Download 2015 Quarter 1 LESOTHO SNAPSHOT

LESOTHO
SNAPSHOT
2015 Quarter 1
Inflation - Consumer price inflation declined to 2.1% y-o-y in February 2015. This was the lowest reading since deflation was last recorded in H2 of 2001 and
far removed from the two-and-a-half-year high of 6.7% y-o-y seen in May 2014. As a result of the global rout in oil prices during H2 of 2014, Lesotho’s
consumers are benefitting from significantly lower energy prices at present compared to a year ago. Electricity, gas and other household fuels – accounting for
6.1% of the consumer price index (CPI) – were 17% y-o-y cheaper during February, including a 37.2% y-o-y drop in the cost of household liquid fuels.
Growth - Prior to the headline-grabbing political situation materialising in Q3 of 2014, the second quarter of last year already revealed numerous challenges
for the Lesotho economy. For example, construction activity dropped more than 60% q-o-q during Q2 due to delays in the release of funding from the State for
capital projects. The third quarter was a better period for the construction sector with a near 20% q-o-q recovery in activity. Admittedly, this level was still less
than half of the activity seen during Q1. The country’s GDP growth performance during 2014 could be the weakest in more than a decade.
National development plan - The World Bank’s strategy in Lesotho was set out by its Country Partnership Strategy 2010-14, which was closely aligned with
the government’s Vision 2020 strategy and National Strategic Development Plan (NSDP) 2013/14 - 2016/17. The multilateral organisation is in the process of
preparing a Systemic Country Diagnostic (SCD) to underpin a new Country Partnership Framework (CPF), which is scheduled for delivery in July 2015.
OPPORTUNITIES
STRENGTHS
Proximity to South Africa – companies located in Lesotho have access to
Africa’s second-largest economy and its 53 million citizens, extensive
infrastructure, and large financial sector.
Private consumption growth outpaced overall GDP growth during 2007-14.
Wholesale, retail & hospitality represent 10% of GDP. Retail ownership
restrictions are limited to small-scale operations only.
Macroeconomic and policy fundamentals are on a much better footing
compared to fellow landlocked kingdom Swaziland.
There is no threat to the local currency's peg to the South African rand. This
carries inherent inflation-fighting benefits linked to the South African Reserve
Bank's (SARB) monetary policy.
Lesotho's economy has maintained strong GDP growth rates in recent years
despite challenging conditions in South Africa, underscoring the landlocked
country's declining dependence on its neighbour.
Government is on a good footing with the International Monetary Fund (IMF)
which has helped the country cope with its significant fiscal challenges.
VULNERABILITIES
WHAT IS BEING DONE?
The political upheaval over the past 12 months has emphasised the tenuous
Successful mediation on the part of South Africa has come to an end, and
nature of coalition governments – squabbles will emerge from time to time.
internal forces will now be responsible to keep the government together.
Fiscal dynamics are exposed to sometimes volatile revenues from the Southern The IMF is attempting to convince Lesotho to implement rules-based fiscal
African Customs Union (SACU).
policy which would make the state less reliant on SACU receipts.
Many households are dependent on farming; three-quarters of all families earn The government is actively promoting the development of mining and tourism
some income from subsistence crops and animal husbandry.
in order to reduce dependence on farming.
The country’s business and investment environment is still ranked amongst the The World Bank’s Second Private Sector Competitiveness and Economic
bottom third of states surveyed by the World Economic Forum (WEF), World Diversification Project has made progress in key areas that should help
Bank Doing Business, and Heritage Foundation.
improve Lesotho’s Doing Business ranking in the forthcoming 2016 edition.
MEGA TRENDS
Population
1,942,008 (July 2014 est.); Age 15 - 64: 61.6%
Population growth rate (%)
0.34% (2014 est.)
Life expectancy at birth
Total population: 52.65 years; male: 52.55 years; female: 52.75 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 22.85%; People living with HIV/AIDS: 364,350 (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 79.4%; male: 70.1%; female: 88.3% (2015 est.)
and write)
Urbanisation
Urban population: 26.3% of total population (2013); Urban population growth: 3.1% (2013)
Population below $1.25 (PPP) poverty line 56.2% (2010 est.)
Unemployment rate
24.7% (2013)
Employment (% of total)
Agriculture: 48%, Industry: 25%, Services: 27% (2008 est.)
Labour participation rate (% of total
population ages 15+)
66.0% (2013)
Business languages
English, Sesotho
Telephone & Internet users
Main lines in use: 57,699; Mobile cellular: 1.79 million; Internet users: 97,100 (2013)
Sources: CIA World Factbook, World Bank, ITU, UNAIDS, Lesotho Bureau of Statistics (BOS) & NKC Research
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Total
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
Economic Freedom 2015 (1 most, 178 least free)
HDI Ranking 2013 (1 most, 187 least developed)
175
55
189
128
144
107
178
187
155
162
0
Source: NKC Research
Lesotho
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
N/R
BB-/Stable
N/R
Fitch Ratings announced on 31 October 2014 that it had affirmed Lesotho’s “BB-” rating with a stable outlook, i.e. one notch above our own assessment. The
rating agency indicated that recent political tensions “illustrate the political risk in a country with a short democratic history and periodical military
involvement in politics.” Fitch expected at the time that the political crisis would affect confidence in the economy and that economic growth would decline by
several percentage points in 2014 compared to the preceding year. The slowdown in GDP growth would have an adverse effect on tax revenues, its analysts
warned, and translate into a widening of the fiscal deficit during the 2014/15 financial year. Fitch also warned about a deteriorating current account deficit
over the medium term. Negative ratings action was said to be possible if the elections scheduled for February 2015 did not lead to a normalisation of the
political situation and thereby extend the negative pressure on economic growth and fiscal dynamics. (The poll result did, however, calm the situation.) State
finances are also vulnerable to changes in international donor support. Fitch will publish its next review on Lesotho by the end of April 2015. Lesotho is not
rated by Standard & Poor’s (S&P) or Moody’s Investors Service.
Infrastructure
Diversity of
the Economy
Limited,
reasonable
quality
Dominated by
farming, very
dependent on
South Africa
Banking
Sector
Continuity
of Economic
Policy
Small,
Broadly
dominated by
consistent under
South African
new government
banks
GDP Growth
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Moderate
Small fiscal
deficit and larger
current account
deficits
Strong
Low
Relatively
healthy and
rising
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Daily Trading
Volume
Development underway
N/a
N/a
N/a
N/a
N/a
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Relatively underdeveloped
Limited
91 days to 7 years
N/a
Limited number
Macro-economic overview
The landlocked economy is heavily dependent on interaction with its surrounding neighbour South Africa, with its largest industries supplying water,
electricity, soft commodities, livestock and textiles to Africa’s second-largest economy. A high level of dependence on remittances from Basotho working in
South African mines is indicative of this interrelatedness with the larger economy. In recent years the Lesotho economy has undergone a structural change,
with certain sectors seeing a notably smaller contribution to overall GDP. The important manufacturing sector has shrunk significantly in its contribution, due
to declining export competitiveness – both associated with increasing competition from Asia as well as changing benefits under the African Growth and
Opportunity Act (AGOA) affecting foreign investment into the sector. In turn, the mining sector has benefitted from continued investment into the diamond
industry. The construction industry has profited from the continued expansion of the Lesotho Highlands Water Project (LHWP), as well as donor-funded
infrastructure development.
Due to Lesotho’s mountainous geography, only 10% of land can be utilised for farming. Still, three-quarters of the resident population is involved in some
form of subsistence agriculture. Over the past decade the sector has been threatened by several ecological problems, including the loss of topsoil owing to
erosion, increased salination in the Caledon River, loss of trees due to excessive firewood harvesting, and loss of pastures as a result of overgrazing. This is
especially devastating to subsistence farmers who do not make use of more scientific practices that could combat these negative effects. As a result, farming is
a high risk, low yield activity, and real growth in this activity has, on average, been negligible over the past decade. Output is consumed locally in the rural
areas, while any surplus is trucked off to urban markets. Crop production is dominated by maize (around 70% of cereal production during 2012/13) with other
key crops including sorghum, wheat and beans.
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Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
8.1%
Service/GDP
61.2%
Industry/GDP
30.7%
The primary sector (8.1% of GDP during 2014) consists of agriculture and mining sub-sectors. The majority of households are dependent on subsistence
farming (especially livestock) and remittance income from migrant labour for some part of their income, with paternal figures often absent for months at a
time. Half of all households earn an income from crop cultivation and animal husbandry. The secondary sector (30.7% of GDP) comprises textile-related
manufacturing, electricity and water exports, and the building and construction sub-sectors. The tertiary sector (61.2% of GDP) includes telecommunications,
health and banking services.
Real GDP Growth & Net FDI/GDP
14.0
8.0
Source: NKC Research
7.0
12.0
6.0
10.0
5.0
8.0
4.0
6.0
3.0
4.0
2.0
2.0
1.0
0.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
The United Nations Conference on Trade and Development (UNCTAD) recorded no cross-border mergers and acquisitions (M&As) in Lesotho during 201113 (the latest available comprehensive data), but registered greenfield investments worth $720m during 2011-13. The latter represented only 1.4% of
greenfield investment in Southern Africa during the three-year period. Lesotho’s net foreign direct investment (FDI) averaged an equivalent of 8.4% of GDP
during 2011-13 and was valued at nearly $600m during the three-year period. Investment Map recorded FDI stock of $1.2bn during 2013 from just $500m a
decade earlier. According to the investment information portal of the International Trade Centre (ITC), South Africa is currently the largest foreign investor in
Lesotho’s tertiary sector. The Lesotho National Development Corporation (LNDC) is of the opinion that the country’s recent political strife posed a minimum
risk to overall foreign investment.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
Main Imports: % share of total
2016F
Manufactures
Agricultural products
2014E 2015F 2016F
Manufactures
52.70
52.07
51.68
Agricultural products
28.49
28.43
29.66
Other
10.87
14.87
13.04
Fuels and mining products
7.94
4.63
5.63
Other
Fuels and mining products
Main Exports: % share of total
Diamonds
Textiles, clothing & footwear
Other exports
2014E 2015F 2016F
Diamonds
41.93
43.12
43.12
Textiles, clothing & footwear
36.47
32.65
28.73
Other exports
14.59
17.14
21.21
Water
7.02
7.09
6.94
Water
Source: NKC Research
0.0
0.5
1.0
1.5
Water flowing from the LHWP accounted for 8% of export revenues during 2011-14. The scheme currently provides South Africa with 2.13 million m3 of
water per day, while the completion of the second phase of infrastructure will almost triple this volume. This important water source is a key economic factor
to South Africa that political stability in Lesotho has, and was an important motivator behind Pretoria’s mediation in the landlocked country’s recent political
crisis. The current account recorded a surplus during 2001-09 and slipped into a deficit during 2010 alongside a 15% drop in current transfers credits due to a
fall in SACU revenues. Five years of current account shortfalls are at present projected to be followed by another five years of shortfalls during 2015-19. This
has resulted in a moderation of expectations about the pace at which the central bank will be able to accumulate reserves. The Central Bank of Lesotho (CBL)
sets targets for its Net International Reserves (NIR) in order to maintain the currency peg between the loti and South African rand.
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Current Account & Budget Balance
(% of GDP)
10.0
10.0
Source: NKC Research
5.0
5.0
0.0
0.0
-5.0
-5.0
-10.0
-10.0
-15.0
-15.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
Data from the CBL indicates that fiscal revenues increased by only 1.5% y-o-y during the April – September 2014 period to M6.755bn. While SACU revenues
were some 11.6% y-o-y higher during the period at M3.5bn, other grants declined by 64.5% to M241m in the wake of a troubling political period for the
country as well as a lacklustre spending performance on capital projects that are in part funded by donor money. Expenditure on capital declined by almost
31% y-o-y to M1bn due to the slow implementation of planned expenditure. This issue weighed significantly on the country’s construction industry and
calculations of real investment – a key factor in GDP growth estimates. Lesotho’s fiscal budget for 2015/16 was not delivered in February or early March as
usual due to the effect of early elections on government processes. It can be expected that some short-term legislation will be pushed through Parliament to
keep the government going until the new finance minister, Mamphono Khaketla, is able to deliver more concrete plans for the year ending in March 2016. Ms
Khaketla served as communications, science and technology minister during 2002-04, natural resources minister during 2004-07, and education and training
minister during 2007-14.
Average CPI (% change, y-o-y)
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
Source: NKC Research
2009
2010
2011
2012
2013 2014E 2015F 2016F
Lesotho recorded an annual inflation rate of 5.4% last year which was in line with the mean seen over the preceding five years. Declining headline inflation is
expected to bottom out at below 2% y-o-y during H1 of 2015, while some base effects, a weak exchange rate, and a recovery in global energy prices should
translate into an upward trajectory in inflation during the second half of the year. Inflation is projected to average 4.5% during 2015 based on 1) projections for
South African inflation, 2) the outlook for international oil prices, 3) the risk of weaker staple food crops stemming from poor rainfall levels across many parts
of Southern Africa, and 4) the Lesotho Electricity Company (LEC) implementing a 5.32% rise in power tariffs from April 1. We have factored in no influence
from recent political turmoil on the country’s pricing dynamics. The outlook for inflation will have no bearing on domestic interest rates considering that local
commercial bank prime lending rates are determined by those of the banks’ parent companies in South Africa and the monetary policy actions of the South
African Reserve Bank (SARB).
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Trevor Hoole – designation is Partner
Tel +27846477276
Email [email protected]
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon
such information or opinions.
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