Botswana has suffered its second sovereign credit rating downgrade from Moody’s in less than a year as a prolonged slump in the global diamond market weakens government revenue and puts pressure on public finances.
The global rating agency on Friday downgraded the Southern African nation’s long-term domestic- and foreign-currency issuer ratings to Baa2 from Baa1, leaving the country two notches above junk status.
It also revised the outlook to stable from negative, citing a stronger fiscal policy response and the possibility that a sustained recovery in diamond revenues could slow the pace of debt accumulation.
The downgrade comes less than a year after Moody’s cut Botswana’s rating to Baa1 from A3 in October.
Botswana’s latest rating action highlights the growing fiscal risks facing one of Africa’s historically stronger economies as weaker diamond revenues expose the country’s dependence on the commodity.
Diamonds account for roughly one-third of government revenue and about three-quarters of foreign-exchange earnings, making the prolonged downturn in the global diamond market a major threat to government finances and external buffers.
Moody’s said weaker revenue from diamonds, lower-than-expected receipts from the Southern African Customs Union (SACU) and disappointing proceeds from newly introduced tax measures had weakened Botswana’s fiscal position.
The agency expects government debt to rise from about 31 percent of GDP in fiscal 2025 to 41 percent by fiscal 2027, despite the government recently reducing its forecast budget deficit for fiscal 2026/27 to 3.1 percent of GDP from 8.9 percent.
The downgrade comes days after Finance Minister Ndaba Gaolathe said Botswana expected a significantly smaller budget deficit in the current fiscal year, supported by higher-than-expected revenue from the central bank and measures to contain government spending.
Further pressure from De Beers deal
Moody’s also warned that Botswana could face further ratings pressure if it materially increases its investment in De Beers through debt-financed transactions.
Botswana currently owns a 15 percent stake in De Beers, while Anglo American is seeking to sell the diamond producer as part of a broader restructuring of its portfolio.
A significant debt-funded increase in Botswana’s stake could put additional pressure on the country’s fiscal position and trigger another rating action, Moody’s said.
The warning underscores the difficult policy choices facing Botswana as it seeks to protect its position in the diamond industry while managing rising public debt and weakening revenues.
Diamond dependence exposes fiscal vulnerability
Botswana has long been regarded as an African economic success story, transforming its diamond wealth into relatively strong institutions, fiscal buffers, and higher living standards than many commodity-dependent economies.
But its economic structure has also left it highly exposed to changes in the global diamond market.
Botswana is the world’s second-largest producer of natural rough diamonds, and diamonds have historically accounted for about 70 percent of exports, one-third of government revenue and roughly a quarter of GDP.
The sector has been under sustained pressure since late 2023 as global demand and prices weakened.
The downturn has been driven by a combination of weaker luxury spending, softer demand from China and growing competition from lab-grown diamonds.
Diamond prices have fallen substantially from their 2022 highs, reducing export earnings and putting pressure on government revenues.
For Botswana, the weakness is particularly significant because diamond revenues have historically helped the government build fiscal buffers and accumulate foreign-exchange reserves.
External buffers also weakening
The pressure is extending beyond government finances to Botswana’s external position.
Foreign-exchange reserves fell to about $3.8 billion at the end of 2025, from $7.5 billion in 2017, reflecting the impact of weaker diamond export earnings.
The Bank of Botswana has introduced several measures aimed at protecting reserves and supporting the pula.
In July 2025, the central bank increased the downward rate of crawl of the pula to 2.76 percent from 1.51 percent and widened trading margins to plus or minus 7.5 percent from 0.5 percent.
It subsequently introduced asymmetric trading margins in January 2026.
While the measures have helped support the country’s foreign-exchange position, reserves remain significantly below their previous levels, underscoring the longer-term challenge posed by weaker diamond revenues.
S and P also cuts Botswana rating
Moody’s is not the only major ratings agency to have raised concerns about Botswana’s fiscal outlook.
In March, S and P Global Ratings lowered Botswana’s long-term sovereign credit rating to BBB- from BBB, while cutting its short-term issuer credit rating to A-3 from A-2 and maintaining a negative outlook.
The downgrade reflected growing risks to fiscal stability as the country grappled with the prolonged weakness in the diamond market.
S and P’s downgrade took Botswana to its lowest investment-grade rating since the agency began assessing the country in 2001, according to BusinessDay analysis.
With Moody’s now also cutting its rating, Botswana faces increasing pressure to diversify government revenues, strengthen its fiscal position and reduce its dependence on diamonds.
The country remains investment grade under Moody’s Baa2 rating, but continued weakness in diamond revenues, rising debt, or a debt-funded expansion of its De Beers stake could increase pressure on its sovereign credit profile.