OF ESWATINI Umntsholi Wemaswati JUNE 2018 Issue No.2 - Central Bank of ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
C E N T R AC
L EBNATNRKAOLFB E
ASNWAT
K OFI NSI WA Z I L A |
ND F IFNIA
NN CC
AN I AI ALLS STA
TABBIILLIITTYY RREEPPO
O RT I s s u eI sNs o
ue. 1N o . 2
OF ESWATINI
Umntsholi Wemaswati
JUNE 2018 Issue No.2
© 2018 Central Bank Of Eswatini a
C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2 b © 2018 Central Bank Of Eswatini
C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
CENTRAL BANK OF ESWATINI
FINANCIAL STABILITY REPORT
June 2018 Issue No. 2
© 2018 Central Bank Of Eswatini iC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
FOREWORD
stability reports (FSRs) with the aim of
limiting financial instability by pointing out
key risks and vulnerabilities to policymakers,
market participants and the public at large.
Central banks publish financial stability
reports in order to contribute to the overall
stability of the financial system, to increase
accountability of the financial stability
function and to strengthen cooperation
on the financial stability function among
the relevant authorities. From an internal
perspective, being aware of systemic risks
among the various structural units of the
central bank is crucial, as is the exchange
of relevant information and analysis across
functional areas. In essence, this serves as
link between the economic policy, financial
stability and banking supervision functions
of the central bank. Equally important,
however, are discussions of appropriate
policy options within an integrated
framework and the taking of timely policy
decisions.
Majozi V. Sithole
Governor The importance of a sound financial system
Chairman - Financial Stability Committee
for price stability and economic growth
cannot be overemphasized, particularly in
Purpose of the Financial Stability light of the financial system’s proneness
Report to periodic disturbances due to lingering
The mission of the Central Bank of Eswatini (the effects of the financial crisis and more recent
Bank) is to foster financial sector stability conducive risks emanating from protectionist policies
to economic development in Eswatini. The principal in advanced economies. Consequently,
objective of the Bank as stipulated in the Central the goal of promoting sustained financial
Bank of Eswatini Order, 1974 is to supervise banks, stability emanates from the Bank’s primary
credit institutions and other financial institutions to objective. This requires macro prudential
the end of promoting a sound financial structure. In oversight of the financial system, which
accordance with the Constitution of the Kingdom of in turn requires appropriate structures for
Eswatini Section 206 (2) (d) and (f), the Bank shall information assimilation and policy making
supervise the operations of financial institutions in that are at a level commensurate with the
the Kingdom and shall promote monetary stability strategic nature of the task.
and a sound and stable financial structure in Eswatini.
The current financial stability framework as adopted The activities of a central bank relating to
from the COMESA includes the issuing of financial financial stability can therefore be defined
ii © 2018 Central Bank Of EswatiniC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
as the policies, instruments, norms, and important precondition for economic growth,
tools applied to prevent, detect, and manage development and employment.
systemic instability of institutions, markets,
and the payment and settlement system. Financial stability is more difficult to define
Clearly, safeguarding financial stability requires than price stability, which simply relates to
adequate information about, and the leveraging among other indicators, a stable inflation
of, the behaviour of market participants, environment and the internal and external
regardless of the institutional arrangements of value of the currency. One way of defining
the authorities. financial stability is in terms of the absence
of systemic risk. Systemic risk is the risk that
The period under review for this report is from the default of one institution in the system can
December 2016 to December 2017. However, lead to the default of one or more otherwise
relevant events that occurred in 2018 are also sound institutions, thereby threatening the
included, where appropriate. The cornerstone markets and the economy as a whole. Another
of the Eswatini financial system is the banking informal definition of financial stability may be
sector, which is accordingly the main focus of in terms of what is necessary to achieve it, for
this report. As this report is forward looking, example, the sound regulatory environment,
current data and forecasts for future economic effective macro-prudential surveillance and
growth are used in the global, regional and public confidence in the system.
domestic risk analyses.
The Central Bank of Eswatini defines financial
Defining “financial stability” stability as a “condition in which the financial
Financial stability is not a sufficient but a system- comprising of financial intermediaries,
necessary precondition for sustainable economic markets and market infrastructures- is capable
growth. There is no general global consensus on of withstanding internal and external shocks
the definition for financial stability, but there is such that participants have confidence in the
general consensus that financial stability is an system.
© 2018 Central Bank Of Eswatini iiiC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2 CONTENTS 1. ESWATINI FINANCIAL SYSTEM AND COBWEB............................................................. 3 External Environment........................................................................................ 3 Domestic Economy............................................................................................ 4 Household Debt............................................................................................... 4 Corporate Sector.............................................................................................. 4 Banking Sector................................................................................................. 4 Non-Bank Financial Institutions (NBFIs) Sector........................................................... 5 Payments Systems Stability.................................................................................. 5 2. ECONOMIC DEVELOPMENTS................................................................................ 6 Global and Regional Economic Growth and Outlook..................................................... 6 South Africa.................................................................................................... 7 Inflation........................................................................................................ 8 RSA Financial Stability........................................................................................ 9 3. DOMESTIC ECONOMY......................................................................................... 10 Economic Growth............................................................................................. 10 Fiscal Position................................................................................................. 12 Government Debt............................................................................................. 14 Foreign Exchange Reserves.................................................................................. 19 Household Sector............................................................................................. 20 Corporate Sector.............................................................................................. 22 Large Corporates.............................................................................................. 23 Corporates’ Profitability..................................................................................... 23 Debts - MSMEs................................................................................................. 25 Debts - Large Corporates.................................................................................... 26 4. DEVELOPMENTS AND RISK ANALYSIS OF THE BANKING SYSTEM..................................... 28 Capital Adequacy............................................................................................. 29 Profitability.................................................................................................... 29 Credit Risk..................................................................................................... 30 Credit and Funding Concentration......................................................................... 32 Banking Funding Structure.................................................................................. 33 Liquidity Risk.................................................................................................. 34 5. STRESS–TESTING THE ESWATINI BANKING SECTOR..................................................... 35 Credit Risk..................................................................................................... 35 Default by the Largest Borrowers.......................................................................... 35 Liquidy Risk.................................................................................................... 36 Simulated Bank run........................................................................................... 36 Sudden withdrawal by the System’s Largest Depositor................................................. 36 iv © 2018 Central Bank Of Eswatini
C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
6. PAYMENT INFRASTRUCTURE AND REGULATORY DEVELOPMENTS.................................... 37
Eswatini Interbank Payment and Settlement System (SWIPSS) or MASHESHISA..................... 38
Eswatini Automated Electronic Clearing House (SAECH)................................................ 38
Card Transactions............................................................................................. 39
Mobile Phone Money Transfers.............................................................................. 41
SWIPSS Availability............................................................................................ 43
SWIFT Availability............................................................................................. 44
Liquid Management by SWIPSS Participants............................................................... 44
Operating Window Extensions............................................................................... 45
7. DEVELOPMENTS IN THE NON-BANKING FINANCIAL SECTOR.......................................... 46
Eswatini Financial Market Developments................................................................. 46
Collective Investments in Eswatini......................................................................... 46
Insurance Sector.............................................................................................. 48
Long Term Insurance Industry............................................................................... 49
Short Term Insurance Industry.............................................................................. 50
Pension Funds.................................................................................................. 51
Savings and Credit Cooperatives............................................................................ 52
8. FINANCIAL INCLUSION....................................................................................... 54
9. REGULATORY DEVELOPMENTS............................................................................. 56
IFRS 9 Implementation....................................................................................... 56
Basel II Implementation...................................................................................... 56
10. STATISTICAL APPENDIX...................................................................................... 57
© 2018 Central Bank Of Eswatini vC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2 FIGURES Figure 1: Eswatini Financial System Cobweb............................................................... 3 Figure 2: South Africa GDP Change (y/y)................................................................... 8 Figure 3: RSA Inflation......................................................................................... 9 Figure 4: Eswatini GDP......................................................................................... 10 Figure 5: Quarterly Average Inflation........................................................................ 11 Figure 6: Discount and Repo Rates........................................................................... 12 Figure 7: Revenue Component Ratios....................................................................... 13 Figure 8: Government Revenue............................................................................... 13 Figure 9: Fiscal Deficit/GDP Ratio........................................................................... 14 Figure 10: Debt-to-GDP Ratio.................................................................................. 15 Figure 11: Government Securities Outstanding............................................................. 15 Figure 12: Government Securities by Ownership............................................................ 16 Figure 13: Foreign Exchange Reserves and Import Cover.................................................. 20 Figure 14: Household Loans by Type of Institution.......................................................... 20 Figure 15: Household Loan Portfolio Analysis – Commercial Banks....................................... 21 Figure 16: Household Indebtedness........................................................................... 21 Figure 17: MSME Composition.................................................................................. 22 Figure 18: MSME Assets.......................................................................................... 22 Figure 19: Large Corporates Composition.................................................................... 23 Figure 20: Earnings - MSME Sector............................................................................. 24 Figure 21: Earnings - Large Corporates....................................................................... 24 Figure 22: Debt - MSMEs......................................................................................... 26 Figure 23: Debt - Large Corporates........................................................................... 26 Figure 24: Banking Sector Assets.............................................................................. 28 Figure 25: Bank Credit Growth Rate:......................................................................... 30 Figure 26: Banks’ Non-performing Loans..................................................................... 31 Figure 27: Sectorial Distribution of Loans.................................................................... 32 Figure 28: Banks’ Sources of Funding......................................................................... 33 Figure 29: Structure of Deposits............................................................................... 33 Figure 30: SWIPSS Usage from June 2007 – March 2018.................................................... 37 Figure 31: SAECH Cheques Volumes and Values............................................................. 38 Figure 32: SAECH EFT Credit and Debit Volumes and Values.............................................. 39 Figure 33: ATM Values and Volumes........................................................................... 41 Figure 34: POS Values and Volumes from 2008 - 2017...................................................... 41 Figure 35: SWIPSS Usage........................................................................................ 43 Figure 36: Operational Risks of SWIPSS....................................................................... 44 Figure 37: Operational Risks of SWIFT........................................................................ 44 Figure 38: Operating Window Extensions..................................................................... 45 Figure 39: SSX All Share Index.................................................................................. 46 Figure 40: Total Financial Sector Assets...................................................................... 47 vi © 2018 Central Bank Of Eswatini
C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
Figure 41: Progression of Assets in Capital Markets......................................................... 47
Figure 42: Share of Total Asset Allocation - Money Markets (CIS)......................................... 48
Figure 43: Money Market Asset Allocation - Domestic Gross Assets...................................... 48
Figure 44: Insurance Industry.................................................................................. 49
Figure 45: Long-Term Insurance Industry Assets............................................................. 49
Figure 46: Asset Allocation of the Long-term Insurance Industry......................................... 50
Figure 47: Short-Term Insurance Assets....................................................................... 51
Figure 48: Local Asset Allocation as at 31 December 2017................................................ 51
Figure 49: NBFI Assets June 17................................................................................. 52
Figure 50: SACCO Performance................................................................................ 52
TABLES
Table 1: Economic growth forecasts for selected countries and regions............................. 7
Table 2: Corporate Sector Profitability Indicators........................................................ 25
Table 3: Corporate Debt Indicators......................................................................... 27
Table 4: Changes in Banks’ Assets........................................................................... 29
Table 5: Indicators of Banking Sector Profitability after Tax............................................ 29
Table 6: Banks’ Credit Concentration Level............................................................... 32
Table 7: Banks’ Funding Concentration Level............................................................. 33
Table 8: Key Indicators of Bank Liquidity.................................................................. 34
Table 9: Summary of Stress Test Results for Loans Migration........................................... 35
Table 10: Default by the Three Largest Borrowers........................................................ 36
Table 11: Summary of Stress Test Results for a Simulated Bank Run.................................... 36
Table 12: Sudden Withdrawal by Systemic Largest Depositor............................................ 36
Table 13: SWIPSS Flows........................................................................................ 38
Table 14: Paper Instrument (Cheques) Flows............................................................... 39
Table 15: Increased Usage of Cards.......................................................................... 40
Table 16: Payments Cards Usage.............................................................................. 40
Table 17: MTN Mobile Phone Money Transactions.......................................................... 42
Table 18: Overnight Loans to Commercial Loans via SWIPSS............................................. 45
Table 19: Selected quarterly financial soundness indicators for Eswatini (percentage ratios)..... 58
Table 20: Commercial banks’ quarterly financial soundness indicators (percentage ratios)........ 59
Table 21: Commercial banks’ quarterly balance sheet.................................................... 61
Table 22: Commercial banks’ quarterly income statement, year-on-year figures.................... 63
BOXES
Box 1: Public/Government Debt.......................................................................... 17
Box 2: Global Long-Term Rating Scale................................................................... 19
Box 3: SSX All Share Index.................................................................................. 46
© 2018 Central Bank Of Eswatini 1C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2 LIST OF ABBREVIATIONS AGOA - Africa Growth Opportunities Act AML - Anti Money Laundering ATM - Automated Teller Machine CAR – Capital Adequacy Ratio CMA – Common Monetary Area ECB – European Central Bank EFT – Electronic Funds Transfers EMDE – Emerging Markets and Developing Economies ENHB - Eswatini National Housing Board ERA – Eswatini Revenue Authority FinTech - Financial Technology FMI - Financial Markets Infrastructure FSR – Financial Stability Report FSRA – Financial Services Regulatory Authority GDP – Gross Domestic Product IAS – International Accounting Standards IFRS – International Financial Reporting Standards IMF – International Monetary Fund JSE – Johannesburg Stock Exchange KYC - Know Your Customer MECI – Macro Economic Convergence Indicators NBFI – Non-Bank Financial Institutions POS - Point of Sale PSPF - Public Service Pension Fund REER – Real Effective Exchange Rate RSA - Republic of South Africa SACCOs – Savings and Credit Cooperatives SACU - Southern African Customs Union SADC – Southern African Development Community SAECH – Swaziland Automated Electronic Clearing House SARB – South African Reserve Bank SSA – Sub-Saharan Africa SSX – Swaziland Stock Exchange STATSSA – Statistics South Africa SWIFT - Society for Worldwide Interbank Financial Telecommunication The Fed – United States Federal Reserve Bank US – United States (of America) VAT – Value Added Tax WEO – World Economic Outlook 2 © 2018 Central Bank Of Eswatini
C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
CHAPTER
1
ESWATINI FINANCIAL SYSTEM
ANDSYSTEM
ESWATINI FINANCIAL COBWEB
AND COBWEB
Between 2016 and 2017, risks to financial stability stemming from the external
economy, domestic economy and corporate sectors increased. On the other hand,
Between 2016 and 2017, risks to financial from the banking sector subsided, while risks
risks from the banking sector subsided,
stability stemming from the external while risks emanating
emanating from the
from the payment payment
systems, non-
economy,
systems,domestic economy
non-banking and
sector andcorporate banking
household debt sectorconstant.
remained and household debt remained
sectors increased. On the other hand, risks constant.
Figure 1: Eswatini Financial System Cobweb
Figure 1: Eswatini Financial System Cobweb
External environment
5
4
NBFI Sector 3 Domestic economy
2
1
0
Payments Systems
Households debt
Stability
Banking Sector Corporate Sector Health
2017 2016
External Environment
Risks emanating from
External Environment the external it into a recession. The rand depreciated
environment have deteriorated since the significantly on the back of domestic fiscal
last FSR as protectionist policies in major
Risks emanating from the external environment challenges and negative
have deteriorated spillovers
since the last FSR from
as
economies have weakened the thrust towards political tensions in other emerging market
protectionistTrade,
globalization. policies in major
a significant economies
driver for have weakened
economies. Advancedthecountries’
thrust towards
path to
global growth, is threatened by high import monetary policy normalization could further
globalization. Trade, a significant driver for global growth, is threatened by high import
costs imposed on goods not produced locally, trigger sudden capital outflows from emerging
shifting market preferences
costs imposed on goods notand resultinglocally,
produced in shifting
market market
economiespreferences
if thereandareresulting
sudden
unfavorable exchange rates. RSA, Eswatini’s interest rate increases. Due to Eswatini’s
in unfavorable
major exchange
trading partner, was rates.
caughtRSA, Eswatini’s
in the major trading partner,
interconnectedness with RSA,wasglobal
caught in
factors
crossfire of major
the crossfire headwinds
of major since the
headwinds last
since the lastaffecting
edition the RSA FSR.
of the economy will eventually spill
edition of the FSR. over to the domestic economy. Such spillovers
are most likely to materialize via the significant
Since the beginning of 2018, RSA’s economy contracted
Since the beginning of 2018, RSA’s economy
for two consecutive quarters
SACU channel, which could affect government
contracted
sending it forinto
two a
consecutive
recession.quarters
The randsending
depreciated significantly
adversely due to itsonhigh
thedependence
back of domestic
on SACU.
8
© 2018 Central Bank Of Eswatini 3C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
Domestic Economy impaired. Household debt to disposable income
Risks to financial stability stemming from ratio was observed to have gone down to 114
domestic developments have worsened since percent in 2017 from 132 percent in 2016. The
the last FSR. Eswatini’s economy is estimated previous issue of the FSR highlighted that the
to have slowed to growth of 1.9 percent in 2017 presence of information asymmetry between
from an estimated increase of 3.2 percent in lenders and borrowers contributes to financial
2016. Economic growth is projected to contract stability risk. This risk remains unchanged.
by 0.4 percent in 2018 before rebounding to 1.7
percent growth in 2019. Challenging domestic Corporate Sector
conditions and external spillovers contribute to Corporate sector indebtedness as a percentage
the lethargic economic outlook in the medium of GDP eased to 39 percent in 2017 from 43
term. Government has continued to experience percent in 2016. Corporate sector profitability,
fiscal challenges weighed on the economy as measured by ROA and ROE, dropped significantly
public sector expenditure was scaled down1. over the year under review. The ROA and ROE
To slow the growth of a high fiscal deficit, ratios declined from 30 percent and 13 percent
government resorted to higher domestic at the end of 2016 to 16 percent and 7 percent
taxation and domestic borrowing which could in 2017 respectively. The weakened profitability
further weigh on economic growth. Higher reflects corporates’ failure to generate more
taxes will likely erode households’ disposable revenue during the year under review. Total
income and corporate profits, and over time revenue recorded for both MSMEs and large
compromise banks’ asset quality. Changing corporates was E16 billion at the end of 2017,
global trade market dynamics also resulted in 38 percent lower than observed in 2016 as
lower demand for Eswatini exports and the loss ongoing liquidity challenges in the government
of the country’s competitiveness contracted the sector spilt over to the corporate sector. Some
market for the country’s exports despite better corporates in the MSME sector, highly exposed
yields from improved weather conditions. In to government, continue to face challenges as
2018, Eswatini was readmitted to AGOA, which government struggles to meet its obligations
casts a positive light towards the outlook for towards suppliers. Risks emanating from the
exports. corporate sector have worsened since 2016 on
account of a worsening fiscal outlook, lowered
Household Debt productivity in various sectors, higher utility
The risks to financial stability emanating prices and changing external markets.
from the household sector remained elevated
but unchanged from the assessment in the Banking Sector
previous FSR. Government’s (being the largest Banking sector assets growth decelerated to
employer), the ongoing fiscal challenges affect 6.2 percent during the year ended June 2018,
households significantly. The civil service’s compared to 15.8 percent of the previous
zero percent cost of living adjustment for year. Banks maintained acceptable levels of
the second consecutive year further reduced capital to absorb unexpected losses that may
household disposable income in real terms. arise. At the end of June 2018, the aggregate
This could weigh down overall growth in credit industry-wide regulatory tier 1 capital ratio
to households as households consciously decide and total capital ratio were at 15.5 percent
against acquiring fresh debt or households and 17.6 percent respectively, thus showing the
falling below lenders’ standards. The erosion banks’ strong solvency positions.
of real household disposable income could
have negative implications on bank assets Similar to corporate profitability, banking
(specifically the households’ loan portfolio) profitability also deteriorated during the period
as households’ debt servicing ability could be under review. Banks’ average ROA fell from 2.2
1
Macro-Forecasting Team (CBE-MEPD) 2018-2021, 2018.
4 © 2018 Central Bank Of EswatiniC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
percent in June 2017 to 2.0 percent in June deemed to be a systemic event as it did not
2018, while ROE followed suit and decreased affect the entire financial system. During the
from 15.7 percent to 13.7 percent by end-June period from 1 July 2017 to 30 June 2018, the
2018. Banks’ operating efficiency somewhat clearing system was unavailable on one day (for
worsened as the average cost-to-income ratio the whole day between 09:00 – 17:00). Only
increased from 76.2 percent in June 2017 to one clearing session was conducted after the
78.8 percent in June 2018. scheduled time and it was completed at 17:15.
Within the same period, there were only seven
Bank lending maintained its growth trend, instances where the completion of a clearing
showing a growing level of inherent credit risk session was delayed. The delays were contained
in the banking sector. Overall credit extended within 20 minutes for all such instances.
by banks grew by 12.3 percent during the
period under review. Banks’ asset quality, when Non-Bank Financial Institutions (NBFIs) Sector
measured using the ratio of non-performing The non-banking sector continues to make
loans (NPLs) to gross loans, improved during progress to comply with the relevant
the period under review from 8.2 percent to legislation and capital adequacy requirements
7.7 percent, though worsening by 5.3 percent under the regulation and supervision of the
on actual basis. This shows that NPLs increased FSRA. However, new legislation imposing a 50
as banks increased lending. NPLs could rise percent local asset requirement, higher than
further if inflation continues to rise, which will the current 30 percent was proposed and
generate higher provisioning costs for banks. remains open for industry comments.
Funding and lending concentration remains The pension and retirement fund industry
fairly high. This raises the risk that deposits continues to remain systemically significant
may be withdrawn rapidly, exposing the banks with a 49 percent industry assets-to-GDP ratio.
to a maturity mismatch between assets and Sector interlinkages are deepening as NBFIs
liabilities. This risk is, however, inherent to have started investing within the industry.
banking and needs to be managed carefully Assets in the insurance sector increased driven
and on an ongoing basis. To mitigate this risk, by growth in long-term insurance assets,
the banks maintained an acceptable level of reflecting investments stimulated through
liquid assets. The ratio of liquid assets to total pension and retirement funds. On the other
deposits increased from 25.3 percent in June hand, capital markets are mainly investing in
2017 to 30.3 percent in June 2018. retirement funds, insurance companies and
credit institutions.
Payment System Stability
The total asset allocation of collective
RTGS/SWIPSS Availability investment schemes has shown a decrease
The first quarter of 2018 recorded the in offshore (outside CMA) gross assets and an
highest downtime (3 hours 16 minutes) of increase in domestic assets, which may explain
SWIPSS availability due to power outages the proposed by legislation change and the
and interruptions by service providers during poor performance of offshore assets resulting in
January and March 2018. capital flight from those investments. This has
created a challenge for the entire industry where
SAECH System Availability investments are concerned, as the country’s
The SAECH system experienced its longest economy does not offer many investment
downtime on 11 May 2018, though it was not avenues. This requires close attention by
regulatory authorities going forward.
© 2018 Central Bank Of Eswatini 5C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
CHAPTER
2 ECONOMIC DEVELOPMENTS
Global and Regional Economic Growth and path to monetary policy normalization, which
Outlook is expected to stay on track in the medium
The overall outlook for global growth remains term. The Fed raised the target range for the
benign despite mounting risks to the outlook. federal funds rate by 25 basis points from 1.75
According to the IMF’s WEO (October 2018), to 2 percent in June 2018. More rate hikes are
global economic growth is forecast to reach 3.7 expected in 2018 and 2019. According to the
percent in both 2018 and 2019. Downside risks WEO (October 2018), if domestic demand in the
predominantly stem from rising oil prices, higher US increases, it will positively affect imports
US yields, manifesting protectionist policies and but will widen both the US and global current
market pressures on currencies from economies account deficit. This will possibly worsen
with weak fundamentals. Managing the effects existing frictions, further slowing economic
of protectionist measures should preserve growth and fast track the tightening of global
continued economic growth especially in global financing conditions, with negative implications
trade. Therefore, finding co-operative solutions for emerging market economies with weak
is imperative in ensuring global expansion fundamentals. The ECB also reaffirmed its
maintains an upward trajectory. However, commitment to taper, and eventually halt,
the risk that current trade tensions worsen its quantitative easing program. The ECB
is skewed to the upside, which will adversely announced a reduction in its monthly purchases
affect global growth through confidence, lower from €30 billion to €15 billion in October 2018.
asset prices and a decrease in investments.
Emerging market and developing economies
Economic growth in advanced economies (EMDEs) have been subjected to global
remains generally strong, and is expected forces, which merged with domestic
to remain at 2.4 percent in 2018 before idiosyncratic factors to yield a downcast
easing to 2.1 percent in 20192. The forecast is outlook on their growth prospects. The IMF
against the backdrop of higher-than-expected projected that EMDEs growth will close at 4.7
moderations in economic growth in the euro percent for 2018 and 2019 respectively (table
area and Japan. Euro area growth is expected 1) amidst rising oil prices, higher yields in the
to slow because of soft economic activity in US, dollar appreciation, trade tensions, and
France and Italy, which recently experienced geopolitical conflict have resulted in additional
tighter financial conditions resulting from pressure on various EMDEs (for example, SA
political tensions. Japan’s growth is forecast to and Turkey in particular). Higher trade costs
slow in to 1.1 percent 2018 and worsen to 0.9 could result in lowered capital expenditures
percent growth in 2019 because of weak private as firms taper production, slow the spread of
consumption and investment. Economic growth new technologies and constrain affordability
in the US, on the other hand, is expected to of consumer goods especially for low-income
strengthen because of a fiscal stimulus, private households and developing economies. Although
final output and low unemployment rates. global financial conditions are still relatively
The strong US employment growth and firming accommodative, they could tighten faster
inflation gives momentum to the Fed’s continued than anticipated as monetary policy tightens
2
World Economic Outlook (WEO) Update, October 2018.
6 © 2018 Central Bank Of EswatiniC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
in advanced economies. A sudden tightening supported by higher oil prices. According to the
would constrain the sustainability of public and IMF, Nigeria is forecast to grow by 1.9 percent
private debt, expose built-up vulnerabilities, and 2.3 percent in 2018 and 2019 respectively.
dent confidence and undermine investments. Despite two consecutive quarterly contractions
The gradual monetary policy normalization in the SA economy in the first half of 2018, SA is
observed in advanced economies has already expected to grow in the near to medium term
put pressure on emerging market economies’ largely supported by stabilizing geo-political
exchange rates and funding costs on the back environments, which should strengthen private
of weak idiosyncratic economic fundamentals. investments. However, risks to the region’s
growth outlook are skewed to the downside.
In sub-Saharan Africa (SSA), growth is A slowdown in China could produce negative
projected to rise to 3.1 percent and 3.8 spillovers to commodity exporters through
percent in 2018 and 2019 respectively, lower-than-expected commodity prices.
picking up from the 2.7 percent estimate for Increasing trade barriers could slow down
2017 (WEO, October 2018). The growth in the growth in the trade dependent SSA region.
region is expected to be supported by Nigeria Furthermore, increasing public and private debt
and SA. The optimistic outlook comes against on the back of an appreciating US dollar could
the backdrop of improved commodity prices strain economies and firms with high leverage
and growth prospects for Nigeria’s economy and and balance sheet mismatches.
Table 1: Economic growth forecasts for selected countries and regions
Annual % CHANGE
2017 2018 2019
Global 3.7 3.7 3.7
Advanced economies 2.3 2.4 2.1
USA 2.2 2.9 2.5
Euro area 2.4 2.0 1.9
United Kingdom 1.7 1.4 1.5
Japan 1.7 1.1 0.9
Emerging Markets and Developing Economies 4.7 4.7 4.7
China 6.9 6.6 6.2
Sub-Saharan Africa 2.7 3.1 3.8
South Africa 1.3 0.8 1.4
Nigeria 0.8 2.1 1.9
Angola 0.7 2.2 2.4
Source: International Monetary Fund World Economic Outlook, October 2018
South Africa market stress, escalating trade tensions and
SA’s economy contracted by 2.2 percent and heightened geopolitical tensions for the rest
0.7 percent for the quarters ending March of 2018. Contributing to the subdued economic
2018 and June 2018 respectively (figure 1), outlook is the fact that the improved political
thereby sending the country into a technical environment following the appointment of a
recession. Consequently, the IMF revised SA’s new president, which was a turning point for
economic growth for 2018 downwards to 0.8 business and consumer confidence, was short
percent (previously 1.5 percent) before picking lived and insufficient to boost investment,
up to 1.4 percent in 2019 (figure 2). SA’s economy strengthen the exchange rate and catapult the
is expected to remain vulnerable to financial economy to growth in the first half of 2018. The
© 2018 Central Bank Of Eswatini 7turning point for business and consumer confidence, was short lived and insufficient to
boost investment, strengthen the exchange rate and catapult the economy to growth
C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
in the first half of 2018. The weaker-than-expected economic performance continues
to compound the country’s fiscal challenges as the depreciation of the rand has resulted
in higher-than-budgeted
weaker-than-expected interest
economic payments and
performance a largertowage
contributing bill. Other
the weak economyfactors
are high
continues to compound the country’s fiscal unemployment figures, slow structural changes
contributing to the weak economy are high unemployment figures, slow structural
challenges as the depreciation of the rand to governance and negative spillover effects
haschanges
resulted to
in governance and negative
higher-than-budgeted spillover
interest effects
from from developments
developments in other
in other emerging market
payments and a larger wage bill. Other factors economies.
emerging market economies.
Figure 2: 2:
Figure South
SouthAfrica
AfricaGDP
GDPChange
Change(y/y)
(y/y)
Source:
Source: Statistics
Statistics South
South Africa
Africa
*Figures for 2018 and 2019 are forecasts
*Figures for 2018 and 2019 are forecasts
Inflation
Inflation
Inflation in SA
Inflation in closed at 5 at
SA closed percent at theatend
5 percent the endAugust 2018,lower
of 2017, inflation
thanstood at 4.9
the 6.3 percent,
percent
of 2017, lower than the 6.3 percent recorded slightly higher than the 4.6 percent recorded
recorded
at the end ofat2016.
the end of 2016.
Inflation wasInflation
subdued was
and subdued andend
at the trended
of Junewithin
2018.the South
Risks African are
to inflation
trended within the South African Reserve Bank
Reserve Bank (SARB) target range of between 3onand the6upside
percentat the back
in the of ahalf
first weakened
of 2018rand,
(SARB) target range of between 3 and 6 percent elevated international oil prices and higher
(seefirst
in the figure 2).ofAs2018
half at August 2018, 2).
(see figure inflation
As at stooddomestic
at 4.9 percent, slightly higher than the
utility prices.
4.6 percent recorded at the end of June 2018. Risks to inflation are on the upside at
16
8 © 2018 Central Bank Of EswatiniC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
the back of a weakened rand, elevated international oil prices and higher domestic
utility prices.
Figure 3: RSA Inflation
Figure 3: RSA Inflation
RSA Inflation (%) Upper Target Lower Target
8.0
7.0
6.0
5.0
%
4.0
3.0
2.0
1.0
Jul-15
Jul-16
Jul-17
Nov-17
Jul-18
Jan-15
May-15
Nov-15
May-16
Nov-16
May-17
May-18
Mar-15
Sep-15
Jan-16
Mar-16
Sep-16
Jan-17
Mar-17
Sep-17
Jan-18
Mar-18
Source: Statistics South Africa
Source: Statistics South Africa
Graph
Graph shows
shows end-of-period
end-of-period ratesrates
RSA FinancialRSAStability
Financial Stability
In their April 2018 FSR, the SARB concluded minister to request that the country’s largest
that SA’s financial sector remained strong
In their April 2018 FSR, the SARB concluded state and that pension funds tosector
SA’s financial reportremained
on the potential
strong
stable despite global uncertainties, monetary exposure. Many of the world’s largest lending
and normalization
policy stable despite in global
advanced uncertainties,
economies monetary policy
institutions had normalization
funded Steinhoffin and advanced
aided
and protectionist policies by major economies. its debt issuance. In the beginning of 2018,
economies and protectionist policies by major economies. Financial stability in SA is,
Financial stability in SA is, however, vulnerable Viceroy Research (a research company that
to however,
the fiscal position emanating
vulnerable from fiscal
to the the rising
position shot to prominence
emanating fromwhen
thein rising
published a report
contingent
contingent exposure of state-owned enterprises’ on Steinhoff’s finances) claimed that Capitec
exposure
financial of state-owned
impairments and the enterprises’
persistentlyfinancial impairments
overstates and the
its financial persistently
assets and income. low
low economic growth resulting in extended These claims which triggered a fall in Capitec’s
economic growth resulting in extended downward business and financial cycles. The
downward business and financial cycles. The low share price by 85 percent were refuted by the
economic growth could
low economic compromise
growth could bank asset
compromise bank
bank. asset
The sharequality
priceas households
recovered as theincome
SARB
quality as households income constricts while came to Capitec’s defense postulating that
constricts
debt while debt
rises and corporate rises andcontracts.
profitability corporate profitability
the bank is contracts.
solvent, wellThe SARB’s FSR
capitalized and also
has
The SARB’s FSR also highlighted that the financial adequate liquidity (News24, 2018). Capitec is
highlighted that the financial system’s vulnerability to market corrections weakens
system’s vulnerability to market corrections a fast growing South African bank surpassing
market
weakens confidence
market confidenceandandresults ininasset
results assetprice veteran
losses. Up until
banks andthe publication
servicing almostof a the
thirdFSR,
of
price losses. Up until the publication of the FSR, RSA’s working population (Capitec Bank, 2018).
South
South Africa’s
Africa’s financial
financial sector sector was impacted
was impacted by In by news
March from
2018, theaSARB
few decided
significant entities.
to place VBS
news from a few significant entities. Steinhoff
Steinhoff International Holdings (an investment Mutualtarget
Bank under curatorship
for many
3
pension . This decision
funds) lost
International Holdings (an investment target was taken due to noted mounting liquidity
forsignificant
many pension market
funds) share. This corporation
lost significant market ischallenges
significant enough
caused to have risks
by unchecked prompted
emanatingthe
share. This corporation is significant enough from deposit concentration and balance sheet
to then
haveRSA’s finance
prompted theminister to request
then RSA’s financethat the country’s
mismatches largest
(SARB, state pension funds to
2018).
17
3
https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/8420/FSR%20First%20Edition%202018.pdf
© 2018 Central Bank Of Eswatini 9C E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
CHAPTER
3 DOMESTIC ECONOMY
Economic Growth down by a contraction in the manufacturing
Economic growth slowed to an estimated 1.9 sector (-0.3 percent) which outweighs growth
percent in 2017 from 3.2 percent in 2016. In in the construction sector (8.3 percent). The
2018, the economy is forecast to contract by 0.4 growth expected in the construction sector will
percent largely weighed down by the tertiary largely stem from private sector construction
sector whose fall is expected to outpace growth while public sector construction eases.
in the secondary and primary sectors.
The primary sector, projected to grow by 1.3
The tertiary sector, projected to contract by percent in 2018 (figure 4), is forecast to be
1.3 percent in 2018 from growth of 2 percent supported by improved growth in agriculture
in 2017 (figure 4), is underpinned by persisting and forestry, which is expected to grow by
fiscal challenges. Government’s expenditure 1.8 percent, while mining and quarrying is
cuts, which include a hiring and cost of living expected to contract by 23.6 percent in the
adjustment freeze, are reflected in the medium term. The mining and quarrying sector,
public administration sector’s zero percent particularly coal mining is faced with geological
contribution to GDP in the medium term. In constraints.
2018, the wholesale and retail sector is forecast
to contract by 6.9 percent while the financial The slowdown in the economy will impede
and insurance sector is expected to show no growth in the financial sector in the medium
growth at all. term. The implication is a loop effect whereby
a stagnant financial sector feeds back to low
The secondary sector, forecast to grow by 0.7 economic productivity as financial institutions
percent in 2018, reflects a slowdown from a become more cautious when lending, while
buoyant 3.1 percent growth in 2017 (figure 4). firms adjust to the anticipated tightening of the
Growth in the secondary sector is largely weighed market by delaying capital expenditure.
Figure 4:
4: Eswatini
EswatiniGDP
GDP
30.0 7.0
6.0
20.0
5.0
10.0 4.0
3.0
%
%
0.0 2.0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
1.0
-10.0
0.0
-20.0 -1.0
Primary Sector (LHS) Secondary Sector (LHS)
Tertiary Sector (LHS) GDP % Change (RHS)
Source: Ministry of Economic Planning and Development
*Source: Ministry
2012-2017 of Economic
are provisional Planning
estimates. and Development
2018-2021 are forecasts
* 2012-2017 are provisional estimates. 2018-2021 are forecasts
10 © 2018 Central Bank Of Eswatini
Inflation averaged 4.8 percent at the end of the second quarter of 2018, lower thanC E N T R A L B A N K O F E S WAT I N I | F I N A N C I A L S TA B I L I T Y R E P O RT Issue No. 2
Inflation averaged 4.8 percent at the end increasing fuel, utility prices, volatile exchange
of the second quarter of 2018, lower than rate and higher consumption taxes. To reflect
the forecasted average of 5.3 percent4 but these developments, average inflation forecasts
higher than the 4.2 percent average from for the third and fourth quarters of 2018 were
the quarter ended March 2018. Food prices reviewed upwards to 5.9 percent and 6.3
depict a declining trend in the first half of the percent respectively from 5.7 percent for both
year reflecting benefits from improved weather quarters. Annual average inflation for 2018 is
conditions. Inflation trends are well within the forecast to close at 5.4 percent, but is expected
SADC - MECI target range of 3 percent to 7 to increase to 6.7 percent before easing slightly
percent (see figure 5). However, the relatively to 6.4 percent in 2019 and 2020 respectively.
low inflation environment is threatened by
Figure 5: Quarterly Average Inflation
Figure 5: Quarterly Average Inflation
9.0
8.0
7.0
INFLATION
6.0
5.0
4.0
3.0
2.0
Quarterly Average - Actual SADC MECI Lower target SADC MECI Upper Target
Source: Central
Source: Bank
Central of Eswatini
Bank of Eswatini
* Thick orange line represents inflation
* Thick orange line represents inflation projections
projections (Q3-Q4
(Q3-Q4 2018,
2018, 2019
2019 andand 2020)
2020)
The performance of the Lilangeni is directly advanced economies, trade spats and political
The performance
linked of the Lilangeni
to the performance of theis Rand
directly
by linked to the performance
uncertainty, of the
however, remain theRand
major threats
byvirtue
virtueof
of being in the
being in the Common
Common Monetary
Monetary Area to the exchange
(CMA). rate inrallied
The Lilangeni the short to medium
on the
Area (CMA). The Lilangeni rallied on the back term.
back of improved
of improved business
business and consumer
and consumer confidenceconfidence in SA. However, it remains
in SA. However,
sensitive it remains
to political sensitive to political
developments Expressed
in that country and against
other aemerging
basket of trading
marketpartners’
developments in that country and other emerging currencies, the REER appreciated at a lower
economies as seen as
market economies in seen
August 2018, 2018,
in August whenwhen
the Rand average
lost its of
footing after developments
0.68 percent as at June 2018, down
the Rand lost its footing after developments in from an appreciation of 3.56 percent recorded
in Turkey before rebounding somewhat after the appointment of former SARB Governor,
Turkey before rebounding somewhat after the in March 2018. The appreciation was because
appointment
Mr. Tito Mboweniof former SARBMinister
as new Governor,for
Mr.Finance.
Tito of domestic
Despite inflation,
being caughtalbeit
up inlow, is relatively
major
Mboweni as new Minister for Finance. Despite higher when compared with Eswatini’s major
headwinds
being caughtin the
up first half ofheadwinds
in major 2018, theinLilangeni
the is expected
trading to remain
partners. resilientrate
If the exchange andcontinues
first half of 2018, the Lilangeni is
gain strength in the medium term. Monetary expected to appreciate,
policy the competitiveness
normalization in advanced in domestic
to remain resilient and gain strength in the exports will be eroded while favoring external
economies,
medium term. trade spats and
Monetary political
policy uncertainty,
normalization in however, remain the major threats
loan repayments.
to the exchange rate in the short to medium term.
4
CBE Inflation Forecasts 2017 - 2020
Expressed against a basket of trading partners’ currencies, the REER appreciated at a
lower average of 0.68 percent as at June 2018, down from an appreciation of 3.56
percent recorded in March 2018. The appreciation was because of© domestic inflation,
2018 Central Bank Of Eswatini 11
albeit low, is relatively higher when compared with Eswatini’s major trading partners.6.75 percent (figure 6). In the quarter ended June 2018, the discount rate stood at 6.75
percent while
C E Nthe
T R A LSARB’s
B A N K O Frepo
E S WATrate
INI stood
| at 6.5
F I Npercent,
A N C I A L S TAbringing the
BILITY REPO RT interest rate
Issue N o. 2
differential between the SA and Eswatini to 0.25 percentage points. In light of the
changing global economic landscape, the CBE faces a tricky task of balancing low
Monetary policy remained accommodative and low interest rates while promoting economic
inflation
throughoutand low
2017 andinterest
the firstrates while
half of 2018.promoting
growtheconomic growth
and preventing and outflows.
capital preventing
The
In the first quarter of 2018, the Bank cut the accommodative environment is threatened by
capital outflows. The accommodative environment is threatened by a quicker-than-
policy rate by 25 basis points to 6.75 percent a quicker-than-anticipated monetary policy
anticipated monetary policy normalization by normalization
(figure 6). In the quarter ended June 2018, the by advanced
advanced countries, whichcountries, which
could result
discount rate stood at 6.75 percent while the could result in balance sheet vulnerabilities,
in balance
SARB’s sheet
repo rate stoodvulnerabilities, particularlyparticularly
at 6.5 percent, bringing for highly indebted
for highly corporates
indebted and
corporates and
the interest rate differential between the SA government. Upward pressure on interest rates
government. Upward pressure on interest rates would constrain already burdened
and Eswatini to 0.25 percentage points. In light would constrain already burdened households
of the changing global economic landscape, the
households by eroding disposable income and increasing by eroding the
disposable income and increasing
debt burden.
CBE faces a tricky task of balancing low inflation the debt burden.
Figure 6 : Discount and Repo Rates
Figure 6 : Discount and Repo Rates
Discount Rate Repo Rate
8.00
7.00
6.00
5.00
4.00
%
3.00
2.00
1.00
0.00
Jul-15
Jul-16
Jul-17
Jul-18
May-15
Nov-15
May-16
Nov-16
Mar-17
May-17
Nov-17
May-18
Jan-15
Mar-15
Sep-15
Jan-16
Mar-16
Sep-16
Jan-17
Sep-17
Jan-18
Mar-18
Sep-18
Source: Central Bank
Bank of
of Eswatini,
Eswatini,South
SouthAfrican
AfricanReserve
Reserve Bank
Bank
Fiscal Position fuel taxes (E269.1 million), VAT (E178.1
In 2017/18, government
Fiscal Position revenue, including million), other taxes (E117.2 million) and
grants, was projected to amount to E16.8 non-tax revenue (E57 million). SACU revenue
billion, higher than the E14.4 billion from contributed an estimated 42.1 percent of total
2016/17 (figure 7). The growth in government revenue collections in 2017/18 and is expected
revenue
In is expected
2017/18, to be driven
government by non-SACU
revenue, includingtogrants,
taper down
wastoprojected
33.8 percenttoinamount
2018/19. to
The
revenue (figure 8), which is forecast to amount Government of Eswatini’s proposed domestic
E16.8 billion,7.5
to E9.3 billion, higher
percentthan the
higher E14.4
than billion from
received 2016/17
revenue raising (figure 7). are
measures The tax
growth in
centric.
in 2016/2017. Contributors to the improvement They will mostly affect already cash-strapped
in non-SACU revenue include licenses on mobile households, lowering corporates’ revenues and
telecommunications companies (E300 million), 22 compromising bank asset quality.
12 © 2018 Central Bank Of EswatiniYou can also read
