Fitch maintains stable outlook on Lesotho
. . . warns of elections ‘downside risk’ if governance reforms are not implemented
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