Botswana keeps its investment-grade rating, but diamonds continue to cast a shadow

For decades, Botswana’s diamonds have done something rare in the global economy: They turned a landlocked desert nation into one of Africa’s most stable and prosperous countries. Now the stones that financed that success are becoming the reason investors are uneasy.

S&P Global Ratings affirmed Botswana’s long-term sovereign rating at BBB- and its short-term rating at A-3, preserving the country’s investment-grade status. But the agency kept the outlook negative, a warning that the rating could come under renewed pressure if the diamond market remains weak and the government fails to repair its finances. S&P said the country’s credit profile is caught between substantial strengths – including its institutions, banking system and foreign-exchange reserves – and a fiscal model still heavily dependent on a single commodity.

The message is less a verdict than a deadline. Botswana has not yet lost the confidence that comes with an investment-grade rating. Nor has it convinced markets that the forces weakening its economy are temporary. The negative outlook reflects S&P’s expectation that structural weakness in global diamond demand will continue to restrain economic growth, exports and government revenue. If those pressures persist while fiscal consolidation stalls, the country could face another downgrade.

That risk is visible in the government’s accounts. Botswana’s fiscal deficit narrowed to 6.2 percent of gross domestic product in the 2025 financial year, substantially better than the 9.5 percent originally forecast. Yet S&P expects the improvement to be short-lived. It projects a deficit of 8.9 percent of GDP in 2026, followed by 6.7 percent in 2027. Across those two years, the average deficit is expected to reach 7.8 percent of GDP before declining to an average of 4.3 percent in 2028 and 2029 as consolidation takes hold.

For a country long associated with prudent management of diamond wealth, the trajectory is jarring. S&P expects Botswana’s government to move from a net asset position equal to 6.3 percent of GDP in 2023 to net debt of 34.2 percent of GDP by 2029. The cost of servicing that debt will rise as well. Interest payments are projected to consume 10.7 percent of fiscal revenue by 2029, compared with 4.7 percent in 2024. The arithmetic leaves the government with less room to absorb another commodity shock, support households or invest in new industries.

The problem is not simply that diamonds are cheaper than they once were. The market itself is changing. Demand in China has weakened, consumer preferences in the United States have shifted and laboratory-grown diamonds have become more widely available. Together, those forces have battered prices and reduced the value of Botswana’s exports since late 2023. The challenge is especially severe because 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, according to S&P.

That concentration has made the country unusually sensitive to decisions made far beyond its borders. A slowdown in Chinese jewelry purchases, a change in American tastes or a retailer’s decision to stock more laboratory-grown stones can eventually affect Botswana’s budget, its currency and the government’s ability to pay for public services. A mine may sit in the Kalahari, but its financial fate is determined in trading centers, jewelry stores and factories thousands of miles away.

The government has tried to secure its position in the traditional diamond business. In February 2025, Botswana signed a long-delayed 10-year sales agreement with De Beers, the Anglo American unit that has long been central to the country’s diamond industry. The agreement offered a measure of certainty to a sector facing an unusually difficult market. It could not, by itself, solve the larger problem: Even a better commercial arrangement cannot fully protect a producer when consumers are questioning whether natural diamonds are worth their premium.

There is some relief in Botswana’s external accounts. Foreign-exchange reserves recovered by nearly $1.5 billion, reaching about $4.8 billion by July 2026, S&P said. The increase reflected receipts from the Southern African Customs Union, a partial recovery in diamond sales and revenue, gains in portfolio investments and new government borrowing abroad. Changes to exchange-rate policy also supported market trading and official reserves. S&P expects usable reserves to average about $4.5 billion from 2026 through 2029, above the roughly $3 billion recorded in 2025.

That cushion matters. Reserves give Botswana time to manage a downturn, pay for imports and protect confidence in the pula. But they do not erase the underlying vulnerability. The expected average would remain far below the country’s historical peak of $7.5 billion in 2017. If diamond earnings weaken again or fiscal deficits remain large, reserves could be drawn down quickly. The improvement is breathing room, not a permanent solution.

The government’s answer is economic diversification, a goal Botswana has pursued for years with limited results. Under the Botswana Economic Transformation Programme, officials are seeking to reduce the economy’s dependence on resources by expanding services and attracting investment into areas including tourism, financial services, information and communications technology and value-added manufacturing. The program also identifies agriculture, healthcare, renewable energy and digital finance as possible engines of future growth.

The ambition is clear; the timing is harder. Diversification requires roads, electricity, skills, reliable digital infrastructure and private capital. Those investments cost money before they generate tax revenue. In the near term, the government must finance the transition with a budget already strained by lower diamond receipts. S&P expects the transformation program to have only a modest effect on growth and government revenue at first, with the more meaningful gains arriving over the medium and long term. Botswana therefore faces a difficult sequence: It must spend to become less dependent on diamonds while the diamonds are generating less money to spend.

The country retains qualities that distinguish it from many emerging-market borrowers. S&P continues to regard Botswana’s institutions and governance as important supports for its rating. The peaceful transfer of power from the Botswana Democratic Party to the Umbrella for Democratic Change in November 2024 reinforced that assessment. In a region where political uncertainty can quickly become an economic risk, the transfer demonstrated the durability of Botswana’s electoral and institutional arrangements.

Its banking sector offers another line of defense. Banks remain profitable and well capitalized, with average capital just below 20 percent of risk-weighted assets, comfortably above the regulatory minimum. That does not make the banking system immune to a prolonged downturn, but it reduces the likelihood that fiscal stress will immediately become a financial-sector crisis. Strong institutions, a functioning banking system and substantial reserves are the reasons Botswana remains at the lower edge of investment grade rather than below it.

The rating decision also shows how quickly a long record of prudent economic management can be tested by a structural change in a major export market. Botswana’s earlier success was built on a compact bargain: diamond revenues would finance public investment, reserves would be accumulated during good years and sound institutions would prevent the proceeds from being squandered. That bargain delivered decades of stability. It is less secure now because the question is no longer only whether Botswana manages diamond revenues well. It is whether diamonds can continue to produce enough revenue to sustain the model.

For President Duma Boko’s government, the warning from S&P arrives at a consequential moment. Fiscal consolidation will need to be credible without undermining spending on infrastructure and diversification. Cuts that are too shallow could leave the debt trajectory untouched; cuts that are too abrupt could weaken demand and delay the very reforms intended to broaden the economy. The government will need to show that its plans are more than a catalogue of sectors and projects – that they can attract private investment, create export earnings and produce revenue on a schedule the budget can withstand.

S&P has identified a path back to a stable outlook. Botswana would need to sustain fiscal consolidation, benefit from a recovery in diamond markets and demonstrate progress toward a less concentrated economy. None of those conditions is entirely under the government’s control. Diamond demand depends on consumers abroad. Interest rates and capital flows are shaped by global markets. But the credibility of the fiscal response and the quality of diversification policy are domestic choices.

The stakes extend beyond a letter grade. A downgrade could raise borrowing costs, narrow access to international capital and make it more expensive to finance the investments required for diversification. It could also weaken the confidence of companies considering Botswana as a base for regional services, finance or technology. A stable outlook, by contrast, would signal that the government had begun to rebuild the fiscal buffers that once set Botswana apart.

For now, the country remains in an uncomfortable middle ground. It is not facing an immediate balance-of-payments crisis, its reserves have recovered and its banks are sound. Its political institutions remain a source of confidence. Yet the fiscal numbers are moving in the wrong direction, and its principal export is confronting a market that may never return to its old shape.

Botswana’s diamond story was once a story about scarcity: scarce stones, carefully managed revenues and a scarce example of mineral wealth translated into national stability. The next chapter will be about something else – whether a country can build new sources of prosperity before its oldest one loses its power. S&P has left the rating unchanged, but its negative outlook makes clear that time, for Botswana, is no longer an abundant resource.

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