Diamond slump pushes Botswana to weakest credit rating since 2001

S&P Global Ratings has cut Botswana’s sovereign credit rating, citing growing risks to fiscal stability as the country grapples with a prolonged slump in the global diamond market.

The agency on Friday lowered the Southern African nation’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, signalling the possibility of further downgrades if fiscal pressures intensify.

BusinessDay analysis shows that the latest downgrade of the country to BBB- marks its lowest investment-grade rating since S&P began assessing Botswana in 2001. Another ratings agency, Moody’s, also lowered Botswana’s long-term issuer rating in October to Baa1 from A3, while maintaining a negative outlook.

Sovereign credit ratings are closely watched by investors such as sovereign wealth funds and pension funds as they assess a country’s creditworthiness. Lower ratings can increase borrowing costs and make access to international capital markets more expensive.

Economy rebounds but recovery fragile

The downgrade comes despite signs of economic recovery. Botswana’s economy rebounded in the third quarter of 2025, expanding to its fastest pace in five years after contracting in the previous quarter. Data from the Central Statistics Office shows that Gross domestic product (GDP) grew to 10.9 percent in Q3 2025, reversing a 3.5 percent contraction in Q2.

On a year-on-year basis, the economy also improved from a 2.8 percent contraction recorded in the same period last year.

However, S&P warned that the recovery could remain fragile as weakness in the diamond sector continues to weigh on growth and government revenues.

“The downgrade reflects our view that global diamond demand will likely remain weak for longer, weighing on Botswana’s already strained economy and public finances,” the agency said.

Diamond dependence exposes structural vulnerability

Botswana’s economic model remains heavily dependent on diamonds. The country is the world’s second-largest producer of natural rough diamonds, and the sector historically accounts for about 70 percent of exports, roughly one-third of government revenue, and about a quarter of GDP.

Since late 2023, however, the industry has come under significant pressure as global demand and prices have weakened sharply.

The decline reflects several factors, including rising competition from lab-grown diamonds, changing luxury consumption patterns, and weaker demand from China.

Diamond prices have fallen substantially since peaking in 2022 and remain subdued, further squeezing export revenues and fiscal receipts.

Weak diamond demand clouds growth outlook

S&P expects only a modest recovery in the coming years. The agency forecasts economic growth of 2.5 percent in 2026, followed by an average expansion of around 3.2 percent between 2027 and 2029.

This follows output contractions of 2.8 percent in 2024 and 0.4 percent in 2025, reflecting the depth of the downturn triggered by weaker diamond demand.

The slump in the sector is also weighing heavily on Botswana’s public finances.

It estimates the country’s general government fiscal deficit will reach 8.9 percent of GDP in the 2026/27 fiscal year, only slightly lower than the 9.3 percent deficit recorded the previous year.

Without major policy adjustments, the agency projects net government debt could rise to 37.4 percent of GDP by 2029, compared with a net asset position before 2023.

Rising borrowing requirements are also expected to increase debt servicing costs. Government interest payments could climb to 11 percent of fiscal revenue by 2029, roughly double the level recorded in 2024.

External balances and reserves under pressure

Botswana’s external accounts are also under strain as diamond export revenues decline.

Foreign exchange reserves fell to $3.8 billion at the end of 2025, down sharply from $7.5 billion in 2017, highlighting the pressure on the country’s external buffers.

In response, the Bank of Botswana has introduced several policy measures aimed at protecting reserves and stabilising the currency. Last July, the central bank increased the downward rate of crawl of the pula to 2.76 percent from 1.51 percent, while widening trading margins to plus or minus 7.5 percent from 0.5 percent. This was followed by the introduction of asymmetric trading margins in January 2026.

While these steps have helped preserve foreign currency reserves, levels remain significantly lower than in previous years.

Rise of lab-grown diamonds reshaping the market

A key structural challenge for Botswana’s diamond industry is the rapid rise of lab-grown diamonds, which are increasingly capturing market share in the global jewellery market.

Lab-grown stones accounted for around 20 percent of the global diamond market by value and up to 50 percent of the United States’s engagement ring segment by volume last year, reflecting shifting consumer preferences.

Because they can be produced more cheaply and are often marketed as environmentally friendly alternatives, lab-grown diamonds are posing a growing challenge to the traditional mined diamond industry, particularly in the under-two-carat segment.

At the same time, diamond demand has also been affected by a combination of factors including softer consumer spending in China and the United States, tariffs on Botswana and on diamond-cutting centres such as India, sanctions on Russian diamonds, and a broader slowdown in global luxury goods consumption.

Uncertain outlook for the diamond market

Some of the pressures facing the diamond sector could prove temporary. For instance, US tariffs may be lowered following negotiations, demand from China could rebound, and greater price differentiation between lab-grown and natural diamonds could support mined stones.

However, S&P cautioned that the outlook remains uncertain.

The rapid expansion of lab-grown diamond production, combined with high inventories of natural stones held by retailers and wholesalers, continues to weigh on demand for rough diamonds.