Fitch af­firms Le­sotho ‘sta­ble out­look’

Lesotho Times - - Business -

GLOBAL rat­ing agency, Fitch, has af­firmed Le­sotho’s long-term for­eign and lo­cal cur­rency Is­suer De­fault Rat­ings (IDR) at ‘BB-’ and ‘BB’, re­spec­tively, adding that the King­dom’s eco­nomic out­look is sta­ble.

The terms “in­vest­ment grade” and “spec­u­la­tive grade” de­scribe the cat­e­gories “AAA” to “BBB” (in­vest­ment grade) and “BB” to “D” (spec­u­la­tive grade).

“In­vest­ment grade” cat­e­gories in­di­cate rel­a­tively low to mod­er­ate credit risk, while rat­ings in the “spec­u­la­tive” cat­e­gories ei­ther sig­nal a higher level of credit risk or that a de­fault has al­ready oc­curred. The Coun­try Ceil­ing for Le­sotho has been af­firmed at “A-“and the short­term for­eign cur­rency IDR at ‘B’.

Ac­cord­ing to Fitch, Le­sotho’s “BB-” rat­ing is sup­ported by its cur­rency peg to the South African rand, which has con­trib­uted to a sta­ble macro en­vi­ron­ment, in­clud­ing mod­er­ate in­fla­tion.

Gross Do­mes­tic Prod­uct ( GDP) growth has been re­silient de­spite a volatile ex­ter­nal and do­mes­tic en­vi­ron­ment. The agency notes that Le­sotho’s de­pen­dence on volatile South African Cus­toms Unions (SACU) rev­enues is a weak­ness.

At 42 per­cent of GDP, gov­ern­ment debt is slightly above the ‘BB’ me­dian, but Le­sotho re­mains a net ex­ter­nal cred­i­tor. Ac­cord­ing to Fitch, the King­dom’s “BB-” IDRS can be at­trib­uted to the re­cent ten­sions which add to the po­lit­i­cal risk in a coun­try with a short demo­cratic his­tory and pe­ri­od­i­cal mil­i­tary in­volve­ment in pol­i­tics.

Dis­cord within the coali­tion gov­ern­ment led to open con­fronta­tion be­tween the army and the po­lice in Au­gust and Prime Min­is­ter Thomas Tha­bane tem­po­rar­ily flee­ing the coun­try after some mem­bers of the Le­sotho De­fence Force had stormed three key Maseru po­lice sta­tions, in what the premier later said was an at­tempted coup.

Re­gional me­di­a­tion, led by South African Vice-pres­i­dent, Cyril Ramaphosa, re­sulted in an agree­ment by all par­ties to hold early elec­tions in Fe­bru­ary 2015.

The agency warns that if the early 2015 elec­tion does not lead to nor­mal­i­sa­tion of the po­lit­i­cal sit­u­a­tion, it could lead to neg­a­tive rat­ing pres­sure if it af­fects macro sta­bil­ity, GDP growth and po­ten­tially ex­ter­nal fi­nan­cial support from the in­ter­na­tional com­mu­nity.

De­spite Fitch’s base­line sce­nario be­ing for an or­derly res­o­lu­tion of the im­passe, it ex­pects the po­lit­i­cal cri­sis to af­fect con­fi­dence in the econ­omy and GDP growth to slow to three per­cent in 2014, from 5.8 per­cent in 2013.

The agency ex­pects growth to pick up in the medium-term, to five per­cent in 2015 and 5.5 per­cent in 2016 sup­ported no­tably by the con­struc­tion of the Le­sotho High­land Wa­ter Project (LHWP).

Fitch’s base­line as­sumes the re­newal of the African Growth and Op­por­tu­nity Act (AGOA), which pro­vides pref­er­en­tial ac­cess to the US mar­ket for Le­sotho’s tex­tiles, which is 12 per­cent of the King­dom’s GDP, in 2015. Non-re­newal, it adds, would re­sult in lower GDP growth.

Mean­while, Fitch forecasts the bud­get deficit widen­ing to 2.2 per­cent of GDP in fis­cal year 2015, which ends in March 2015, from 1.2 per­cent of GDP, re­flect­ing the im­pact of the slower econ­omy on tax re­ceipts.

The agency also ex­pects the defi- cit to re­main around two per­cent of GDP in the medium-term and pub­lic debt to de­cline as a per­cent­age of GDP, to 40 per­cent by FY17 (from 42 per­cent in FY14).

Fitch ex­pects the cur­rent ac­count to widen to neg­a­tive 4.5 per­cent of GDP in 2014 from neg­a­tive 1.2 per­cent of GDP in 2013 due to a higher trade deficit and con­tin­u­ing weak global en­vi­ron­ment.

The agency ex­pects the cur­rent ac­count will de­te­ri­o­rate in the medium-term as in­vest­ment projects funded by gov­ern­ment ex­ter­nal bor­row­ing ac­cel­er­ate.

The higher ex­ter­nal im­bal­ance will weigh on of­fi­cial re­serves, ex­pected to drop to 3.8 months of cur­rent ac­count pay­ments by 2016, from 4.6 in 2014.

On a pos­i­tive note, the agency fore­sees fur­ther progress in de­vel­op­ing tax re­ceipts that lessen de­pen­dence on SACU rev­enues.

Sus­tained high GDP growth, Fitch noted, would be sup­ported by an im­prove­ment in the business en­vi­ron­ment and di­ver­si­fi­ca­tion in the econ­omy.

–– Staff Writer.

Fitch’s base­line as­sumes the re­newal of AGOA which pro­vides pref­er­en­tial ac­cess to the Us mar­ket for Le­sotho’s tex­tiles.

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