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Fitch Affirms Lesotho at 'BB-'; Outlook Stable
November 18, 2013 / 4:36 PM / 4 years ago

Fitch Affirms Lesotho at 'BB-'; Outlook Stable

LONDON, November 18 (Fitch) Fitch Ratings has affirmed Lesotho's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-' and 'BB', respectively. The Outlooks are Stable. The Country Ceiling has been affirmed at 'A-' and the Short-term foreign currency IDR at 'B'. KEY RATING DRIVERS Lesotho's 'BB-' rating is supported by its net external creditor positions (6.8% of GDP) and its government debt (36% of GDP), which is in line with rating peers. Good standards of governance and a low inflation environment have contributed to attract private and official capital and supported steady GDP growth. The global economic crisis highlighted the risks of the budget's exposure to highly volatile South African Customs Unions (SACU, 42% of government receipts). Development indicators are much lower than peers. The affirmation also reflects the following key rating drivers: - Balanced Government Budget Fitch expects the budget to remain close to balance by 2015 after a budget surplus of 5.1% of GDP in financial 2012/13 (FY13, starting in April 2012 and ending in March 2013) and an expected surplus of 0.5% in FY14. The improvement in the budget outcome after large deficits in 2009-2011 (-4.9% FY10 and -10.1% in FY11) reflects the rebound in SACU receipts combined with lower public investment, restraint in current spending after an increase in wages in FY14, and an improvement in tax compliance. - Rebuilding Buffers Fitch forecasts a gradual recovery in fiscal and external buffers after a steep fall in 2009-2011. We expect government deposits will reach 23% of GDP by end-FY15 (from a low of 19% in FY12), improving Lesotho's ability to deal with potential new fiscal shocks. Rebuilding deposits will contribute to a stabilisation in foreign reserves to 4.3 months of current account payables by 2015. High FX reserves are critical for maintaining confidence in the peg with the South African rand. - Investment-Led Growth Fitch expects GDP growth will remain above 4% (4.3% in 2012), supported by private and official investment projects, including diamond mining and the large Lesotho Highland Water Project (worth a total 80% of GDP), and structural reforms to improve the business environment. Exports are also expected to benefit from the recovery in the global economy. The key risk to the growth outlook is lower than expected growth in Lesotho's main economic partners: Europe, the US and South Africa. - Sound Banks GDP growth will also continue to benefit from rapid credit growth to the private sector at 40% in 2012 and an expected 25% in 2013. Rapid credit growth reflects strong demand for consumer credit and mortgages, lending to the mining sector and the expansion of the banking sector from a low base. Local banks, most of which are subsidiaries of South African banks, have remained sound despite the rapid expansion of their balance sheets. In March 2013, the capital adequacy ratio was 19%, the loan-to-deposit ratio was 62% and non-performing loans were 2.7%. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. The main factors that individually or collectively might lead to rating action are as follows: Positive: - Continued efforts to develop non-SACU revenues and improve the business environment to facilitate a diversification of the economy and a sustained increase in GDP per capita. - Diversification away from US markets for the textile industry, the main private sector employer, would also improve long-term growth prospects, especially in the context of uncertainty over renewal of the African Growth Opportunity Act (which allows duty-free exports to the US) beyond 2015. Negative: - Lesotho's highly open economy would suffer from a weaker than expected global economy, notably through SACU receipts and demand for diamonds and textiles. - An expectation of slower progress with reforms, especially if the IMF programme has no successor from 2014. - Deterioration in the budget balance leading to weakening debt ratios and a reversal in the trends of growing government deposits and foreign exchange reserves. KEY ASSUMPTIONS Fitch anticipates continuing efforts to develop non-SACU revenues, support budget consolidation and improve the business environment. Fitch assumes the authorities will aim to contain current expenditure growth beyond 2013 and increase FX reserves at the Central Bank, in line with their commitments to the IMF and in the FY14 budget. Fitch assumes that economic growth in Lesotho will be supported by a gradual recovery in the economies of its key economic partners, namely the US, Europe and South Africa. 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 Arnaud Louis Associate Director +44 20 3530 1539 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Carmen Altenkirch Director +44 20 3530 1511 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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