Fitch warns of dark clouds ahead
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)