Fitch warns of dark clouds ahead

Lesotho Times - - Business - Staff Writer

GLOBAL rat­ing agency, Fitch Rat­ings, has down­graded Le­sotho’s out­look from sta­ble to neg­a­tive cit­ing sig­nif­i­cant re­duc­tions in South African Cus­toms Union (SACU) rev­enues and po­lit­i­cal in­sta­bil­ity.

In a state­ment re­leased last Fri­day, Fitch Rat­ings re­vised Le­sotho’s out­look from sta­ble to neg­a­tive, while af­firm­ing its long-term for­eign and lo­cal cur­rency Is­suer De­fault Rat­ings (IDRS) at ‘BB-’ and ‘BB’, re­spec­tively.

IDRS opine on an en­tity’s rel­a­tive vul­ner­a­bil­ity to de­fault on financial obli­ga­tions. ‘BB’ rat­ings in­di­cate an el­e­vated vul­ner­a­bil­ity to de­fault risk, par­tic­u­larly in the event of ad­verse changes in busi­ness or eco­nomic con­di­tions over time.

Le­sotho’s coun­try ceil­ing was af­firmed at ‘A-’ and the short-term for­eign-cur­rency IDR at ‘B’. ‘A’ rat­ings de­note ex­pec­ta­tions of low de­fault risk, while ‘ B’ rat­ings in­di­cate that ma­te­rial de­fault risk is present, but a lim­ited mar­gin of safety re­mains.

Fitch Rat­ings at­trib­uted the down­grade to a fore­cast deficit of 2.3 per­cent and 7.4 per­cent of gross do­mes­tic prod­uct (GDP) in fis­cal year-end­ing March 2016 financial year (FY16) and FY17 re­spec­tively, com­pared with a sur­plus of 0.6 per­cent of GDP in FY15.

“This is due to a fall in South African Cus­toms Union (SACU) rev­enues, which we fore- cast to fall to 15.9 per­cent of GDP by FY17 from 26.4 per­cent in FY16 and spend­ing rigidi­ties,” the rat­ings agency noted.

“The deficit will be funded from gov­ern­ment de­posits, fore­cast to fall to 21 per­cent of GDP in FY17 from 24 per­cent in FY15, and gov­ern­ment bor­row­ing. The agency expects the deficit to be seven per­cent of GDP from FY17,” the agency said.

Fitch fore­casts gross gen­eral gov­ern­ment debt (GGGD) to in­crease to 47 per­cent of GDP by FY17 from 45 per­cent in FY16, with po­ten­tial for fur­ther in­creases.

“Ex­ter­nal debt com­prises 90 per­cent of GGGD and with the de­pre­ci­a­tion of the loti, pegged to the South African rand, GGGD has in­creased at a faster rate than ex­pected,” read the state­ment.

“Higher gov­ern­ment bor­row­ing has also con­trib­uted to the in­crease, with GGGD now ex­ceed­ing the ‘BB’ me­dian of 42.8 per­cent of GDP.

“Fitch fore­casts the gen­eral gov­ern­ment’s net debt po­si­tion will also in­crease to 26 per­cent of GDP in FY17 from 18 per­cent in FY15.”

It fur­ther notes that the con­tin­ued po­lit­i­cal ten­sion was af­fect­ing eco­nomic per­for­mance.

“This is high­lighted by the re­cent de­te­ri­o­ra­tion of World Bank gov­er­nance in­di­ca­tors and cir­cum­stances sur­round­ing the com­mis­sion of in­quiry in­ves­ti­ga­tion into the death of a gen­eral (Lieu­tenant-gen­eral Maa­parankoe Ma­hao),” the agency said.

“Ten­sions be­tween po­lit­i­cal fac­tions last year re­sulted in the South African De­vel­op­ment Com­mu­nity (SADC) in­ter­ven­ing. Fitch expects sta­bil­ity to pre­vail in the medium term al­though Le­sotho’s his­tory sug­gests bouts of po­lit­i­cal in­sta­bil­ity re­main pos­si­ble.”

Le­sotho’s fore­cast slug­gish eco­nomic per­for­mance, Fitch said, was “ex­ac­er­bated by the un­sta­ble po­lit­i­cal en­vi­ron­ment caus­ing lower in­vest­ment, con­sump­tion and confi- dence”.

“Con­tin­ued po­lit­i­cal tur­moil would also af­fect macro sta­bil­ity, GDP growth and po­ten­tially ex­ter­nal financial sup­port from the in­ter­na­tional com­mu­nity.

“As such, Fitch fore­casts growth at three per­cent in 2016 and 2.7 per­cent in 2015 from 2.5 per­cent in 2014 ver­sus pre­vi­ous fore­casts of 4.0 per­cent in 2016 and 4.8 per­cent in 2015,” said the state­ment.

On a pos­i­tive note, the agency said new min­ing ca­pac­ity and ini­tial work on the Le­sotho High­lands Wa­ter Project (LHWP) would add to eco­nomic growth.

It also said Le­sotho’s peg­ging of the mal­oti to the South African rand con­trib­uted to macroe­co­nomic sta­bil­ity.

“With large gov­ern­ment de­posits, fore­cast at 24 per­cent of GDP in FY16, and mostly held at the cen­tral bank, this will con­tinue to sup­port Le­sotho’s of­fi­cial for­eign re­serves and its po­si­tion as a net ex­ter­nal cred­i­tor,” Fitch said.

How­ever, the agency warned that Le­sotho risked a fur­ther down­grade if it failed to con­sol­i­date fis­cal ac­counts due to pres­sure from non-cap­i­tal spend­ing as well as a fasterthan-pro­jected fall in SACU rev­enues.

Fitch added that Le­sotho needed to ur­gently di­ver­sify its rev­enue base and grow tax re­ceipts that lessen the de­pen­dence on SACU rev­enues.

This is high­lighted by the re­cent de­te­ri­o­ra­tion of World Bank gov­er­nance in­di­ca­tors and cir­cum­stances sur­round­ing the com­mis­sion of in­quiry in­ves­ti­ga­tion into the death of a gen­eral (Lieu­tenant-gen­eral Maa­parankoe Ma­hao)

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