News

LESOTHO ECONOMIC GROWTH TO PICK UP FROM 2020

Key View

  • Lesotho’s real GDP growth will remain sluggish in 2019 due to weak wool and textile exports, and government fiscal cutbacks.
  • Over the past few months, economic growth prospects in neighbouring South Africa, to which Lesotho’s economy is tightly linked, have deteriorated, while drought conditions have developed in Lesotho itself. As a result, Fitch Solutions has revised down its 2019 real GDP growth forecast for Lesotho from 1.0 percent to 0.8 percent. It has left its 2020 forecast unchanged at 1.6 percent.
  • Growth will strengthen steadily from 2020 onwards, thanks in part to an improving South African economy, investment into a major water project and the fledgling medical marijuana industry.

 

By Staff Writers

Research firm that provides macroeconomic, industry and financial market analysis, covering 24 industries and 200 global markets, Fitch Solutions Macro Research, has released a new report looking at Lesotho’s economy in 2019 and 2020.

As part of the report, the firm outlines that Lesotho’s economic growth will strengthen in 2020 and beyond, boosted by major infrastructure investment and stronger growth in South Africa.

It says it forecasts South Africa’s economic growth to steadily accelerate in the coming years, picking up from 0.7 percent in 2019 to 1.7 percent in 2020 and edging up towards 3.0 percent over the longer-term forecasting period to 2028.

While stagnant mining sector growth in South Africa will limit the boost to remittances, it said increased South African import demand will boost Southern African Customs Union (SACU) revenues.

Larger revenues flowing into Lesotho state coffers will reduce the need for spending cuts by the government and thus support underlying economic growth.

SACU revenue constitutes a substantial share of the state revenue of Lesotho.

Fitch Solutions Macro Research was founded in 1984 as Business Monitor International Reasearch.

In 2014 it was acquired by Fitch Group – an industry-leading provider of credit, debt market, and macro intelligence solutions, and the primary distributor of Fitch Ratings content.

Today, 90 percent of the world’s leading banks and financial institutions, as well as multinational companies, government agencies, and consulting firms based across the globe depend on Fitch content to inform their business decisions.

On July 30, 2018, BMI Research was integrated into Fitch Solutions as Fitch Solutions Macro Research.

The report published by Fitch Solutions Macro Research on Monday this week indicates that construction of the second phase of the Lesotho Highlands Water Project (LHWP) will also begin to boost economic growth from 2020.

Phase 1 of the project was completed in 1998 to facilitate the export of water to South Africa.

Phase 2 will expand capacity through investment amounting to more than 50.0 percent of Lesotho’s Gross Domestic Product (GDP) over the next eight years. The investment outlay is fully financed through capital grants from South Africa.

Even though the bulk of capital equipment, raw materials and engineering services will be imported, the project will have a positive impact on local employment during the construction phase, Fitch Solutions says.

For example, the first phase of the LHWP employed more than 3,000 workers at its peak.

“Finally, Lesotho became the first African country to legalise production of medical marijuana in 2017, and has since attracted investment from Canadian companies,” the report reads.

It adds that although the cannabis industry is at a very early stage of development, “we believe that an ideal climate, low labour costs and government support will see a steady ramp up in investment, helping Lesotho to tap into an industry that is widely expected to grow into a multi-billion dollar global market over the coming years”.

However, Fitch Solutions paints a bleak picture for the current year.

It says it has revised down its growth projections for the Lesotho economy in 2019 and now forecasts real GDP growth of just 0.8 percent this year, compared to 1.3 percent in 2018 and “our previous projection of 1.0 percent”.

It explains that this pace of growth is markedly below potential given that the economy contracted by 2.7 percent in 2017 and had averaged annual growth of 3.8 percent between 2012 and 2016.

Two key factors have encouraged this downward revision, Fitch Solutions said in its report.

“First, we have revised down our real GDP growth forecast for neighbouring South Africa from 1.2 percent to 0.7 percent in 2019. Slower economic growth in South Africa negatively impacts expansion in Lesotho through lower demand for Lesotho exports, weaker regional customs revenues and smaller remittances.

“Second, drought conditions in Lesotho look set to negatively impact agricultural production in the coming months. Weaker agricultural output will both limit exports and weigh on household spending capacity,” the report reads.

More generally, exports will be a source of weakness for the economy as a whole.

Slower economic growth in the United States of America, which accounts for almost half of Lesotho’s exports, will undermine export growth.

The U.S. is a major recipient of Lesotho’s considerable textile exports, in part due to the African Growth and Opportunity Act (AGOA), which enhances access to the US market for qualifying African nations.

“We forecast U.S. real GDP growth to slow from 2.9 percent in 2018 to 2.2 percent in 2019,” the report says.

Furthermore, a reported outbreak of anthrax at farms in Lesotho led South Africa to ban imports of wool and livestock from the country beginning in May.

Finally, although United Nations trade data suggests that diamond exports from Lesotho rebounded in 2018, Firth Solutions expects mineral export growth to be subdued as global diamond demand and prices remain weak. 

It says that government fiscal cutbacks will also constrain economic activity, particularly capital investment projects.

Around half of government revenues stem from SACU revenues, which are heavily influenced by South African import demand.

South Africa experienced a technical recession in the first half of 2018, and grew by just 0.8 percent over the year as a whole, implying weak import demand.

The report states that: “SACU revenues are typically dispersed with a one-year lag, and we therefore expect this weak South African growth to hit Lesotho government revenues in 2019. Lesotho’s fiscal accounts have been in deficit since 2016, and the budget for the 2019/20 fiscal year (April-March) implies fiscal consolidation.”

It says Lesotho’s planned revenue measures include an increase in value-added tax on telecoms and the introduction of a levy on alcohol and tobacco.

Planned spending cuts include curbs on civil service salaries. NW

Comment here

This site uses Akismet to reduce spam. Learn how your comment data is processed.