Agency down­grades Le­sotho

Lesotho Times - - Business - Bereng Mpaki

GLOBAL rat­ing agency, Fitch has down­graded Le­sotho’s in­ter­na­tional credit rat­ings cit­ing the de­cline in South African Cus­toms Union (SACU) rev­enues and per­cep­tions of po­lit­i­cal in­sta­bil­ity which have im­pacted on in­vestor con­fi­dence in the coun­try.

In its lat­est rank­ings re­leased last week, Fitch re­vised down­wards the coun­try’s longterm for­eign cur­rency Is­suer De­fault Rat­ing (IDR) from ‘BB-’ to ‘B+’ sta­tus.

The long-term lo­cal cur­rency IDR was also re­vised down­wards from ‘BB’ to a ‘BB-’ sta­tus.

Fitch’s in­ter­na­tional credit rat­ings re­late to ei­ther for­eign cur­rency or lo­cal cur­rency com­mit­ments and in both cases, as­sess the ca­pac­ity to meet th­ese com­mit­ments us­ing a glob­ally ap­pli­ca­ble scale.

The lo­cal cur­rency rat­ing mea­sures the like­li­hood of re­pay­ment in the cur­rency of the ju­ris­dic­tion of the coun­try. On the other hand, the for­eign cur­rency rat­ings con­sider the pro­file of the is­suer or note af­ter tak­ing into ac­count trans­fer and con­vert­ibil­ity risk.

‘BB’ rat­ings in­di­cate an el­e­vated vul­ner­a­bil­ity to de­fault risk, par­tic­u­larly in the event of ad­verse changes in busi­ness or eco­nomic con­di­tions over time.

The mod­i­fiers ‘+’ or ‘-’ may be ap­pended to a rat­ing to de­note rel­a­tive sta­tus within ma­jor rat­ing cat­e­gories.

‘B’ rat­ings in­di­cate that ma­te­rial de­fault risk is present, but a lim­ited mar­gin of safety re­mains. It means that fi­nan­cial com­mit­ments are cur­rently be­ing met but the ca­pac­ity for con­tin­ued pay­ment is vul­ner­a­ble to de­te­ri­o­ra­tion in the busi­ness and eco­nomic en­vi­ron­ment.

In a state­ment, Fitch at­trib­uted the de­cline to pre­vail­ing eco­nomic and gover­nance de­vel­op­ments.

“Medium Fitch fore­casts a con­tin­ued de­te­ri­o­ra­tion in public fi­nances, with pro­jected deficits of 3.4 per­cent of GDP in fis­cal year- end­ing March 2016 (FY16), 6.8 per­cent of GDP in FY17 and 6.5 per­cent of GDP in FY18,” the agency said.

“The widen­ing deficit is due to the fall in South African Cus­toms Union (SACU) rev­enues linked to the weak­en­ing in South Africa’s eco­nomic per­for­mance.

“SACU re­ceipts are fore­cast to drop to 16.6 per­cent of GDP in FY17 from 25.8 per­cent of GDP in FY16, and re­main at around 18 per­cent of GDP in FY18. The au­thor­i­ties have not ad­justed fis­cal pol­icy in re­sponse.

“Ex­pen­di­ture on wages is ex­pected to re­main very high at 23.7 per­cent of GDP in FY16 and FY17. The deficit will be funded from gov­ern­ment de­posits, which are fore­cast to fall to 19 per­cent of GDP in FY18 from 26 per­cent of GDP in FY16, and new gov­ern­ment debt is­suance.”

Fitch also pre­dicted fur­ther de­te­ri­o­ra­tion in the sta­tus of the gov­ern­ment debt.

“Fitch fore­casts gross gen­eral gov­ern­ment debt (GGGD) to in­crease to 56 per­cent of GDP by FY18 from 52.5 per­cent of GDP in FY16 as a re­sult of new debt is­suance and Loti de­pre­ci­a­tion, as around 85 per­cent of GGGD debt is in for­eign cur­rency. In FY17 Le­sotho’s GGGD is fore­cast to ex­ceed the

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peer ‘ B’ me­dian of 54.4 per­cent of GDP. GGGD is mostly con­ces­sional with long ma­tu­ri­ties. Po­lit­i­cal ten­sions are com­pli­cat­ing any pol­icy re­sponse to the grow­ing fis­cal deficit,” the or­gan­i­sa­tion said.

The or­gan­i­sa­tion noted that the pre­vail­ing “po­lit­i­cal ten­sions are com­pli­cat­ing any pol­icy re­sponse to the grow­ing fis­cal deficit”.

“The gover­nance and in­sti­tu­tional en­vi­ron­ment have weak­ened sig­nif­i­cantly fol­low­ing an al­leged coup at­tempt in 2014, as ev­i­denced by the de­te­ri­o­ra­tion in Word Bank gover­nance in­di­ca­tors. The re­cent South African Devel­op­ment Com­mu­nity (SADC) com­mis­sion of in­quiry re­port on its in­ves­ti­ga­tion into the death of a for­mer army gen­eral high­lights the in­sti­tu­tional weak­nesses.”

Fitch said it did not ex­pect mean­ing­ful im­prove­ment in the po­lit­i­cal en­vi­ron­ment in the short-term.

As a re­sult, the or­gan­i­sa­tion pre­dicted “con­tin­ued weak real GDP growth in 2015 and 2016 due to on­go­ing po­lit­i­cal ten­sions, a drop in SACU rev­enues and a re­cent drought.”

“The po­lit­i­cal ten­sion has hit in­vest­ment, con­sump­tion and con­fi­dence, af­fect­ing the im­ple­men­ta­tion of the Na­tional Strate­gic Devel­op­ment Plan (NSDP). Fitch fore­casts GDP growth of 2.8 per­cent in 2016 up slightly from 2.7 per­cent in 2015, be­fore in­creas­ing to 4 per­cent by 2017 as new min­ing pro­duc­tion comes on stream and ini­tial work on phase II of the Le­sotho High­lands Water Project (LHWP) boosts the construction in­dus­try.

“Donor re­la­tions are be­com­ing in­creas­ingly strained. Disquiet re­gard­ing the po­lit­i­cal sit­u­a­tion led to a loss of EU bud­get sup­port in 2016 and has gen­er­ated un­cer­tainty re­gard­ing re-cer­ti­fi­ca­tion for the African Growth and Op­por­tu­nity Act (AGOA). AGOA is very important to the tex­tiles sec- tor, a key com­po­nent of Le­sotho’s econ­omy, as it pro­vides pref­er­en­tial ac­cess to the US mar­ket.”

Fitch also fore­cast the cur­rent ac­count deficit (CAD) to widen to 14 per­cent of GDP in 2016 from 8 per­cent of GDP in 2015 due to the drop in SACU rev­enues in 2016 be­fore re­turn­ing to around 8 per­cent of GDP in 2017.

“The CAD is due to on­go­ing construction of projects in the coun­try. A com­bi­na­tion of grants and FDI will fund the CAD,” Fitch noted.

The or­gan­i­sa­tion fur­ther fore­cast in­ter­na­tional re­serves to fall to four months of cur­rent ex­ter­nal pay­ments in 2017 from 4.7 months in 2015, al­though this would be ad­e­quate to sup­port the ex­change rate peg.

Fitch iden­ti­fied fur­ther ma­te­rial weak­en­ing of debt ra­tios and an ero­sion of gov­ern­ment de­posits as well as po­lit­i­cal tur­moil as the main fac­tors that could in­di­vid­u­ally or col­lec­tively lead to a neg­a­tive rat­ing ac­tion.

On the fac­tors that could lead to a pos­i­tive rat­ing, the or­gan­i­sa­tion iden­ti­fied higher real GDP growth sup­ported by an im­prove­ment in the busi­ness en­vi­ron­ment and po­lit­i­cal sta­bil­ity and di­ver­si­fi­ca­tion in the econ­omy.

“Fur­ther progress in di­ver­si­fy­ing the rev­enue base and grow­ing tax re­ceipts that lessen the de­pen­dence on SACU rev­enues as well as a sus­tained re­duc­tion in GGGD/ GDP,” were iden­ti­fied as other fac­tors that could lead to a pos­i­tive rat­ing.

Fitch also made as­sump­tions that eco­nomic growth in Le­sotho would be sup­ported by a grad­ual re­cov­ery in its key eco­nomic part­ners, namely the US, Europe and South Africa.

“Fitch also as­sumes there will be no ma­jor re­vi­sion to the SACU rev­enue-shar­ing for­mula that could neg­a­tively af­fect SACU rev­enues to Le­sotho. Fitch also as­sumes AGOA will be re­cer­ti­fied in 2017,” the or­gan­i­sa­tion said.

FITCH states that po­lit­i­cal ten­sions were com­pli­cat­ing any pol­icy re­sponse to the grow­ing fis­cal deficit.

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