Lesotho’s economic growth is expected to slow further in 2023 as muted SA growth translates to lower household incomes and company profits in Lesotho, Fitch says.
In its latest research note, Fitch said it expects Lesotho’s real GDP growth will slow to 2.1% in 2022 from 2.2% in 2021.
“We forecast that growth will have slowed in quarter four of 2022 as base effects will have faded and because the Central Bank of Lesotho pursued further monetary tightening, raising the cost of borrowing for consumers and business,” Fitch said.
In preservation of the 1:1 peg between the loti and the rand, Lesotho tends to mirror SA’s monetary policy movements.
The landlocked country lifted rates by a further 75 basis points in November, bringing the benchmark interest rate to 7%, even though some economists said the country’s inflation risks required a more aggressive move.
Oxford Economics senior financial economist Irmgard Erasmus said a more conservative stance was warranted by the domestic price environment, especially in the context of the loose fiscal stance.
Erasmus said strong government spending resulted in the budget deficit ballooning to the equivalent of 6.9% of GDP in the third quarter, significantly wider than the 0.2% of the GDP shortfall in the previous quarter.
The stock of debt expanded as a result to 58.2% of GDP, a notable weakening from the end of the second quarter’s 54.3%.
“Excess liquidity created by high government spending poses significant inflationary risk over the medium term,” she said.
SA’s slowing GDP growth, which is expected to come in at 1.6% in 2023 from 2.1% in 2022 due to sticky inflation and monetary tightening, raising the cost of borrowing for consumers and businesses, also places further constraints on exports and household incomes in Lesotho.
Research shows that 40% of Lesotho’s migrants worked in SA in 2019 with remittances equating to 20.8% of GDP in 2020.
Other pressure on the Lesotho economy will come from weaker growth in the US and Europe. SA, the US and Europe remain Lesotho’s main export destinations.
“In 2023, we forecast that economic growth will weaken further to 1.5% and we forecast that net exports will subtract 5.2 percentage points from economic growth in 2023, up from a 5.1 percentage point subtraction in 2022,” Fitch said.
The US-based agency added that weaker growth in SA will also constrain the recovery of the tourism industry in Lesotho, which accounted for 12.3% of employment in 2019.
“Taking these dynamics into account, we forecast that private consumption will only contribute 4 percentage points to real GDP growth in 2023, down from 4.6 percentage points in 2022,” Fitch said.
It said a positive contribution to GDP will include the Lesotho Highlands Water Project, which is expected to keep fixed investment elevated over the coming quarters.
The country’s department of water sanitation announced that contracts for the next section of the water project — the Polihali Dam and Polihali Transfer Tunnel — had been awarded and work was set to start in December 2022.
“This next phase will see fixed investment remain high in 2023,” Fitch said. “It is against this backdrop we forecast the fixed investment contribution to economic growth will rise from 1.8 percentage points in 2022 to 1.9 percentage points in 2023.”
Another positive effect on Lesotho’s GDP is the pick-up in economic momentum that will be driven largely by demand for commodities from China, the world’s second-biggest economy, where growth is expected to improve to 5% in 2023 from 3.3% in 2022.
From December 1, China waived tariffs on 98% of Lesotho’s exports, up from 97% previously.
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