New York, April 02, 2019 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of eSwatini's long-term issuer rating
at B2. The outlook remains negative.
Moody's decision to affirm the B2 rating reflects a number of credit
challenges including limited policy effectiveness, as reflected
in a likely further rise in the government's debt burden despite
some fiscal consolidation, and subdued medium-term growth
prospects; and the country's low wealth levels constraining
the economy's shock absorption capacity despite a relatively well
integrated and diversified economy.
The negative outlook is underpinned by persistent liquidity pressures
evident in the accumulation of arrears and regular reliance on central
bank financing of some of the government's debt. In the absence
of a track record of effective fiscal consolidation, the budget
deficit may narrow more slowly than Moody's currently expects,
resulting in a faster increase in the debt burden that may strain government
liquidity further.
The local-currency bond and deposit ceilings remain unchanged at
Ba3. The foreign-currency bond ceiling is unchanged at B1
and the foreign-currency deposit ceiling is unchanged at B3.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE B2 RATING
INSTITUTIONAL CONSTRAINTS AND LIMITED POLICY EFFECTIVENESS REMAIN A KEY
CHALLENGE
Institutional limitations related to the government's capacity to
implement reforms represent a key rating constraint.
Reforms are often stalled by the need to navigate eSwatini's complex
political system, including the royal family, its advisers
and the cabinet. Limited policy effectiveness is also reflected
in the government's failure to adjust to lower Southern African
Customs Union (SACU) revenue and the accumulation of arrears in response
to financing constraints. A large number of extra-budgetary
public entities create additional governance challenges, particularly
as relates to improving control over government spending.
eSwatini's membership in a common monetary area, and close
economic ties, with South Africa offer some benefits in terms of
institutional quality, particularly with respect to maintaining
price stability. Through the country's membership in a common
monetary area with South Africa, the lilangeni -- the legal
tender in eSwatini -- is exchanged at parity with the rand.
eSwatini's monetary policy stance, specifically its policy
rate, closely follows that of the South African Reserve Bank (SARB).
This has served eSwatini well in achieving price and financial stability,
albeit at the expense of relinquishing full independence over monetary
policy.
FURTHER RISE IN GOVERNMENT DEBT BURDEN DESPITE FISCAL CONSOLIDATION
eSwatini's institutional challenges contribute to the government's
limited capacity to contain the rise in its debt burden. While
Moody's expects some fiscal consolidation over the next few years,
it will likely be slower than the government projects and not significant
enough to prevent a further increase in debt.
The government has put forward a plan for fiscal consolidation,
targeting a number of revenue measures while maintaining control over
government spending. On the revenue side, these measures
include increasing taxes on items such as fuel, alcohol, and
tobacco, as well as changes to personal income tax, which
should raise tax collection. The government also plans some asset
sales to raise additional revenue. Spending measures focus on controlling
the growth in the wage bill, with the government proposal of no
cost-of-living adjustment for civil servants in FY 2019/20
(the year ending in March 2020).
However, Moody's expects the government to generate less revenue
than currently anticipated in the budget, particularly due to shortfalls
in revenue from asset sales. The size of some tax increases,
such as those on fuel prices, could also be reduced as the proposals
go through parliament.
The government's revenue-raising capacity is also constrained
by the fact that 40% of total revenue is accounted for by SACU
revenue, which is to a large extent determined by economic conditions
in South Africa which Moody's expects to remain subdued in the next
few years.
Overall, Moody's expects the fiscal deficit to be around 5.4%
of GDP and 5.2% of GDP in FY 2019/20 and FY 2020/21 respectively,
from 6.9% in FT 2018/19 and compared to 4.5%%
and 5.9% projected by the government.
Government debt will reach 43% of GDP, compared with 15.7%
of GDP at the end of FY 2015/16. Unless the deficit narrows further,
government debt will continue to rise, approaching 50% of
GDP by FY 2022/23.
REGIONALLY INTEGRATED, DIVERSIFIED ECONOMY, AGAINST LOW GROWTH
AND RELATIVELY LOW AND UNEQUALLY DISTRIBUTED INCOMES
The economy's shock absorption capacity is supported by its regional
integration and diversification across sectors; but it is constrained
by relatively low growth and incomes, with high income inequality.
The economy is integrated in regional agreements, with a focus on
South Africa (Baa3 stable), the recipient of over 60% of
the country's exports. Through SACU membership, eSwatini's
companies have ready access to a much larger customer base than the economy's
size would allow.
eSwatini's economy is relatively well diversified, with relatively
large manufacturing sector, and with many industries realigning
their markets toward the African region.
However, eSwatini's economy has experienced several years
of low growth, a trend Moody's expects to continue over the
foreseeable future. Over the past five years, growth has
averaged just 1%, and Moody's forecasts GDP growth
at 1% in 2019 and 1.5% in 2020.
The new administration, which came in after parliamentary elections
in September 2018, is developing a program to stimulate growth.
The government aims to foster a greater role for the private sector,
with privatization of certain state-owned assets as one step to
encourage investment and improve competitiveness; in addition,
the government is looking to improve business incentives, including
making it easier to start a business and receive work permits for foreign
workers. If implemented and effective, this plan would likely
improve economic efficiency and the country's growth potential.
Income levels are low compared to Moody's-rated sovereigns
in general, although with GDP per capita at more than $10,000
at the end of 2017 on a purchasing power parity (PPP) basis they are higher
than the B2-rated median of less than $6,000.
Moreover, the high level of income inequity somewhat undermines
the shock-absorption capacity of the economy conveyed by income
levels higher than peers; more than 60% of the population
lives in poverty and eSwatini's Gini coefficient denotes one of
the most unequal distribution of incomes amongst the sovereigns rated
by Moody's.
RATIONALE FOR NEGATIVE OUTLOOK
PERSISTENT LIQUIDITY PRESSURES
The negative outlook is underpinned by persistent liquidity pressures.
Should fiscal consolidation be markedly slower than Moody's currently
expects, resulting in a faster increase in the debt burden,
liquidity pressures would likely intensify, leading eSwatini's
credit metrics to levels no longer consistent with a B2 rating.
The government continued to accumulate arrears to domestic creditors in
FY 2018/19. Moody's estimates new arrears of 2.5%
of GDP in the just ended fiscal year, bringing the stock of arrears
to around 8% of GDP. In addition, the government relied
on advances from the Central Bank of eSwatini (CBE) for financing,
most recently borrowing E680 million (1.1% of GDP) in December
2018. This follows the conversion of E1.3 billion of CBE
advances into longer-term government debt in April 2018.
Moody's estimates that the government's borrowing needs will
hover around 13% of GDP in the next few years. Treasury
bills account for more than one-quarter of domestic debt and represent
a source of rollover risk. In particular, commercial banks,
which hold nearly 70% of Treasury bills outstanding, have
shown limited willingness to increase their exposure to government securities
beyond regulatory requirements. Commercial bank holdings of government
securities have increased to above 11% of total assets in 2018,
continuing a rising trend. The ratio of liquid assets to total
deposits stood at just over 30% at the end of December 2018,
above the regulatory minimum requirement of 25%.
Compared to other sovereigns at similar income levels, eSwatini
benefits from a broad domestic financial sector, which beside commercial
banks includes sizeable insurance and pension funds sectors. Moody's
expects the government to rely primarily on longer-term domestic
financing in FY 2019/20 and beyond, from non-bank financial
institutions (NBFI), mainly pension funds, retirement funds,
and insurance companies. Demand for government bonds would increase
if the government enacts legislation to amend to the Retirement Funds
and Insurance Act. The Financial Services Regulatory Authority
put forward a proposal to increase the local asset requirement of collective
investment schemes to 50% from 30% of total assets.
In Moody's view, this would increase scope for the government
to rely more heavily on longer-dated domestic financing.
However, high reliance on domestic financing by the government threatens
to crowd out private investment.
WHAT COULD CHANGE THE RATING UP
The negative outlook indicates that an upgrade is unlikely in the near
term.
Moody's would consider changing the outlook to stable if the government
were increasingly likely to implement a significant fiscal adjustment
plan that would ease liquidity pressures and slow the increase in the
debt burden.
Over time, a material improvement in growth prospects, as
a result of structural reforms, would enhance the economy's
resilience to shock, generate higher sustained revenue and contribute
to a reduction in the debt burden, potentially supporting a higher
rating.
WHAT COULD CHANGE THE RATING DOWN
Moody's would likely downgrade eSwatini's rating if liquidity
pressures intensified and constrained the government's capacity
to finance its debt at moderate costs and/or increasing reliance on central
bank financing and accumulation of arrears. This could result from
a weaker fiscal performance and faster rise in debt than Moody's
currently expects possibly as a result of increasing social pressures.
GDP per capita (PPP basis, US$): 10,110 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.6% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.2%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -5.7%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 12.5% (2017 Actual) (also
known as External Balance)
External debt/GDP: 14.8% (2017 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 28 March 2019, a rating committee was called to discuss the rating
of eSwatini, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, has decreased. The issuer's governance
and/or management, have not materially changed. The issuer's
fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to
event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
David Rogovic
VP - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
