SA sluggish growth to pull down Lesotho

SA sluggish growth to pull down Lesotho

MASERU – SOUTH AFRICA’s sluggish growth will weigh down Lesotho’s economic recovery over the next two years, according to an international rating agency.
Fitch Solutions said the major drawback on the recovery will be the lower remittances and subdued consumer demand” which are expected to hobble the manufacturing, wholesale and retail trade sectors.

The agency said “weaker growth in South Africa will also weigh on government consumption in the short-term, limiting fiscal stimulus”.
It however said it expected Lesotho to come out of the 2017 recession period stronger on the back of anticipated rebound in the mining and construction sectors.
But even that recovery will not be substantial enough to help Lesotho meet its growth forecasts for 2018 and 2019.
Fitch Solutions has therefore slashed the growth forecast this year from the 2.6 percent to 1.3 percent.
The forecasted growth for next year has also been cut from 2.2 percent to 1.1 percent.

“Although recovering from a period of recession in 2017, Lesotho’s economic activity will grow slower than we previously expected, mainly due to poor economic performance in South Africa,” the agency said. “Weakness in South Africa’s mining sector activity will weigh on Lesotho’s private consumption, which is directly affected via remittances sent by Basotho working in mine sites in the country.”

“Remittances, which accounted for 15.2 percent of GDP in 2017, are fundamental to support consumption and growth in the wholesale and retail trade sector. The weaker outlook for the South African economy as a whole, and the mining sector in particular, will weigh on these inflows.”
Fitch Solutions also expects that the textile manufacturing sector, which contributed 13.1 percent to the GDP growth in 2016, “to underperform due to structural issues and lower demand from South Africa”.

“The textile sector has been one of the main engine of growth in Lesotho, but its prospects remain grim due to several factors.”
It said “there continues to be little domestic value addition in the supply chain of textile sector with most factories preferring to “Cut, Make and Trim”, keeping the sector’s competitive advantage focused only on cheap labour”.

“Secondly, the sub-sector’s performance and profitability is held back by the high cost of doing business in Lesotho as indicated by the poor performance of the country in the labour market risk subcomponent of our proprietary Operational Risk Index, which ranks Lesotho 192nd over 202 countries covered globally.”

“This leaves Lesotho’s textile sector’s growth largely dependent on clothing demand from South Africa – where part of the goods are exported to. With higher inflation and lower household disposable incomes likely to weigh on South Africa’s consumer demand, we believe the sector will face severe headwinds in the coming quarters, weighing on headline country growth.”
The agency also said weaker growth in South Africa will weigh on government spending in Lesotho in 2019. This, it said, is because “just under half of the country’s budget resources have historically come from pooled regional customs revenues, which are largely determined by South African import demand.

“Lesotho’s fiscal deficit has widened sharply from 3.3 percent of GDP in 2016/17 fiscal year, reaching an estimated 6.3 percent of GDP in 2017/2018 fiscal year as the government has kept the fiscal taps open despite a steady decline in revenues due to weaker South African growth in recent years.”
“As we now see Southern African Customs Union (SACU) revenues as a percentage of GDP declining in 2019 and 2020, we expect that the government will have little choice but to rein in spending to prevent the budget deficit from rising to unsustainable levels.”

It however said it expects Lesotho to avoid a recession this year because stronger performance in the mining and construction sectors.
Growth in mining will be driven by Letseng Diamond while second phase of the Highlands Water Project (LHWP) will be the mainstay of the construction sector.

Staff Reporter

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