- Fitch Ratings has revised Lesotho's outlook to stable from negative.

Fitch has simultaneously affirmed the country's long-term foreign currency issuer default rating at 'BB-', long-term local currency IDR at 'BB' and short-term foreign currency IDR at 'B'.

Fitch has also affirmed Lesotho's country ceiling at 'A-'.

Fitch says the revision of Lesotho's reflects the following key rating factors:

1. On-going improvements in public finance management which will support budget consolidation and lessen dependence on South African Customs Union (SACU) receipts. Reforms with the assistance of the IMF (Extended Credit Facility started in 2010) have led to improved tax compliance and increase in non-SACU tax revenue (at 23.5% of GDP in fiscal year 2012-13 (FY12-13) from 20.5% in FY09-10).

Although the agency forecasts a budget deficit of 1.1% of GDP by FY14-15 from a surplus of 5.1% in FY12-13, this reflects an expected rebalancing of Lesotho's public finances, with lower SACU receipts partially offset by lower investment, restraint in current expenditures and gradual increase in non-SACU tax receipts.

2. Structural reforms expected to benefit real GDP growth. Fitch expects growth to remain above 4% (from 3.6% in 2012) in the medium term, supported by public investments in infrastructure, foreign direct investment (FDI) in the diamond sector and structural reforms to improve the business environment (such as the new Company Act) in line with the National Strategic Development Plan. The extension of the Third Country Fabric Provision of the African Growth Opportunity Act (AGOA) in September 2012 allows the textile exporting sector, the main private sector employer, to keep sourcing materials from non-AGOA countries and supports growth prospects.

3. The positive impact of the rebound in SACU receipts, the main budget and current account receipt, on Lesotho's public and external finance dynamics. SACU receipts have rebounded to 28.9% of GDP in FY12-13 from 14.4% of GDP in FY11-12 reflecting the lagged adjustment of the SACU revenue-sharing formula and improvement in South Africa's economic performance since the trough of the crisis in 2009.

The budget surplus was 5.1% in FY12-13 from a deficit of 10% the previous year, while the current account deficit reduced to 10.1% of GDP (from 19.8%) reversing the downward trend in FX reserves. Fitch forecasts SACU receipts to decline to 23% of GDP by FY14-15 but to remain consistent with an increase in FX reserves and near to a balanced budget in the medium term.

4. The smooth transition of political power in 2012. Following an election that a number of observers have described as free, fair and transparent Lesotho is ruled by a coalition of parties for the first time in its history. Fitch expects political stability in the coming years, giving the authorities time and continuity to implement reforms.

5. Lesotho's 'BB-' rating is supported by its net external creditor position and public debt (39% of GDP in 2012) in line with the 'BB' category median, reflecting accumulated reserves and fiscal surpluses before the 2009 crisis.

The stable monetary environment provided by Lesotho's membership of the Common Monetary Area has contributed to robust GDP growth. The main weaknesses relative to 'BB' peers are volatility in current account and government receipts linked to the dependence on SACU revenues, and relatively weak economic development evidenced by low GDP per capita and Human Development Index.

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