GLOBAL rating agency, Fitch, has affirmed Lesotho’s long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-’ and ‘BB’, respectively, adding that the Kingdom’s economic outlook is stable.
The terms “investment grade” and “speculative grade” 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.
The Country Ceiling for Lesotho has been affirmed at “A-“ and the short-term foreign currency IDR at ‘B’.
According to Fitch, Lesotho’s “BB-” rating is supported by its currency peg to the South African rand, which has contributed to a stable macro environment, including moderate inflation. Gross Domestic Product (GDP) growth has been resilient despite a volatile external and domestic environment. The agency notes that Lesotho’s dependence on volatile South African Customs Unions (SACU) revenues is a weakness.
At 42 percent of GDP, government debt is slightly above the ‘BB’ median, but Lesotho remains a net external creditor. According to Fitch, the Kingdom’s “BB-” IDRs can be attributed to the recent tensions which add to the political risk in a country with a short democratic history and periodical military involvement in politics.
Discord within the coalition government led to open confrontation between the army and the police in August and Prime Minister Thomas Thabane temporarily fleeing the country after some members of the Lesotho Defence Force had stormed three key Maseru police stations, in what the premier later said was an attempted coup.
Regional mediation, led by South African Vice-President, Cyril Ramaphosa, resulted in an agreement by all parties to hold early elections in February 2015.
The agency warns that if the early 2015 election does not lead to normalisation of the political situation, it could lead to negative rating pressure if it affects macro stability, GDP growth and potentially external financial support from the international community. Despite Fitch’s baseline scenario being for an orderly resolution of the impasse, it expects the political crisis to affect confidence in the economy and GDP growth to slow to three percent in 2014, from 5.8 percent in 2013.
The agency expects growth to pick up in the medium-term, to five percent in 2015 and 5.5 percent in 2016 supported notably by the construction of the Lesotho Highland Water Project (LHWP). Fitch’s baseline assumes the renewal of the African Growth and Opportunity Act (AGOA), which provides preferential access to the US market for Lesotho’s textiles, which is 12 percent of the Kingdom’s GDP, in 2015. Non-renewal, it adds, would result in lower GDP growth.
Meanwhile, Fitch forecasts the budget deficit widening to 2.2 percent of GDP in fiscal year 2015, which ends in March 2015, from 1.2 percent of GDP, reflecting the impact of the slower economy on tax receipts.
The agency also expects the deficit to remain around two percent of GDP in the medium-term and public debt to decline as a percentage of GDP, to 40 percent by FY17 (from 42 percent in FY14).
Fitch expects the current account to widen to negative 4.5 percent of GDP in 2014 from negative 1.2 percent of GDP in 2013 due to a higher trade deficit and continuing weak global environment. The agency expects the current account will deteriorate in the medium-term as investment projects funded by government external borrowing accelerate. The higher external imbalance will weigh on official reserves, expected to drop to 3.8 months of current account payments by 2016, from 4.6 in 2014.
On a positive note, the agency foresees further progress in developing tax receipts that lessen dependence on SACU revenues. Sustained high GDP growth, Fitch noted, would be supported by an improvement in the business environment and diversification in the economy.