Eswatini has not dodged the recession bullet – Governor

CBE Governor Dr Phil Mnisi during a briefing.

By Ntombi Mhlongo

With other African countries currently second-guessing whether they will be affected by the projected global recession in 2023, the situation also remains uncertain for the Kingdom of Eswatini.

This is despite that the kingdom’s overall inflation slowed down to 5.5 per cent in October 2022 from 6.7 per cent the previous month. Recently, the International Monetary Fund (IMF) shared that a third of the world could be in recession next year, led by the globe’s largest economies including the US, China, and Europe.

The recent growth projections by the international financier put African countries’ prospects for this and next years better than the global average, but analysts say the region will not be spared from the coming recession. Already, Ghana has been declared as one of the African countries that are in a full-blown economic recession after the economy suffered significantly since the beginning of this year.

During the presentation of the Monetary Policy Statement recently, Central Bank of Eswatini Governor Dr Phil Mnisi was put on the spot to shed light on whether the Kingdom of Eswatini has dodged the recession bullet following that the inflation has gone down. In response, Dr Mnisi referred to the policy statement where it is detailed that the GDP growth of the country has contracted.

“A contraction means that it is coming down. But do not forget that we have had instances where it came from a low base and shot up. Even now, it is marginally picking up. So I think if we get all our fundamentals right, stabilised inflation, active participation, and increased lending to both the public and private sector, I do not want to be a prophet of gloom but I want to say that we are on a trajectory hoping that we will continue to balance monetary policy and fiscal points because these two work together for triggering sustainable economic growth,” the Governor said.

He said while the country is picking up, it was key to get all the factors involved in inflation to be fully aligned to avoid an economic recession. In the policy statement, it is emphasised that the CBE will continue to monitor international, regional, and domestic developments that influence the movements of inflation and other macroeconomic indicators and it will act appropriately in line with its mandate to foster price and financial stability that is conducive to the economic development of Eswatini.

The Governor also provided answers on the issue of credit extended to various sectors of the economy. In the policy statement, it is highlighted that credit extended to the private sector increased by 2.2 per cent month-on-month to settle at the end of September 2022. It was also said that credit extended to other sectors of the domestic economy expanded by 4.4 per cent to close at E807.9 billion at the end of September 2022. Furthermore, the policy statement highlighted those non-performing loans decreased by 1.6 per cent and that this was a result of improved loan service by the business sector.

Following such analysis, a concern was raised that both consumers and the private sector could be taking too many loans to survive.

In response, the Governor said: “When the CBE decides on monetary policy, the intention is to control the cost of money. So, when the cost of money goes up, credit extended to people shrinks because it becomes expensive to borrow. And then the loans become difficult to repay. Also, banks use what they call their risk appetite whereby they ascertain if a borrower can afford.”

The Governor added that banks also extend credit based on their (banks) deposits and look at the type of proportion of the deposits they can lend without putting themselves at risk.

“This is called the loans-to-deposit ratio. They do not want to take all the deposits and lend them, so they look at that. When you see the number of loans increasing to parastatals, it is because the government is not making subventions to those parastatals, and they then go to the banks. The banks will assess if that parastatal is credit-worthy in the context of the interest rate,” he said.

Banks could see an upsurge in non-performing loans

As the Covid-19 pandemic and inflationary pressures continue, banks could face a substantial increase in non-performing loans (NPLs) and associated loan loss provisions. An NPL is a sum of borrowed money whose scheduled payments have not been made by the debtor for a specific period. According to the Central Bank of Eswatini (CBE) Annual Integrated Report, this could be due to the rise in household and corporate sectors’ defaults. In the report, it is reflected that the short–to–medium growth outlook is expected to remain challenging.

CBE Building in Mbabane.

It was noted that the possible increase in the NPLs and associated loan loss provisions may further be exacerbated by political instability. 

“Such a deterioration in bank’s asset quality and earnings performance could limit banks’ capacities to absorb higher loan losses over time, flowing through to their ability to intermediate credit and support the economic recovery,” reads part of the report.

An analysis of the banking sector reflects that it remained sound and stable during the year 2021. It is highlighted that banks complied with minimum capital requirements and continued to maintain adequate liquidity resulting in an improvement from the previous year’s position. 

Banking sector earnings and profitability also improved during the year as lockdown restrictions eased up. In addition, the report highlights that banks increased their investments in government securities as they are considered to be safer/liquid assets, which ultimately minimised liquidity risk. 

“The Covid-19 pandemic and its drawn-out nature, in combination with the measures put in place to contain the spread of the virus, continued to present a challenging operating environment for the banking system and systemic risks to financial sector stability remain elevated, especially from credit risk and operational risk,” it is stated in the report.

In terms of insurance, the report reflects that it remained resilient throughout 2021 despite the adverse economic and financial impact of the Covid-19 pandemic. Premium income and investment income grew over the year reflecting a rebound in the performance of invested assets in financial markets after recording losses in 2020. Premium income increased by 4 per cent while investment income grew by 97.7 per cent over the year.

On the other hand, the number of claims paid outgrew by 9.9 per cent mainly driven by disability and credit life insurance claims. It is highlighted that medium-term risks to financial stability remain high for as long as the course of the Covid-19 pandemic remains uncertain and civil unrests persist.  

“Pension sector concentration risks remain high in the pension sector, with two public pension institutions making up over 86 per cent of the pension sector assets,” it is highlighted.

It is explained that the failure of either of these institutions would, therefore, have a significant adverse impact on the entire economy. This is due to the interconnectedness of the pension fund sector with the broader financial system and the real economy through high investments in government securities and the issuance of loans to corporates and equity holdings. 

Also highlighted is that the sector’s funding ratio is declining, posing a risk of not meeting future pension obligations. Market risk remains high in the pension sector owing to their exposure to the South African stock market – mainly the Johannesburg Stock Exchange (JSE).

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