October 20, 2017 / 8:06 PM / a year ago

Fitch Affirms Lesotho at 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 20 (Fitch) Fitch Ratings has affirmed Lesotho's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Lesotho's 'B+' ratings reflect a high stock of government deposits at 16% of GDP in FY16/17 (fiscal year ending March 2017) balanced by weak GDP per capita and human development indicators and heavy dependence on South African Customs Union (SACU) revenue, which fell in FY16/17. A new government, elected in June, is implementing recommendations by the South African Development Community (SADC) after a political crisis in 2014. These include reducing the involvement of the army in civilian affairs. This process brings near-term risks; the head of the army was assassinated by dissident soldiers in September. However, if successfully implemented it should improve the political environment. Lesotho's ranking in the World Bank governance indicators has worsened in recent years, but remains above the 'B' median. Public finances continue to be strained by the fall in SACU revenue, which declined to 16.2% of GDP in FY16/17 from 25.2% in FY15/16 leading to a fiscal deficit of 7.8% of GDP in FY16/17. The deficit has been funded from a drawdown of government deposits, which fell to 16.2% of GDP in FY16/17 from 26% in FY15/16 and higher government debt, which increased to 58% of GDP from 54.8%. Fitch forecasts a smaller fiscal deficit of 4.8% of GDP in FY17/18 and FY18/19, driven by an expected rise in SACU revenue to 18.4% of GDP in FY17/18 and a limited fiscal adjustment. Net general government debt is forecast to increase to 51.9% of GDP in FY19/20 from 23.3% in FY15/16, versus a peer 'B' median of 52.7%. Fitch forecasts GDP growth to increase slightly to 3% in 2017 and 3.5% in 2018 from 2.7% in 2016. Weak growth in 2016 was due to lower SACU revenue and the effect of political turmoil on policy implementation and capital expenditure. Fitch expects 2018 growth to increase due to the expansion of Liqhobong diamond mine and the effects of the construction of the second phase of the Lesotho Highlands Water Project (LHWP). African Growth and Opportunity Act (AGOA) re-certification risk has declined due to greater implementation of SADC commission recommendations. The agreement, which permits duty-free textile exports to the US, is important to GDP growth, balance of payments and private sector employment. Lesotho runs persistent current account deficits, owing to ongoing construction projects, with a substantial component of the current account funded by foreign direct investments (FDI). International reserves were USD925 million in 2016, or 5.4 months of current external payments (CXP). Fitch forecasts reserves to fall to 4.3 months of CXP in 2019. 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 Foreign-Currency (LT 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 fiscal adjustment to the fall in SACU revenue, and a government revenue base twice the peer 'B' median, forecast at 50.4% of GDP in 2017. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings 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; and - A significant decline in foreign reserves. The main factors that could, individually or collectively lead to positive rating action are: - Higher real GDP growth, supported by an improvement in the business environment, political stability and diversification in the economy; and - 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 revenue to Lesotho. The full list of rating actions is as follows: Long-Term Foreign- and Local-Currency IDRs affirmed at 'B+'; Outlook Stable Short-Term Foreign- and Local-Currency IDRs affirmed at 'B' Country Ceiling affirmed at 'BB+' 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: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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