Moody’s has given the country’s sovereign rating, which is on both ratings scales, a two-notch downgrade to ‘Baa2’, the lowest investment-grade rating category. This is the second rating downgrade in less than a year by the rating agency, due to the expected deterioration of the nation’s public finances.

The downgrade comes after a recent announcement by the Minister of Finance, Mr. Ndaba Gaolathe, that the budget deficit for the upcoming fiscals year is going to be reduced. This positive domestic forecast was based on above-average revenues from the Bank of Botswana and disciplined government spending.

But in Botswana, the economy, so far considered an African success story, continues to be affected by the extended global downturn of the diamond market. The industry has been hit hard by economic uncertainty and the growing demand for lab-grown diamonds. Diamonds play a vital role in Botswana, contributing about one-third of the country’s total revenue and three-fourths of its foreign exchange.

Botswana’s financial situation is severely affected by the revenue shortfalls from its diamond sales and poor results of new tax initiatives, the rating agency said. Furthermore, the nation has also gotten less than expected income in the form of financial receipts from the Southern African Customs Union (SACU) – one of the country’s major sources of income.

If Botswana aggressively invests in new projects with borrowed money, it may see additional downgrades, the agency warned. In particular, they cited the possibility of debt-financed transactions to boost the state’s share of the De Beers Group as Anglo American aims to wrap up its sale by the end of this year.

In general, we can see that the economic picture is transformed from bad to stable despite some warnings. This revision takes into account the greater fiscal response of the government and shows that a positive trend in diamond receipts may help lower the debt over time.