Central Bank of Eswatini Quarterly Review - September 2018

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3 CENTRAL BANK OF ESWATINI QUARTERLY REVIEW SEPTEMBER 2018 The Quarterly Review is prepared by the Research Department of the Central Bank of Eswatini Enquiries concerning the Review should be addressed to:- GM, Economic Policy, Research and Statistics Central Bank of Eswatini P.O. Box 546 MBABANE, Eswatini Tel: General Notes The following symbols and conventions are used throughout this review. n.a.: not available -: nil or less than half of the final digit shown Users should also note that: Owing to the rounding of figures, the sum of separate items will sometimes differ in the final digit from the total shown; and data in the tables are subject to revision from time to time as more current information becomes available. 1

4 TABLE OF CONTENTS 1. OVERVIEW OF GLOBAL ECONOMIC DEVELOPMENTS RECENT ECONOMIC DEVELOPMENTS FOR SELECTED ECONOMIES ECONOMIC DEVELOPMENTS IN SOUTH AFRICA DOMESTIC ECONOMIC DEVELOPMENTS GENERAL OVERVIEW Headline Inflation Sugar Industry Developments Electricity Consumption Water Consumption Fuel Imports Construction Exchange Rate / Real Effective Exchange Rate MONETARY SECTOR Net Foreign Assets Gross Official Reserves Credit Extension Money Supply Domestic Liquid Assets Interest Rates PUBLIC DOMESTIC DEBT Eswatini Government Treasury Bills Eswatini Government Bonds Bond Issuances Coupon Payments Promissory Notes PUBLIC EXTERNAL DEBT Debt Stock Disbursements Debt Service New Loans/Loan Maturity BALANCE OF PAYMENTS Overview Current Account Merchandise Trade Account Services Account Primary Income Secondary Income Financial Account STATEMENTS OF MONETARY POLICY CONSULTATIVE COMMITTEE Monetary Policy Statement - July Monetary Policy Statement - September

5 LIST OF FIGURES Figure 1: Gold and Oil Prices (US Dollars) Figure 2: South Africa GDP Figure 3: South Africa PPI and CPI Figure 4: Inflation Trends and Components Figure 5: Monthly Lilangeni s NEER/REER Indices Figure 6: Cross Atlantic Currency Rates Figure 7: Basket Currency Rates Figure 8: Net Foreign Assets Figure 9: Gross Official Reserves and Import Cover Figure 10: Private Sector Credit Figure 11: Private Sector Credit Composition Figure 12: Net Government Balances with Banking Sector Figure 13: Money Supply Figure 14: Domestic Liquid Assets and Liquidity Ratio Figure 15: Monetary Base, Deposits and Loans Figure 16: Interest Rates Figure 17: Treasury Bills and the Average Discount Rate Figure 18: Treasury Bills and Bonds Figure 19: Current Account Figure 20: Financial Account LIST OF TABLES Table 1: Major Economic Indicators... 6 Table 2: Sugar Production & Sales Table 3: Eswatini Comparative Interest Rates Table 4: Savings Deposit Rates for Banks Table 5: Public Domestic Debt Portfolio Table 6: Public Debt Portfolio By Proportion Table 7: Holding of Eswatini Government Treasury Bills Table 8: Holding of Eswatini Government Bonds Table 9: Eswatini Government Bonds listed on Eswatini Stock Exchange Table 10: Second Quarter Coupon Payments Table 11: Private Placements Table 12: Standard Critical Value of Debt Ratios

6 STATISTICAL TABLES Central Bank S 1.1 Central Bank of Eswatini, Assets...38 S 1.2 Central Bank of Eswatini, Liabilities...39 S 1.3 Denominations of Eswatini Currency Issued by the Central Bank of Eswatini Money S 2.1 S 2.2 S 2.3 Depository Corporations Survey...41 S Central Bank of Eswatini Survey...42 S Other Depository Corporations Survey...43 S Depository Corporations Survey...44 Other Depository Corporations and Monetary Ratios...45 Money Supply...46 Commercial Banks S 3.1 Bank Liquidity Requirements...47 S 3.2 Bank Reserve Requirements...47 S 3.3 Bank Liquidity Position...48 S 3.4 Reserve Requirement Position of the Banks...49 S 3.5 Assets of Other Depository Corporations (Banks and Building Society)...50 S 3.6 Liabilities of Other Depository Corporations (Banks and Building Society)...51 S 3.7 Total Other Depository Corporations Loans and Advances by Category of Borrowers...52 S 3.8 Total Bank Loans and Advances by Type of Industry (Other Non-Financial Corporations)...53 S 3.9 Ownership of Other Depository Corporations Deposits (Deposits in Foreign Currency Included)...54 S 3.9 Ownership of Other Depository Corporations Deposits (Deposits in Foreign Currency Included) (cont d)...55 S 3.10 Classification of Selected Other Depository Corporations Deposits...56 Money Market S 4.1 Interest Rates Paid on Deposits in Eswatini (%)...57 S 4.2 Comparative Interest Rates: Eswatini and South Africa...58 Government Debt S 5.1 Outstanding Issues of Eswatini Government Stocks and Stocks Guaranteed by Government...59 S 5.2 Ownership of Eswatini Government Stocks and Bills...60 S 5.3 Maturity Distribution of Eswatini Government Securities...61 S 5.4 Government of Eswatini Treasury Bills

7 Budget S 6.1 S 6.2 Summary of Central Government Operations...63 Eswatini Government Current Revenue...64 Balance of Payments S 7.1 S 7.2 S 7.3 S 7.4 S 7.5 S 7.6 S 7.7 S 7.8 S 7.9 Eswatini s Summary Balance of Payments...65 Balance of Payments - Financial Account...66 International Investment Position (IIP)...67 Export of Goods by Commodity Section...68 Import of Goods by Commodity Section...69 Total Public External Debt Stock...70 Eswatini s Official Reserves...71 Eswatini s Foreign Assets...72 Selected Foreign Exchange Rates...73 Prices S 8.1 S 8.2 CMA Comparative Price Indices...74 Eswatini Consumer Inflation...75 Real Economy S 9.1 S 9.2 S 9.3 S 9.4 Mineral Production...76 Electricity Consumption...77 Treated Water Consumption...78 Construction

8 TABLE 1 MAJOR ECONOMIC INDICATORS; REAL SECTOR # Nominal GDP E' Million/1 35, , , , , , , Real GDP (factor cost) - E' Million/1 35, , , , , , , Real growth rate/ GDP/Capita/1 32, , , , , , , Agric./GDP (%) - market price/ Manuf./GDP (%) - markey price/ Govt./GDP (%) - market price/ Population ('000)/1 1, , , , , , , Average inflation BALANCE OF PAYMENTS - (E' Million)*** Merchandise exports 11, , , , , , , Merchandise imports 11, , , , , , , Trade balance (309.75) , , , , , Services exports 2, , , , , Services imports 7, , , , , , , Primary income (225.61) (197.96) (151.38) Secondary Income 2, , , , , , , Current account , , , , , , Direct investment (net) (771.27) (320.60) (860.35) (271.21) (538.42) (419.48) 1, Portfolio investment (net) , (290.38) Other investment (net) (451.63) 2, , , , , , Overall balance (660.63) 1, , (214.25) (288.96) (355.78) (733.72) Exchange rate* (E/US Dollar) MONEY AND BANKING Narrow money growth (%) (3.50) (5.65) Quasi money growth (%) (1.37) Broad money growth (%) Domestic credit (net) - E' Million 7, , , , , , , Government (618.89) (1,589.80) (3,008.44) (2,965.02) (2,737.66) (832.78) (62.55) Private sector 8, , , , , , , Interest rates (% p.a) Prime lending Discount rate Deposit rate - 31 days months T. bill rate Ratios Liquidity ratio (required = 25%) Loans/deposits ratio Net foreign assets (E) 4, , , , , , , Gross official foreign reserves (end of period) (E) 4, , , , , , , In months of imports of goods and services PUBLIC FINANCE [E'Million] Total revenue and grants 7, , , , , , , Total expenditure and net lending (9,132.33) (10,567.40) (12,889.82) (15,304.43) (16,998.65) (21,193.88) (21,779.35) Overall surplus/deficit (1,948.18) 1, (573.31) (2,546.33) (6,842.35) (4,933.58) As a % of GDP (5.40) (1.20) (4.80) (12.30) (8.20) External financing (net) (135.94) (146,043.00) 38, (1,208.95) 1, Domestic financing (net) 2, (1,321,254.00) (255,006.00) , , , Total external debt** [E' million] 2, , , , , , , As a % of GDP As a % of exports of goods and services Debt service (E' million) As a % of GDP As a % of exports of goods and services Source: Central Bank, Ministry of Finance and Economic Planning & Development Note: N/A = Not available * Exchange rate quoted at average period as at December /1 Revised # GDP figures are based on CSO provisional data and rebased to the new base year **Total external debt stock excludes private sector debt from *** are now in the new BPM6 format and still subject to further revisions. 6

9 1. OVERVIEW OF GLOBAL ECONOMIC DEVELOPMENTS According to the International Monetary Fund s World Economic Outlook (IMF WEO) for October 2018, global growth is projected at 3.7 per cent for both 2018 and 2019 downwardly revised from 3.9 per cent for 2018 and This follows the same levels of growth recorded in Downside risks to global growth include the negative effects of the trade measures approved by the United States (US) between April and mid-september 2018, as well as a weaker outlook for some key emerging market and developing economies. Benign growth is exacerbated by tighter financial conditions, geopolitical tensions, and higher oil import bills. Global growth moderated in the first half of 2018, with negative surprises to activity in several large advanced economies. Following rapid growth in 2017, world trade volumes and industrial production have slowed, and some high-frequency indicators have softened. Growth in advanced economies was recorded at 2.3 per cent and is forecast to edge up to 2.4 per cent before easing to 2.1 per cent in The IMF WEO highlights that, beyond the next couple of years, as output gaps close and monetary policy settings begin to normalise, growth in most advanced economies is expected to decline to potential rates well below the averages reached before the global financial crisis of a decade ago. While financial market conditions remain accommodative in advanced economies, they could tighten rapidly if trade tensions and policy uncertainty intensify, or unexpectedly high inflation in the US triggers a strongerthan-anticipated monetary policy response. Aggregate growth in the emerging market and developing economies (EMDEs) group stabilised in the first half of For 2018 and 2019, EMDEs are forecast to grow steadily by 4.7 per cent, the same level of growth experienced in 2017 (IMF World Economic Outlook, 30 October 2018). 2. RECENT ECONOMIC DEVELOPMENTS FOR SELECTED ECONOMIES The United States: Real gross domestic product (GDP) increased at an annual rate of 3.5 per cent in the third quarter of 2018, according to an advance estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP rose by 4.2 per cent. The Bureau emphasised that the third-quarter advance estimate was based on source data that are incomplete or subject to further revision by the source agency. The growth in real GDP reflected positive contributions from personal consumption expenditures, private inventory investment, state and local government spending, federal government spending, and non-residential fixed investment that were partly offset by negative contributions from exports and residential fixed investment. The second estimate for the third quarter, based on more complete data, will be released on November 28, 2018 (US Bureau of Economic Analysis, 26 October 2018). According to the minutes of the Federal Reserve Open Market Committee (FOMC) of the September 2018 meeting, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to between 2 per cent and 2.25 per cent, in line with market expectations. FED policymakers see one more rate hike this year, 3 increases in 2019 and 1 in 2020, in line with previous projections. The Fed considered that further gradual increases in the target range for the fed funds rate would be necessary to achieve a sustained economic expansion (US Federal Reserve, 17 October 2018). The US Bureau of Labour Statistics reported that annual inflation rate fell to 2.3 per cent in September 2018 from 2.7 per cent in August 2018 and below market expectations of 2.4 per cent. It was the lowest inflation rate since February 2018, mainly due to a sharp slowdown in gas prices and smaller increases in fuel and shelter costs (US Bureau of Labour Statistics, 11 October 2018). 7

10 The unemployment rate declined to 3.7 per cent in September 2018 from 3.9 per cent in each of the previous two months and below market expectations of 3.8 per cent. It was the lowest jobless rate since December The number of unemployed persons decreased by 270,000 to 6.0 million. Over the year, the unemployment rate and the number of unemployed persons declined by 0.5 percentage point and 795,000, respectively (US Bureau of Labour Statistics, 5 October 2018). In the Eurozone: According to Eurostat, the Eurozone economy grew by 0.2 per cent quarter-on-quarter in the three months to September 2018, following a 0.4 per cent expansion in the previous period and missing market expectations of a 0.4 per cent advance, a flash estimate showed. It was the weakest growth rate since the second quarter of 2014 (Eurostat, 30 October 2018). The European Central Bank (ECB) held its benchmark-refinancing rate at 0 per cent on 25 October Policymakers reiterated that the monthly pace of the net asset purchases will be reduced to 15 billion from September to December 2018, and will then end. According to ECB President, Mario Draghi policy makers expect key interest rates to remain at record low levels at least through the summer of The ECB highlighted that incoming information, while somewhat weaker-thanexpected, remains overall consistent with the ECB s baseline scenario of an ongoing broad-based economic expansion, supported by domestic demand and continued improvements in the labour market (European Central Bank, 25 October 2018). According to the latest Eurostat report, annual inflation rate was confirmed at 2.1 per cent in September 2018, slightly above 2.0 per cent in the previous month. Main upward pressure came from prices of energy and unprocessed food. On a monthly basis, consumer prices edged up to 0.5 per cent in September 2018, following a 0.2 per cent increase in the previous month and matching market expectations (Eurostat, 17 October 2018). The unemployment rate slowed to 8.1 per cent in August 2018 from the previous month s figure of 8.2 per cent and below 9 per cent a year earlier. It was the lowest jobless rate since November 2008, as the number of unemployed continued to fall (Eurostat, 1 October 2018). The United Kingdom: According to the United Kingdom (UK) Office for National Statistics, the economy grew by 0.4 per cent quarteron-quarter in the three months to June 2018, unrevised from the first estimate, following a 0.1 per cent expansion in the previous quarter. Household consumption rose further than initially thought while business investment unexpectedly contracted amid uncertainty around Brexit (UK Office for National Statistics, 28 September 2018). The Bank of England voted unanimously to leave the Bank Rate unchanged at 0.75 per cent on 13 September 2018, following a 25 basis points hike in the previous meeting. The decision came in line with market expectations. The Committee again voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at 10 billion and 2018 the stock of UK government bond purchases, financed by the issuance of central bank reserves, at 435 billion (Bank of England, 13 September 2018). According to the UK Office for National Statistics, annual inflation rate eased to 2.4 per cent in September 2018 from 2.7 per cent in August 2018, below market expectations of 2.6 per cent. It was the lowest reading in three months, mainly due to a slowdown in cost of food, transport and recreation and culture and a fall in clothing prices. EU inflation remains above the Bank of England s target of 2 per cent (UK Office for National Statistics, 17 October 2018). The unemployment rate was unchanged at 4 per cent in the three months to August 2018, the lowest since 1975 and matching market expectations. The number of unemployed dropped by 47,000 from the March to May 2018 period while employment unexpectedly declined by 5,000, the first fall in near a year 8

11 (UK Office for National Statistics, 16 October 2018). Japan: According to the Japanese Cabinet Office, the economy advanced by 0.7 per cent quarter-on-quarter in the second quarter of 2018, stronger than the preliminary figure of a 0.5 per cent growth and after a 0.2 per cent contraction in the previous period. It was the highest growth rate since the first quarter of 2017, boosted by an upward revision of business spending and a strong rebound in private consumption (Cabinet Office Japan, 10 September 2018). According to the statement on monetary policy issued by the Bank of Japan (BOJ) on 19 September 2018, short-term interest rates were left unchanged at -0.1 per cent. The statement further highlighted that the BOJ kept the target for the 10-year Japanese government bond yield at around zero, saying the economy will continue to expand modestly despite intensifying trade tensions. The Bank also reiterated that it will keep interest rates extremely low for an extended period as inflation remains well below its 2 per cent target (Bank of Japan, 24 October 2018). The BOJ further highlighted that risks to the outlook include the US macroeconomic policies and their impact on global financial markets; the consequences of protectionist moves and their effects; developments in emerging and commodity-exporting economies including the effects of the two aforementioned factors; negotiations on the UK s exit from the European Union (EU) and their effects; and geopolitical risks (Bank of Japan, 19 September 2018). According to Statistics Japan, consumer price inflation edged down to 1.2 per cent in September 2018 from 1.3 per cent in August 2018, mainly due to lower prices of food. It was the second-highest figure in the last seven months. On a monthly basis, consumer prices remained unchanged in September 2018, after a 0.5 per cent rise in August 2018 and following four straight positive prints. The unemployment rate in Japan edged down to 2.4 per cent in August 2018 from 2.5 per cent in the previous month and slightly below market expectations of 2.5 per cent (Statistics Japan, 19 October 2018). Emerging Markets Brazil: According to latest information on Brazil sourced from the trading economics website, the economy grew by 0.2 per cent on quarter in the three months to June 2018, following a downwardly revised 0.1 per cent advance in the previous period and slightly beating market expectations of 0.1 per cent. The slight expansion was sharply impacted by nationwide truckers strikes in May and June, which led to the first fall in investment in more than a year and the biggest decline in exports since the last quarter of 2014 (Trading Economics, 31 August 2018). The Central Bank of Brazil voted unanimously to hold its key hold its key Selic (Bank) rate at 6.5 per cent at its board meeting on 19 September 2018 as widely expected, keeping borrowing costs at the lowest level in modern history amid below-target inflation and slightly lowerthan-expected growth in the second quarter of Policy makers underscored the more gradual economic recovery pace envisaged this year. They also mentioned that the global economic outlook remains challenging, with reduction of risk appetite towards emerging economies. Regarding risks to the inflation outlook, the Bank board sees risks in both directions (Trading Economics, 20 September 2018). Brazil annual inflation rate increased to 4.53 per cent in September 2018 from 4.19 per cent in August, above market expectations of 4.45 per cent. It was the highest inflation rate since March 2017, mainly driven by higher oil and food prices and reaching the midpoint of the central bank s target range of 4.5 per cent (Trading Economics, 5 October 2018). The unemployment rate fell to 12.1 per cent in the three months to August 2018 from 12.7 per cent in the March-May 2018 period, below market consensus of 12.2 per cent (Trading Economics, 28 September 2018). 9

12 Russia: According to the Federal State Statistics Service of Russia, real GDP expanded by 0.9 per cent in the second quarter of 2018 following a 0.4 per cent growth in the first of 2017 (Trading Economics, 23 October 2018). The Bank of Russia held its benchmark one-week repo rate at 7.5 per cent on 26 October 2018 after an unexpected 25 basis points hike in the previous meeting, saying pro-inflationary risks remain elevated and uncertainties over future external conditions persist. Policymakers expect annual inflation to be between per cent in 2019, before returning to 4 per cent in 2020 (Central Bank of Russia, 26 October 2018). Russia s annual inflation rate rose to 3.4 per cent in September 2018 from 3.1 per cent in the previous month, slightly above market expectations of 3.3 per cent. It was the highest inflation rate since July 2017, mainly due to food prices (Federal State Statistics Service of Russia, 5 October 2018). According to the Russian Federal State Statistics Service, the unemployment rate dropped to a fresh record low of 4.5 per cent in September 2018 from 5 per cent in the corresponding month of the previous year, below market expectations of 4.7 per cent. In August, unemployment rate was higher at 4.6 per cent (Russian Federal State Statistics Service, 17 October 2018). India: According to latest statistics released through the trading economics website, India s GDP growth expanded by a lower 1.9 per cent in the second quarter of 2018 compared to a 2 per cent expansion in the first quarter of 2018 driven by a recovery in government spending (Trading Economics, 23 October 2018). The Reserve Bank of India unexpectedly left its key policy rate steady at 6.5 per cent on 5 October 2018, following a 25 basis points hike in the previous meeting, surprising markets that expected a similar rise to support a falling currency and curb inflationary pressures from high oil prices. Policymakers said the decision is consistent with a calibrated tightening that aims to achieve a 4 per cent per cent inflation target and support growth. The reverse repo rate was also left at 6.25 per cent and the marginal standing facility rate and the bank rate at 6.75 per cent each (Reserve Bank of India, 5 October 2018). Annual consumer inflation edged up to 3.77 per cent in September 2018 from 3.69 per cent in August 2018, but below market expectations of 4 per cent. Food inflation increased only slightly, in line with central bank expectations. The Reserve Bank of India cut its inflation forecasts to 4 per cent from 4.6 per cent in the second half of 2018 through to 2019, highlighting low food inflation (Trading Economics, 12 October 2018). China: According to the Chinese Statistics Bureau, the economy grew by 1.6 per cent quarter-on-quarter in the three months to September 2018, compared to a 1.8 per cent expansion in the previous period and matching market estimates. For 2018, the Chinese government targets growth at around 6.5 per cent amid efforts to deleverage, contain debt and financial risks (China National Bureau of Statistics, 19 October 2018). On 27 September 2018, the People s Bank of China left interest rates for open market operations unchanged according to a statement posted in the Bank s website. Furthermore, the rate for 7-day reverse repurchase agreements remained at 2.55 per cent, the 14-day tenor at 2.70 per cent and the 28-day tenor at 2.85 per cent. The benchmark interest in China was last recorded at 4.35 per cent, the central bank said in a statement on its website (People s Bank of China, 24 October 2018). According to latest data from China Statistics Office, the consumer price inflation rose to a seven-month high of 2.5 per cent year-onyear in September 2018 from 2.3 per cent in the previous month and matching market consensus. Prices of food surged while cost of non-food continued to increase. On a monthly basis, consumer prices went up by 0.7 per cent in September, the same as in August and in line with market expectations. It remained the highest monthly figure since February. Unemployment Rate in China decreased to 10

13 3.83 per cent in the second quarter 2018 from 3.89 per cent in the first quarter of 2018 (China National Bureau of Statistics, 16 October 2018). FIGURE 1: GOLD & OIL PRICES (US DOLLARS); SEPTEMBER SEPTEMBER 2018 Gold ($) Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep Oil ($) Gold Oil Source: indexmundi.com 3. ECONOMIC DEVELOPMENTS IN SOUTH AFRICA Statistics South Africa reported that the economy shrank by a seasonally adjusted and annualised 0.7 per cent in the second quarter of 2018, following a 2.6 per cent contraction in the first quarter of 2018, plunging the country into a technical recession. Agriculture, transport and trade were the largest negative contributors to the growth outcome. The agriculture sector contracted by 29.2 per cent, and contributed -0.8 percentage points to GDP growth while transported shrunk by 4.9 per cent and contributed -0.4 of a percentage point to growth. Trade contracted by 1.9 per cent and contributed -0.3 percentage point to growth (Statistics South Africa, 7 September 2018). FIGURE 2: SOUTH AFRICA GDP; JUNE JUNE q-o-q % change Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun Source: Statistics South Africa 11

14 According to the South African Reserve Bank (SARB) monetary policy statement posted on 20 September 2018, the SARB held its benchmark repo rate unchanged at 6.5 per cent as widely expected. The Committee said the decision is accommodative given the current state of the economy. Policymakers noted risks and uncertainties at higher levels and a deterioration in the inflation outlook magnified by multiple supply-side factors. The Committee added that they will continue to monitor and will act when necessary (SARB, 20 September 2018). Additionally, the SARB then forecasted growth in 2018 to average 0.7 per cent (down from 1.2 per cent in July 2018). The forecast for 2019 and 2020 was unchanged at 1.9 per cent and 2.0 per cent respectively. At these growth rates, the negative output gap is wider in the near term, but is still expected to close by the end of 2020 as GDP growth rates exceed potential growth (South African Reserve Bank MPC Statement, 20 September 2018). According to Statistics South Africa, the annual inflation rate was at 4.9 per cent in September 2018, unchanged from the previous month and in line with market expectations. This happened as the cost of food and nonalcoholic beverages rose faster while transport prices slowed. On a monthly basis, consumer prices went up by 0.5 per cent, after declining 0.1 per cent in August and higher than market expectations of a 0.4 per cent gain. According to SARB forecasts issued in September 2018, headline inflation is expected to remain at an average of 4.8 per cent in 2018, before increasing to 5.7 per cent in 2019 (up from 5.6 per cent) and moderating to 5.4 per cent in Headline CPI inflation is expected to peak at around 5.9 in the second quarter of The forecast for core inflation is 4.4 per cent in 2018 (down from 4.6 per cent), 5.6 per cent in 2019 (up from 5.5 per cent) and 5.5 per cent in 2020 (up from 5.3 per cent). The impact of the value added tax (VAT) increase continues to be muted. The more elevated headline inflation trajectory is explained by the weaker rand exchange rate and higher oil prices (South African Reserve Bank, 24 October 2018). According to Statistics South Africa, the unemployment rate rose to 27.5 per cent in the third quarter of 2018 from 27.2 per cent in the previous period. It was the highest jobless rate since the third quarter of 2017, as the number of unemployed increased by to 6.21 million. Meantime, the number of employed advanced by to million (Statistics South Africa, 30 October 2018). FIGURE 3: SOUTH AFRICA PPI AND CPI; SEPTEMBER SEPTEMBER 2018 Year-on-Year % change Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 PPI CPI Source: Statistics South Africa 12

15 4. DOMESTIC ECONOMIC DEVELOPMENTS 4.1. General Overview Headline Inflation Eswatini s annual consumer price inflation averaged 5.0 per cent in the quarter ended September 2018 from an average of 4.8 per cent recorded in the previous quarter. This upturn in inflation mainly resulted from increases in the price indices for transport, housing and utilities and communication. Transport inflation averaged 4.5 per cent in the third quarter of 2018 compared to 3.5 per cent in the previous quarter, owing to the continuous increase in international oil prices which in turn affect the domestic costs of transportation. The index for housing and utilities grew by an average of 13.9 per cent in the quarter under review compared to 13.7 per cent in the quarter ended June 2018 whilst the index for communication recorded a deflation of 0.3 per cent from a deflation of 2.3 per cent in the previous quarter. Food inflation remained low in the period under review, maintaining a deflation of 1.0 per cent in the quarter ended September 2018 same as it was in the previous quarter. The above increases were partially counteracted by decreasing rates of growth in the price indices for education, restaurants and hotels, furnishing and household equipment and alcohol beverages and tobacco. Education inflation decreased from 7.8 per cent in the quarter ended June 2018 to 7.2 per cent in the quarter ended September On the other hand, the price indices for restaurants and hotels, furnishing and household equipment and alcoholic beverages and tobacco decreased by 2.0, 0.6 and 0.3 percentage points, respectively, in the quarter under review. Core inflation, which is measured as the CPI excluding food and non-alcoholic beverages, auto-fuel and energy grew by a slightly higher average rate of 7.3 per cent in the quarter ended September 2018, up from 7.2 per cent in the previous quarter. FIGURE 4: INFLATION TRENDS AND COMPONENTS; SEPTEMBER SEPTEMBER Year-on-Year % change Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Food Inflation Transport Overall Other Source: Central Statistics Office 13

16 Inflation outcomes in the short-to-medium term will continue to be influenced by both domestic and external developments. Externally, the international Brent oil prices (which continue to be on the high side), coupled with the weak and volatile Lilangeni exchange rate will continue to weigh heavily on the inflation outlook. On the other hand, international food price developments, as measured by the Food and Agriculture Organisation s Food Price Index have been largely on the downside in the quarter under review, recording a deflation of 7.4 per cent in September 2018 and is expected to benefit food price developments. Domestic developments, particularly the effects of the upward adjustments in administered prices as well as the 1 percentage point increase in the value added tax (VAT) which was effected on 01 August 2018 are likely to continue to exert additional inflationary pressures in the short term. Even though there was a noted increase in food prices in the month of September, they remain low compared to the same period last year and these low prices are expected to benefit the favourable inflation outlook in the short-term Sugar Industry Developments According to Eswatini Sugar Association, sugar production increased by 4 per cent to 482,081 metric tonnes in the first six months to September 2018, from 465,744 metric tonnes recorded in the same period in the previous year. This increase reflects a continuous recovery of the sugar industry from the 2015/16 El Nino drought effects, which has been mainly supported by improvement in weather conditions as well as continuous expansion in the Lower Usuthu Smallholder Irrigation Project (LUSIP) areas under sugar cane production. In addition to the improved weather conditions, Eswatini Sugar Association through its technical services assisted smallholder growers to replant the cane that was affected by drought through the EU support of 50 per cent of seed-cane cost for the planting season, resulting in increased sugar production in the period under review. Total volume sugar sales in the first half of the 2018/19 marketing season rose by 14 per cent to 322,003 metric tonnes from 282,076 metric tonnes in the same period the previous year, in line with the observed increase in sugar production. Sugar export volumes to markets outside the Southern African Customs Union (SACU), which are predominantly destined to the EU, grew by 7 per cent to 130,685 metric tonnes in the period under review compared to 122,186 metric tonnes exported during the same period in the previous year. However, export receipts received from outside the SACU market fell by 19 per cent to E607 million in the period under review compared to E746 million in the same period in the previous year, mainly due to a significant fall in world sugar prices. The world market average prices of sugar declined by approximately 24 per cent and 13 per cent by the second quarter of 2018/19 compared to 2017/18, for raw and refined sugar, respectively. Sugar sales destined to the domestic SACU market increased by 20 per cent to 191,318 metric tonnes in the six months to September 2018 compared to 159,890 metric tonnes recorded in the same period the previous year. Revenues received from the SACU market increased marginally by 1 per cent to E1.362 billion in the period under review. A significant fall in world sugar prices made the SACU protection tariff to be less effective and this paved way for an influx of Brazilian sugar into this market. As a result, sales revenues from the SACU market fell short of the corresponding increase in volume sales, as the sugar had to be sold at reduced prices. Due to the effects of the falling world sugar prices in the different sugar markets, total sugar sales revenue declined by 6 per cent to E1.969 billion in the first half of the 2018/19 marketing season compared to E2.089 billion recorded at the same period the previous year. 14

17 TABLE 2: SUGAR PRODUCTION AND SALES Production (MT) Export Volumes (MT) Domestic 1 Sales (MT) Value of Exports f.o.b. (E 000) Value of Domestic 1 Sales (E 000) 2017/18 Q1 160,071 34,964 72, , , /18 Q2 305,673 87,222 87, , ,387 TOTAL 465, , , ,304 1,342, /19 Q1 168,987 37,358 69, , , /19 Q2 313,094 93, , , ,652 TOTAL 482, , , ,132 1,361,842 1 Domestic refers to SACU market which includes Eswatini with an approximated market share of 30 per cent of total SACU. Export sales refer to sales destined outside the SACU market; these include exports to EU, USA and regional markets (i.e. SADC and COMESA) Source: Eswatini Sugar Association Molasses, which is a bi-product for sugar production and a major input to ethanol production for distillers, decreased by 9 per cent to 158,076 metric tonnes recorded in the first half of 2018/19 from 172,935 metric tonnes in the first half of 2017/18. In line with the decline in production, revenues from molasses decreased by 6 per cent to E119.4 million in the period under review from E126.5 million in the previous year. In the medium-term, the outlook for the sugar industry is mixed. Production prospects remain broadly positive while the marketing landscape remain challenging. Continuous investment in developing irrigation infrastructure in the LUSIP areas facilitated by Eswatini Water Agricultural Development Enterprise is expected to result in further expansion of land under sugarcane plantation and this will result in an increase in sugar production in the medium term. On the downside, the global market for sugar remains depressed for a second season in a row. The over-supply of sugar particularly within the EU following the abolition of beet sugar quotas in September 2017 has greatly affected the returns from the market as sugar prices have been on a significant decline. As such, the industry is continuously moving to increase sales volume into the SACU market, especially with the increase in the tariff protection in the region, which is expected to significantly reduce the volume of sugar imports into SACU. The regional market, particularly SADC and COMESA is also actively being pursued to cushion the challenges experienced in the EU market, which together with other world market destinations are being treated as residual markets Electricity Consumption Total electricity sales slowed slightly by 1.3 per cent to GWh during the quarter ended September 2018 from GWh in the quarter ended June While electricity sales from the domestic and commercial category grew during the period under review, electricity sales from the irrigation power and bulk category which constitute more than 50 per cent of total sales declined. Domestic electricity sales grew by 5.2 per cent to GWh during the quarter ended September 2018, while commercial electricity sales grew by 4.6 per cent to record 28.9 GWh. On the negative side, electricity sales from the irrigation power and bulk category decreased by 6.7 per cent to GWh during the third quarter of 2018 from GWh in the previous quarter. The total number of customers rose by 2.2 per cent to 212, 542 in the quarter ended September 2018 from 207, 990 in the previous quarter. All customer categories recorded marginal increases in the number of consumers in the quarter under review. 15

18 4.1.4 Water Consumption Total treated water consumption declined by 1.3 per cent to million kilolitres during the quarter ended September 2018 from million kilolitres in the quarter ended June Commercial category sales declined by 5.1 per cent to million kilolitres in the quarter ended September 2018 from million kilolitres in the previous quarter. Domestic sales, on the other hand, grew by 2.4 per cent to record million kilolitres during the quarter under review. The total number of treated water connections remained on an upward trend increasing by 3.3 per cent to 45, 560 in the end of the third quarter of 2018 from 44, 092 in the previous quarter end. Domestic customers grew by 3.5 per cent while commercial customers grew by 1.6 per cent Fuel Imports Total fuel imports volumes, which are sourced from the Ministry of Natural Resources and Energy, rose by 7.0 per cent to 90,516 kilolitres in the quarter ended September 2018 from 84,608 kilolitres in the quarter ended June Both petrol and diesel import volumes recorded positive growth during the period under review, reflecting an acceleration in economic activity, particularly in the transport and manufacturing sectors. While petrol import volumes grew by 3.8 per cent to record 43,118 kilolitres during the quarter ended September 2018, diesel import volumes accelerated by 10.6 per cent to 46,148 kilolitres during the same period. Paraffin import volumes, on the other hand, declined by 5.3 per cent from 1,320 kilolitres to 1,250 kilolitres between the two quarters Construction Preliminary figures sourced from municipalities and town boards showed that, building plans approved have been on an upward trend for the past three quarters of Total building plans approved accelerated to 204 units in the quarter ended September 2018 to 188 units during the quarter ended June Notable increases were observed in residential building plans approved which grew to 141 units from 136 units between the two quarters, mainly driven by an acceleration in building plans approved for new residential dwelling units. Industrial and other building plans also remained on an upward trend. In terms of value, total building plans approved increased by 19.6 per cent amounting to E227.5 million as at end September 2018 from E190.2 million recorded in the previous quarter Exchange Rate/Real Effective Exchange Rate In the third quarter of 2018, the Lilangeni/Rand continued with its depreciation against major currencies, which was observed since the first quarter of The Lilangeni/Rand was weaker against the major trading currencies recording a double-digit depreciation of 11.4 per cent against the US Dollar, 6.8 per cent against the Pound Sterling and 8.7 per cent against the Euro. The depreciation was influenced by developments in South Africa and international factors leading to the local unit trading at a three-month average of E14.09 to the US Dollar, at E18.36 to the Pound Sterling and at E16.38 to the Euro. During the quarter, the Rand took pressure from both political and economic developments in South Africa. Positive pressure came as South Africa secured huge foreign investment from China that was extended through the New Development Bank under the auspices of BRICS at a conference held in July However, the gains in the Rand were somewhat limited by the uncertainty caused by developments around the land expropriation without compensation debate in the South African parliament and the entering into a recession by the South African economy. Furthermore, the South African Reserve Bank s decision to keep the repo rate unchanged at 6.5 per cent during the quarter, reversed some of the gains that had been made by the Rand as the US Federal Reserve Bank decided to hike interest rates. 16

19 FIGURE 5: MONTHLY LILANGENI S NEER/REER INDICES; SEPTEMBER SEPTEMBER Index (2010=100) Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 NEER REER Source: Central Bank of Eswatini Expressed against a basket of trading partners currencies, the value of the domestic currency as measured by the Nominal Effective Exchange Rate (NEER) depreciated by an average of 2.25 per cent in the quarter ended in September 2018 following another depreciation of 0.68 per cent in the quarter ended June This comes after the Lilangeni lost more than 11 per cent against the US Dollar. The inflation adjusted effective exchange rate value of the currency as measured by the Real Effective Exchange Rate (REER) recorded an average depreciation of 3.32 per cent in the quarter under review after recording an appreciation of 0.39 per cent in the quarter ended June This an indication that domestic inflation rose at slower pace compared to those of the trading partners. Therefore, during the reviewed quarter, the country s exports competiveness is envisaged to have improved. FIGURE 6: CROSS ATLANTIC CURRENCY RATES; SEPTEMBER SEPTEMBER Emalangeni Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 E/USD E/GBP Source: Central Bank of Eswatini 17

20 FIGURE 7: BASKET CURRENCY RATES; SEPTEMBER SEPTEMBER Emalangeni Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 E/EURO E/SDR Source: Central Bank of Eswatini 4.2 MONETARY SECTOR Net Foreign Assets Net foreign assets increased by 10.0 per cent during the quarter-ended September 2018 to reach E7.6 billion. This was a positive turnaround from the 10.3 per cent decline of registered in the previous quarter. The rise was recorded in net foreign assets of other depository corporations and the official sector. Net foreign assets of other depository corporations grew by 15.2 per cent to reach E2.0 billion at the end of September 2018, contrary to the 14.8 per cent fall recorded at the end of June Net official assets on the other hand went up by 8.2 per cent quarteron-quarter to reach E5.6 billion compared to the 8.7 per cent decline registered in the previous quarter. Valued in Special Drawing Rights (SDR), net foreign assets increased by a comparatively lower rate of 7.4 per cent to SDR380.5 million; in line with the depreciation of the Lilangeni/Rand exchange rate over the quarter under review. On an annual comparison, net foreign assets declined by 8.8 per cent in Emalangeni terms and by 12.7 per cent in SDR terms. FIGURE 8: NET FOREIGN ASSETS; SEPTEMBER SEPTEMBER 2018 E Billion Sep Dec Mar Jun Sep Dec Mar Jun Sep SDR Million E SDR Source: Central Bank of Eswatini and Other Depository Corporations 18

21 4.2.2 Gross Official Reserves Over the quarter ended September 2018, Gross official reserves registered an increase of 6.2 per cent to reach E6.5 billion. The rise was a notable improvement from the fall of 8.1 per cent reflected in the previous quarter. In terms of imports, the Reserves covered an estimated 3.0 months of imports of goods and services, higher than the 2.8 months covered in the previous quarter. The value of the reserves in SDRs totalled SDR325.3 million at the end of September 2018, higher than the SDR313.7 million recorded in the previous quarter. Compared year-on-year, the reserves deteriorated by 10.0 per cent in Emalangeni terms and by 13.8 per cent in SDR terms. FIGURE 9: GROSS OFFICIAL RESERVES & IMPORT COVER; SEPTEMBER SEPTEMBER E Billions Sep Dec Mar Jun Sep Dec Mar Jun Sep Import Cover in Months Gross Official Reserves Import Cover Source: Central Bank of Eswatini and Other Depository Corporations Credit Extension Over the quarter ended September 2018, credit extended to the private sector slowed down by 0.9 per cent to E 14.4 billion, contrary to the 4.7 per cent rise recorded in the previous quarter. The fall in private sector credit was ascribed to a reduction in demand for credit to the Other sectors as well as households. Credit to the Business sector, however, increased. Credit extended to Other sectors declined by 11.6 per cent to settle at E1.9 billion at the end of the September The quarterly fall was on account of credit to local government (-77.0 per cent), public nonfinancial corporations (-30.3 per cent). However, credit extended to other financial corporations increased by 0.2 per cent. Credit extended to household sector declined by 2.5 per cent to E5.8 billion at the end of September 2018, more than the fall of 0.6 per cent reflected in the preceding quarter. The fall in credit to households was evident in other personal as well as housing loans whilst motor vehicle loans accelerated over the quarter under review. Consequently, credit extended for Other personal loans fell by 13.9 per cent to E1.6 billion and credit for housing finance by 0.8 per cent to E3.2 billion. Motor vehicle finance, however increased by 15.9 per cent to E1.0 billion. Credit extended to businesses increased by 4.2 per cent over the quarter under review to reach E7.0 billion compared to an increase of 8.9 per cent per cent recorded in the preceding quarter. The rise in credit to businesses was mainly registered in the Manufacturing (27.3 per cent), Community Social and Personal Services (8.9 per cent) and Transport & Communication (7.2 per cent). 19

22 FIGURE 10: PRIVATE SECTOR CREDIT; SEPTEMBER 2016 SEPTEMBER 2018 Total, Businesses, Households (E Billion) Other (E Billion) 3.0 Sep Dec Mar Jun Sep Dec Mar Jun Sep Credit to Businesses Total Private Sector Credit Credit to Households Credit to Other Sectors Source: Central Bank of Eswatini and Other Depository Corporations A substantial share of private sector credit continued to be channelled to both businesses and households over the quarter under review. The business sector which forms the largest proportion of total private sector credit accounted for 46.6 per cent of total private sector credit more than the 44.4 per cent recorded in the previous quarter. The share of the household sector which is the second largest, constituted 40.1 per cent of private sector credit, slightly less than the share of 40.7 per cent observed in the previous quarter. Other sectors accounted for the remaining 13.3 per cent of total private sector credit, lower than the 14.9 per cent share reflected in the previous quarter. FIGURE 11: PRIVATE SECTOR CREDIT COMPOSITION; SEPTEMBER 2016 SEPTEMBER 2018 Per cent Sep Dec Mar Jun Sep Dec Mar Jun Sep Households Businesses Other Sectors Source: Central Bank of Eswatini and Other Depository Corporations 20

23 Government deposits continued to fall by 19.3 per cent to reach E2.0 billion over the quarter under review compared to that of 16.7 per cent recorded in the previous quarter. Claims on government on the other hand remained almost the same as the previous quarter at E4.0 billion at the end of September FIGURE 12: NET GOVERNMENT BALANCES WITH THE BANKING SECTOR; SEPTEMBER SEPTEMBER E Billion Sep Dec Mar Jun Sep Dec Mar Jun Sep Claims on Central Government Government Deposits Source: Central Bank of Eswatini and Other Depository Corporations Money Supply In line with growth in net foreign assets over the quarter under review, broad money supply (M2) advanced by 2.9 per cent to E17.5 billion at the end of the September The rise in M2 was depicted in quasi money supply while narrow money supply (M1) dropped slightly. Quasi money supply went up by 4.6 per cent over the review quarter to E11.6 billion from E11.1 billion registered in the previous quarter. The rise in quasi money supply was attributed to both savings and time deposits which increased by 5.4 per cent and 4.4 per cent respectively. Narrow money supply decreased by 0.2 per cent to E5.9 billion at the end of September The quarter-on-quarter fall in M1 was a result of a reduction in transferable deposits while emalangeni in circulation increased. Therefore, Transferable deposits declined by 0.3 per cent to E5.3 billion while emalangeni in circulation rose by 0.2 per cent to E687.1 million at the end of the quarter under review. 21

24 FIGURE 13: MONEY SUPPLY; SEPTEMBER SEPTEMBER Sep E Billion Dec Mar Jun Sep Dec Mar Jun Sep Narrow Money Quasi Money Broad Money Source: Central Bank of Eswatini and Other Depository Corporations Domestic Liquid Assets Banks liquid assets increased by 13.5 per cent over the review quarter to reach E5.0 billion. The rise in liquid assets was discernible in banks holdings of currency as well as balances with the Central Bank. Consequently, the liquidity ratio increased from 28.3 per cent in June 2018 to close at 30.1 per cent at the end of September Compared year-on-year, the banks liquid assets grew by 12.9 per cent. FIGURE 14: DOMESTIC LIQUID ASSETS AND LIQUIDITY RATIO; SEPTEMBER 2016 SEPTEMBER Domestic Liquid Assets (E Billion) Sep Dec Mar Jun Sep Dec Mar Jun Liquidity Ratio (Per cent) Sep Domestic Liquid Asset Liquidity Ratio Source: Central Bank of Eswatini and Other Depository Corporations 22

25 FIGURE 15: MONETARY BASE, DEPOSITS & LOANS; SEPTEMBER SEPTEMBER Sep Dec E Billion Mar Jun Sep Dec Mar Jun Sep Deposits Monetary Base Loans Source: Central Bank of Eswatini and Depository Corporations Interest Rates Interest rates were not altered during the quarter ended September This followed the Bank s pursuit of a steady monetary policy stance. Therefore, the discount rate remained at 6.75 per cent in September The prime lending rate was at per cent at the end of September FIGURE 16: INTEREST RATES; SEPTEMBER SEPTEMBER 2018 Per cent Sep Dec Mar Jun Sep Dec Mar Jun Dec Discount Rate Prime Rate Source: Central Bank of Eswatini and Other Depository Corporations Survey 23