Lesotho

Country Summary

Macroeconomic performance and outlook

Lesotho’s economy grew at an estimated 2.6% in 2019, up from 1.2% in 2018 owing to strong mining perfor- mance and a textiles recovery in an improved global economy.

Growth is projected at 1.8% for 2020 and 1.7% for 2021. Services predominated in GDP (60.1%), followed by industry (34.6%), and agriculture (5.3%). Yet 80% of the population depends on subsistence farming, so productivity is low.

Lesotho imports about 80% of its goods from South Africa, and since inflation in South Africa is low and within the target range of 3%–6%, any currency depreciation is minimal. Lesotho’s inflation, estimated at 5.6% for 2019, is projected at 5.3% for 2020 and 5.4% for 2021.

The fiscal deficit worsened from 3.4% in 2017 to 5.1% in 2018, reflecting a sharp decline in Southern Afri- can Customs Union (SACU) receipts, which are below their historical average of 30% of GDP. But the deficit improved to an estimated 4% in 2019 and is projected to be 3.9% in 2020 and 3.6% in 2021. The deficit will be financed by a drawdown of central bank deposits, which might have implications for the currency peg to the South African rand.

The risk of external debt distress was revised from low in 2017 to moderate in 2018, but at 34% of GDP in 2018 and an estimated 37% in 2019 the debt was sustainable, according to the IMF/World Bank debt sus- tainability analysis.

The current account deficit, at 0.2% of GDP in 2018, deteriorated to an estimated 3.7% of GDP in 2019 due to increased imports. It is financed by a drawdown of foreign exchange reserves, reducing Lesotho’s ability to absorb external shocks.

Low productivity in agriculture, coupled with fiscal and liquidity difficulties, continued to undermine efforts to reduce poverty (57%), unemployment (32.8%), and inequality.

Tailwinds and headwinds

With construction beginning in 2020, the Lesotho Highlands Water Project, costing $2.3 billion, will bring royalties from South Africa, improve water resources, and boost private sector growth. And Southern African Development Community efforts, combined with the national governance dialogue launched in June 2018, augur well for political stability and policy continuity.

With the recent improvement in Lesotho’s business environment, the Continental Free Trade Area will pro- vide a wider market, create new industrial jobs, and boost Lesotho’s GDP. And the country’s picturesque landscape and snow-covered mountain slopes, ideal for skiing, will foster tourism.

A possible South African economic slowdown could further reduce SACU revenues. Lesotho’s huge public wage bill of 24% of GDP and accumulation of payment arrears, currently $76.4 million, may contribute to fur- ther deterioration in fiscal space.

Textiles declined from 21.7% of exports during 2003–07 to 11% in 2018, even with US African Growth and Opportunity Act trade preferences, due to competition from Asian producers. This threatens macro- economic stability and underscores the need to invest in more efficient textile machinery.

Lesotho lacks skills and capacity, particularly in digital technology and statistics, partly due to the migration of qualified Basotho to South Africa. A 49% shortfall in reliable statistics hinders national planning and monitor- ing and evaluating donor-funded projects.

The European Union discontinued its budget sup- port due to budgetary opacity. Official development assistance was already at an all-time low of $147 million in 2017, down from $256 million in 2010. And the fiscal situation is likely to deteriorate further with the ongoing trade tensions between the United States and China and between the United States and the European Union.

Source: African Economic Outlook 2020

Fixed Income

Summary

  • The government securities yield curve extended to 10 years with three benchmark points along the curve (5-7 and 10 years). 
  • The issuance strategy is based on the government’s budgetary needs and the development of the domestic debt market. 
  • According to 2018/19 – 2020/21 budget strategy paper,  Lesotho’s debt portfolio as at June 2019 totalled M14,564.6 million, with foreign debt constituting M12,698.1 million (87 percent of total debt) while the remaining M1,866.5 million was domestic debt
  • Lesotho is 30th in the ABMDI 2017 Ranking Report. 

Issuance Strategy 

The issuance strategy is to finance government budgetary needs and to develop the domestic debt market.  . In the Medium-Term Debt Strategy (MTDS) of 2018, the government has prioritised the development of domestic debt market to mitigate exposure to foreign exchange risk . This redirected focus of government to domestic market yielded a one percent year on year increase in the share of domestic to foreign debt. However, the limited number and diversity of domestic market participants means exposure to government securities is already high and has prompted commercial banks as major participants to acquire mostly short tenor instruments. In mid2018/19, after a series of poor performance of bond auctions, the government in its quest to finance the fiscal deficit was for the first time forced to issue the 365-day treasury bills to aid fiscal policy. The move has further increased refinancing risk of the domestic portfolio through declining average time to maturity from 15.3 to 15 years. To curb the risk, the government plans to attract pension funds through high economic return projects financing and innovative long tenor bonds due to long term emphasis of the fund’s strategy. The shallowness of the domestic market means the Government will continue to borrow externally for capital projects with substantial cost and relatively low financial returns

Source :[ 2018/19 – 2020/21 budget strategy paper ]

Benchmark issues 

In order to facilitate pricing and valuation of capital market securities, the government issues debt instruments, although not in a satisfactory manner as there are currently no long-dated maturities, which defeats the purpose of lengthening the maturity profile of government domestic debt. There are few benchmark points to construct the yield curve that could be used for pricing of other financial instruments. There are 3 benchmarks maturities: 5-7 and 10 years. By the auction method, the government issues new instruments and also re-opens existing bonds. 

Yield curve 

Yield curve calculation models 

There is no yield curve in Lesotho even though the government issuance strategy refers to building the government benchmark yield curve. The “bootstrapping” model has been approved and the yield curve will be constructed once a month. The yield curve will be based on primary market activities.

Interpolation methods 

There is no yield curve in Lesotho. 

Yield curve managed by 

If constructed, the yield curves will be built by the Central Bank of Lesotho. 

Display platform 

The yield curve will be on the Bank's website first, and later on both Bloomberg and Reuters. 

Challenges in building an efficient yield curve 

  • Illiquid bonds and limited secondary market: there is no vibrant secondary market because activity is minimal. Holders do not sell but hold securities to maturity as they view them as a form of savings. 
  • Lack of transparency in pricing: due to inactivity in the secondary market, there is lack of transparency and knowledge in terms of pricing of securities. 
  • Narrow investor base 

Guide to Buying Bonds

Procedures for market participation

To participate in the auction, an investor must have a Central Securities Deposit (CDS) account at the Central Bank of Lesotho (CBL) and a bank account with one of the commercial banks.

The investor can then choose to participate in a competitive bid or a non-competitive bid. Competitive bidders can submit up to 4 bids and non-competitive bidders only one. Bid forms must be submitted to the Central Bank at 3:00 PM the day preceding the auction day.

Participations to the 91-d & 182-d T-bills are distinct: bids for the 91-d can only be competitive, with minimum bid amount of 250,000 maloti. Bids for the 182-d can either be competitive and non-competitive: minimum participation amount must be respectively 250,000 maloti (multiple bids allowed for competitive bids) and 5,000 maloti.

Investors may gain further details on auction participation rules in the Government Treasury Securities Trading Regulations of 2009.

Taxation

Withholding Tax is payable on interest income earned from investment in treasury securities. The rates are 10% and 15% for residents and non-residents respectively.

The tax rate on capital gains is 25%.

Settlement cycle

The settlement takes place the same day as the auction (T+0).

Market restrictions

Openness to foreign investors

There are almost no restrictions on foreign investment and foreign investors are allowed to participate in the purchase and sale of Treasury securities (which are available only in the local currency).

Capital controls

Non-residents of the Common Monetary Area (CMA) zone are subject to exchange rate restrictions.

Profits and dividends from investments in Lesotho should be registered at the CBL as well as inflows of capital. Local companies can invest outside the CMA, but foreign exchange earnings must be repatriated.

Foreign exchange restrictions and profit repatriation

With some restrictions, residents and non-residents may hold foreign exchange accounts. However, CBL must approve all flows of capital and dividends outside of the CMA zone. Some payments and transfers are subject to prior government approval and limitations, and many capital transactions face restrictions or quantitative limits.

Credit rating

Rating agency Rating Outlook
Moody’s    
Fitch B Stable
Standard and Poor’s    

List of Primary Dealers

There are no primary dealers in Lesotho. 

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