lessons for Zimbabwe
Botswana’s experience offers valuable lessons for Zimbabwe. Chief among them is the importance of economic diversification.
Zimbabwe’s foreign currency receipts currently stem from multiple sources, remittances, gold, platinum, tobacco and tourism, which provide some resilience. This diversification must be strengthened further.
Policymakers should ensure that lagging export sectors receive targeted support through value addition, regulatory reform and improved ease of doing business.
Botswana’s overreliance on diamonds illustrates the dangers of excessive sectoral concentration.
Scenario planning is another critical lesson. Governments must anticipate potential downturns in key sectors and develop contingency plans before crises emerge. Moody’s assessment of Botswana highlights the cost of delayed and poorly coordinated responses
High inequality, unemployment and poverty also weaken economic resilience. Zimbabwe should urgently address these structural challenges, which similarly afflict its economy. It should also deal with the political volatility.
Botswana remains an example of relatively strong governance, but both countries must urgently reform public procurement systems. Studies in the region suggest that improved procurement efficiency could save governments up to 3% of GDP.
Finally, Botswana’s low debt levels and limited foreign borrowing provide a benchmark worth emulating.
However, sustainable public finances are best achieved through private-sector-led growth rather than debt accumulation. Promoting deregulation and ease of doing business remains essential to this objective.
- Tutani is a political economy analyst. — [email protected].
