Fitch main­tains sta­ble out­look on Le­sotho

. . . warns of elec­tions ‘down­side risk’ if gov­er­nance re­forms are not im­ple­mented

Sunday Express - - NEWS - Staff Writer

FITCH Rat­ings has kept its out­look for Le­sotho un­changed at ‘B+’ with a sta­ble out­look, as the global rat­ing agency has fore­cast real gross do­mes­tic prod­uct growth of 3.5 per­cent in 2017.

Fitch has, how­ever, pointed to the “down­side risk” of the 3 June 2017 gen­eral elec­tions to its fis­cal fore­cast, say­ing they may make it more dif­fi­cult to ef­fect gov­er­nance re­forms needed to en­sure con­tin­ued Africa Growth and Op­por­tu­nity Act (AGOA) el­i­gi­bil­ity.

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.

The terms “in­vest­ment grade” and “spec­u­la­tive grade” have es­tab­lished them­selves over time as short­hand to 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.

‘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 re­port is­sued last week, Fitch also states that Le­sotho’s short-term for­eign and lo­cal-cur­rency Is­suer De­fault Rat­ings (IDR) have been af­firmed at ‘B’, while the coun­try ceil­ing has been af­firmed at ‘BB+’.

IDRs opine on an en­tity’s rel­a­tive vul­ner­a­bil­ity to de­fault on fi­nan­cial obli­ga­tions. The agency cites the sig­nif­i­cant re­duc­tions in South African Cus­toms Union (SACU) rev- enues among the key driv­ers of the rat­ing.

SACU con­sists of Botswana, Le­sotho, Namibia, South Africa and Swazi­land, and the re­gional trade bloc main­tains a com­mon ex­ter­nal tar­iff, shares cus­toms rev­enues, and co­or­di­nates poli­cies and de­ci­sion-mak­ing on a wide range of trade is­sues.

“The ‘ B+’ rat­ing re­flects Le­sotho’s high stock of gov­ern­ment de­posits and macroe­co­nomic sta­bil­ity, which is aided by the cur­rency peg to the South African rand, bal­anced against weak GDP per capita and Hu­man De­vel­op­ment in­di­ca­tors and heavy de­pen­dence on South­ern African Cus­toms Union (SACU) rev­enues, which are fall­ing,” Fitch states.

“Pub­lic fi­nances have de­te­ri­o­rated due to fall­ing SACU rev­enues. After two years of small fis­cal sur­pluses, a deficit of 10.9 per­cent of GDP is es­ti­mated for fi­nan­cial year (FY)16/17 (fis­cal year end­ing March 2017), re­flect­ing a drop in SACU rev­enues to an es­ti­mated 16.2 per­cent of GDP from 25.9 per­cent in FY15/16.”

Gov­ern­ment de­posits, the rat­ing agency says, have been drawn down to fi­nance the deficit and re­main large at an es­ti­mated 17.4 per­cent of GDP at end-FY16/17. Net gen­eral gov­ern­ment debt is fore­cast to dou­ble to 51.2 per­cent of GDP at the end-FY18/19 from 25.9 per­cent at end-FY15/16.

Fitch also says the po­lit­i­cal scene in Le­sotho re­mained “volatile” ahead of the elec­tions.

Le­sotho will hold its third elec­tions in five years after a four-party op­po­si­tion al­liance suc­cess­fully spon­sored a par­lia­men­tary no­con­fi­dence mo­tion on Prime Min­is­ter Pakalitha Mo­sisili’s seven-party coali­tion gov­ern­ment on 1 March 2017. Six days later, King Let­sie III dis­solved par­lia­ment and even­tu­ally de­clared 3 June 2017 as elec­tion day.

“Fitch as­sumes that the elec­tion out­come will not ma­te­ri­ally al­ter the fis­cal tra­jec­tory, as any in­com­ing gov­ern­ment will be con­strained by lim­ited tax rev­enues and SACU rev­enues.

“How­ever, the com­ing elec­tion rep­re­sents a down­side risk to the fis­cal fore­cast. The po­lit­i­cal sit­u­a­tion may make it more dif­fi­cult to ad­dress gov­er­nance-re­lated chal­lenges. Le­sotho’s un­der­per­for­mance on gov­er­nance bench­marks has threat­ened its el­i­gi­bil­ity for the United States’ African Growth and Op­por­tu­nity Act (AGOA), which per­mits du­tyfree ex­ports to the US for Le­sotho’s tex­tiles.”

The Moun­tain King­dom’s tex­tile and gar­ment in­dus­try, which is an­chored on AGOA, em­ploys more than 40 000 peo­ple, in ad­di­tion to other down­stream sec­tors.

The cur­rent AGOA leg­is­la­tion pro­vides the US ad­min­is­tra­tion greater flex­i­bil­ity in re­view­ing coun­tries on an on­go­ing ba­sis, in­clud­ing ini­ti­at­ing “out-of-cy­cle” re­views at any point dur­ing the cal­en­dar year. Some of the gov­er­nance bench­marks set by the Amer­i­cans in­clude im­ple­ment­ing the rest of the South­ern African De­vel­op­ment Com­mu­nity Com­mis­sion of In­quiry’s rec­om­men­da­tions, se­cu­rity sec­tor re­forms and fa­cil­i­tat­ing an amnesty for Le­sotho De­fence Force mem­bers fac­ing mutiny charges.

“Presently, Le­sotho re­mains el­i­gi­ble for AGOA in 2017, based on the pre­cept of progress in meet­ing the bench­marks,” Fitch notes.

“The ac­cess pro­vided under AGOA is im­por­tant for GDP growth, the bal­ance of pay­ments and pri­vate sec­tor em­ploy­ment. Le­sotho’s rank­ing in the World Bank gov­er­nance in­di­ca­tors has wors­ened in re­cent years, but it re­mains above the ‘B’ me­dian.”

On the GDP front, Fitch fore­casts growth of 3.5 per­cent in 2017, up from 2.7 per­cent in the pre­vi­ous year.

“This is down from our pre­vi­ous 2017 fore­cast of 4 per­cent, due to lower gov­ern­ment capex, un­cer­tainty around AGOA and drought. Fitch ex­pects growth to re­cover to 4 per­cent in 2018, in line with peers; but be­low the 2006-2015 av­er­age of 4.6 per­cent.

“Growth in 2017 and 2018 will be boosted by the con­struc­tion of the sec­ond phase of Le­sotho High­lands Wa­ter Pro­ject (LHWP) and min­ing sec­tor de­vel­op­ments such as the Liqhobong mine.”

The LHWP is a mul­ti­phase ini­tia­tive es­tab­lished by a 1986 treaty be­tween Le­sotho and South Africa and in­volves the con­struc­tion of dams and tun­nels in the two neigh­bour­ing coun­tries, and gen­er­a­tion of hy­dropower. The sec­ond phase of the pro­ject would, among oth­ers, see Poli­hali Dam be­ing con­structed at the con­flu­ence of Khubelu and Senqu rivers in Mokhot­long.

Fitch also fore­casts re­serves to fall in 2017, but to re­main above the Cen­tral Bank of Le­sotho’s tar­get of five months of im­port cover.

How­ever, the com­ing elec­tion rep­re­sents a down­side risk to the fis­cal fore­cast. The po­lit­i­cal sit­u­a­tion may make it more dif­fi­cult to ad­dress gov­er­nance-re­lated chal­lenges

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