By Ntsebeng Motsoeli
MASERU — Lesotho has received a mixed report from global financial agency, Fitch Ratings Inc.
In a statement released on May 2, the agency, which is dual-headquartered in New York and London, indicated that while the country enjoys good governance that encourages investment, strong dependence on the South African Customs Union (SACU) revenue and the economy’s lack of diversity, are cause for concern.
“Strong standards of governance have ensured access to donor-support. The budget and the balance of payments are exposed to the volatility of SACU revenue (42 percent of government receipts, 22 percent of current account receipts) and the economy lacks diversity. Human development indicators are lower than the ‘BB’ median (more prone to changes in the economy).
“Lesotho’s ratings also reflect the following key rating drivers: Real Gross Domestic Product (GDP) grew 5.8 percent in 2013 after six percent in 2012, primarily driven by public and private investment. Currency depreciation (-23percent in 2013) has helped offset slower growth in export markets while inflation has remained moderate (5.3 percent in 2013, 5.6 percent in March 2014).
“Fitch expects real GDP to grow 5.5 percent in 2014 and 2015, supported by a continuing positive trend in public spending, development in new sectors (e.g. commercial agriculture) and stronger external demand.
“Inflation is forecast at six percent over the next two years. For fiscal year April 2013-March 2014, the budget recorded a surplus of 4.3 percent of GDP, up from one percent in Fiscal Year (FY)13.
“After three years of deficits, the budget has firmly rebounded on a stronger path, due to a recovery in SACU receipts (27.5 percent of GDP in FY14 from 14.6 percent in FY12).
“The budget outcome is likely to remain volatile, reflecting its dependence on SACU. Fitch expects the budget balance will deteriorate to a deficit of 1.4 percent by FY16 as a result of a renewed decline in SACU revenues and lower official grants,” reads part of the statement.
According to the agency, government debt was 45 percent of GDP in 2013 –– up from 37 percent in 2011, “largely reflecting the impact of the currency depreciation (-30 percent over the two past years) on external debt (90 percent of total public debt)”.
Fitch expects debt to decline to 40 percent of GDP by next year.
The statement continues: “Over the long-term, debt will increase to finance Phase II of the Lesotho Highlands Water Project (estimated cost of 50 percent of 2013 GDP).
Fitch forecasts that debt will increase to 45 percent by 2022 but could reach 56 percent with wider-than-expected deficits or steep currency depreciation.”
Foreign reserves at the central bank were US$1.1 billion (4.5 months of current payments) at end of 2013, up from a low of US$919 million in 2011, the agency also noted.
“Rebuilding reserves is critical to building buffers for future shocks and to maintaining confidence in the peg with the South African rand.
“Given continuing high current account deficits (-19 percent of GDP in 2013, forecast at -13 percent in 2015), Fitch expects only a gradual increase in reserves to $1.2 billion by 2015.”
Fitch also noted the political situation, which saw a coalition government assume power after the May 26 2012 election resulted in a hung parliament, has not been helpful to the country’s economy.
“The ruling coalition’s majority in parliament — with 61 seats out of 120 — is only secured by a narrow margin and has been weakened by political disputes as illustrated by the threat of a no-confidence vote in March this year.
“The lack of cohesive decision-making is hampering policy implementation and likely to limit the scope of reforms. The expected absence of a successor International Monetary Fund (IMF) programme in 2014, after the extended credit facility expired in September 2013, will also likely hamper reform.”
Fitch has also recommended the further development of alternative sources of revenue and improving the business environment to facilitate diversification of the economy, while also warning against political instability.
“Diversification of the economy would improve long-term growth prospects.
This is especially relevant for the textile sector (12 percent of GDP, eight percent of current account receipts), which is facing stiff competition from South Asian producers, particularly as the African Growth Opportunity Act (which allows duty-free exports to the United States of America) may not be renewed beyond 2015.
“Further deterioration in the domestic political environment could also weigh on reform progress.”
