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Fitch Affirms Lesotho at 'B+'; Outlook Stable
April 21, 2017 / 8:09 PM / 8 months ago

Fitch Affirms Lesotho at 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, April 21 (Fitch) Fitch Ratings has affirmed Lesotho's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+'. The Outlooks are Stable. The Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'B'. The Country Ceiling has been affirmed at 'BB+'. KEY RATING DRIVERS 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. Public finances have deteriorated due to falling SACU revenues. After two years of small fiscal surpluses, a deficit of 10.9% of GDP is estimated for FY16/17 (fiscal year ending March 2017), reflecting a drop in SACU revenues to an estimated 16.2% of GDP from 25.9% in FY15/16. Government deposits have been drawn down to finance the deficit and remain large at an estimated 17.4% of GDP at end-FY16/17. The government's ability to continue drawing down deposits is limited, as some are the counterpart to international reserves held by the central bank that support the currency peg. General government debt (GGGD) fell to 50.8% of GDP in FY16/17, below the 'B' median, as a result of currency fluctuations, but is forecast to increase to 57% of GDP in FY17/18. Debt/revenues is 100%, compared with the 'B' median of 225%. Public debt is 86% foreign-currency denominated, making it highly susceptible to exchange rate risk. However, Lesotho's debt stock is also highly concessional, leading to significantly lower debt servicing costs than peers. Fitch forecasts the fiscal deficit to narrow to 8.6% of GDP in FY17/18, wider than the 'B' median of 4.7%, due to a small rise in SACU receipts and a limited fiscal adjustment involving cutting capital expenditures and containing increases in current expenditure. Net general government debt is forecast to double to 51.2% of GDP at end-FY18/19 from 25.9% at end-FY15/16. The political scene remains volatile. An early election has been called for 3 June 2017 after Prime Minister Pakalitha Moisili lost a March 2017 vote of no confidence. 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 duty-free exports to the US for Lesotho's textiles. Presently, Lesotho remains eligible for AGOA in 2017, based on the precept of progress in meeting the benchmarks. 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. Fitch forecasts real GDP growth of 3.5% in 2017, up from 2.7% in the previous year. This is down from our previous 2017 forecast of 4%, due to lower government capex, uncertainty around AGOA and drought. Fitch expects growth to recover to 4% in 2018, in line with peers; but below the 2006-2015 average of 4.6%. Growth in 2017 and 2018 will be boosted by the construction of the second phase of Lesotho Highlands Water project and mining sector developments such as the Liqhobong mine. Fitch forecasts the current account deficit to widen to 7.8% of GDP in 2017, significantly higher than the 4.4% 'B' median. Lesotho runs persistent current account deficits, owing to ongoing construction projects, with the current account funded by a combination of grants and FDI. International reserves were USD1.1 billion, or 5.9 months of current external payments (CXP) at end-2016. Fitch forecasts reserves to fall in 2017, but to remain above the Central Bank's target of five months of import cover. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Lesotho a score equivalent to a rating of 'B' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Public finances: +1 notch, to reflect government deposits, at 16% of GDP, which will help support the adjustment to the fall in SACU revenues, and the high degree of concessional government debt. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that could, individually or collectively, lead to negative rating action are: - An inadequate policy response that leads to a material rise in net government debt/GDP. - Political turmoil that affects macro stability, GDP growth and potential external financial support from the international community. - Deterioration in the current account leading to a significant decline in foreign reserves. The main factors that could, individually or collectively lead to positive rating action are: - Further progress in diversifying the revenue base and growing tax receipts that lessen the dependence on SACU revenues. - Higher real GDP growth, supported by an improvement in the business environment, political stability and diversification in the economy. - A sustained reduction in net general government debt/GDP. KEY ASSUMPTIONS Fitch assumes there will be no major revision to the SACU revenue sharing formula that could negatively affect SACU revenues to Lesotho. Contact: Primary Analyst Chris Findlay Analyst +44 20 3530 1342 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Jermaine Leonard Director +852 2263 9830 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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