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Fitch Affirms Lesotho at 'BB-'; Outlook Stable
May 2, 2014 / 4:05 AM / in 4 years

Fitch Affirms Lesotho at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 02 (Fitch) Fitch Ratings has affirmed Lesotho's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-' and 'BB' respectively. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling was affirmed at 'A-' and the Short-term foreign currency IDR at 'B'. KEY RATING DRIVERS Lesotho's 'BB-' LTFC IDR is supported by its stable economic environment and low inflation, which have favoured investment and GDP growth. The sovereign is a net external creditor. Strong standards of governance have ensured access to donors' support. The budget and the balance of payments are exposed to the volatility of South African Customs Union (SACU) revenue (42% of government receipts, 22% of current account receipts) and the economy lacks diversity. Human development indicators are lower than the 'BB' median. Lesotho's ratings also reflect the following key rating drivers:- -Real GDP grew 5.8% in 2013 after 6% in 2012, primarily driven by public and private investment. Currency depreciation (-23% in 2013) has helped offset slower growth in export markets while inflation has remained moderate (5.3% in 2013, 5.6% in March 2014). Fitch expects real GDP to grow 5.5% 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 6% over the next two years. For fiscal year April 2013-March 2014 (FY14), the budget recorded a surplus of 4.3% of GDP, up from 1% in FY13. After three years of deficits, the budget has firmly rebounded on a stronger path, due to a recovery in SACU receipts (27.5% of GDP in FY14 from 14.6% 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% by FY16 as a result of a renewed decline in SACU revenues and lower official grants. -Government debt was 45% of GDP in 2013 (versus 41% for the BB median), up from 37% in 2011, largely reflecting the impact of the currency depreciation (-30% over the two past years) on external debt (90% of total public debt). Fitch expects debt to decline to 40% of GDP by FY16 as the budget remains close to balance. Over the long term, debt will increase to finance Phase II of the Lesotho Highland Water Project (estimated cost of 50% of 2013 GDP). Fitch forecasts that debt will increase to 45% by 2022 but could reach 56% with wider-than-expected deficits or steep currency depreciation. -Foreign reserves at the central bank were USD1.1bn (4.5 months of current payments) at end-2013, up from a low of USD919m in 2011. 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% of GDP in 2013, forecast at -13% in 2015), Fitch expects only a gradual increase in reserves to USD1.2bn by 2015. -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 IMF programme in 2014, after the extended credit facility expired in September 2013, will also likely hamper reform. 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: - Further progress in developing non-SACU revenues and improving the business environment to facilitate diversification of the economy and a sustained increase in GDP per capita - Diversification of the economy would improve long-term growth prospects. This is especially relevant for the textiles sector (12% of GDP, 8% 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 US) may not be renewed beyond 2015 Negative: - Deterioration in the budget balance leading to weakening debt ratios and a reversal in the trends of growing government deposits and foreign exchange reserves - Slower progress with reforms, especially in light of the end of the IMF programme in September 2013 with no successor. Further deterioration in the domestic political environment could also weigh on reform progress. - Lesotho's highly open economy would suffer from a weaker-than-expected global economy, notably through SACU receipts and demand for diamonds and textiles. KEY ASSUMPTIONS Fitch assumes the authorities will aim at rebuilding external and fiscal buffers after the 2010-2012 shock, in line with the budget commitment to run a fiscal surplus in 2014/15 and to raise foreign reserves to five months of imports over the medium term. Fitch assumes that economic growth in Lesotho will be supported by a gradual recovery in 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 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 and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status null/gws/en/disclosure/solicitation?pr_id=828520 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 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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