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Rating Action:

Moody's affirms eSwatini's B2 rating, maintains negative outlook

02 Apr 2019

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

No Related Data.
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