REPORT ON FINANCIAL STABILITY
Central Bank of Eswatini Governor Majozi Sthole

REPORT ON FINANCIAL STABILITY

The importance of a sound financial system for price stability and economic growth cannot be overemphasized,
particularly in the light of the financial system’s proneness to periodic disturbance due to lingering effects of the financial crisis and more recent risks emanating from protectionist policies in advanced economy. According to Central Bank Governor Majozi Sithole, financial stability is how government can finance its self. Speaking during the presentation of the Financial Stability Report held at Central recently Sithole submitted that risks to financial stability stemming from domestic development have worsened since the last FSR. Eswatini‘s economy is
estimated to have slowed to growth of 1.9 percent in 2017 from an estimated increase of 3.2 percent in 2016. Economic growth is projected to contract by 0.4 percent in 2018 before rebounding to 1.7 percent in 2018 before rebounding to 1.7 percent growth in 2019. Challenging domestic conditions and external spillovers contribute to the lethargic economic outlook in the medium term. Government has continued to experience fiscal challenges weighed on
the economy as a public sector expenditure was scaled down. According to the report, to slow the growth of a higher fiscal deficit, government resorted to higher domestic taxation and domestic borrowing which could further weigh on economic growth. Higher taxes will likely erode household’s ring the global trade market dynamics also resulted
in lower demand for Eswatini exports and the loss of the country ‘exports competitiveness contracted the market for the country’s export despite better yields from improved weather conditions. Furthermore, the banking sector
assets growth decelerated to 6.2 percent during the year ended June 2018 compared to 15.8 percent of the previous year. Banks maintained acceptable levels of capital to absorb unexpected losses that may arise. At the end of June 2018, the aggregate industry-wide regulatory tier 1 capital ratio and a total capital ratio were 15.5 percent and 17.6 percent respectively, thus showing the bank’s strong solvency positions. Similar to corporate profitability, banking profitability also deteriorated during the period under review. Moreover, the corporate sector indebtedness as a percentage of GDP eased to 39 percent in 2017 from 43 percent in 2016. Corporate sector profitability, measured by ROA and ROE, dropped significantly over the year under review. The ROA and ROE ratios declined from 30 percent and the 13 percent at the end of 2016 to 16 percent and 7 percent in 2017 respectively. The weakening profitability reflects corporate’s failure to generate more revenue during the year under review. Total revenue
recorded for both MSMEs and large corporates was 16 billion at the end of 2017, 38 percent lower than observed
in 2016 as ongoing liquidity challenges in the government sector spilt over to the corporate sector.

DOMESTIC AND EXTERNAL RISK INCREASES
The continuously evolving financial sector environment prescribes that central banks worldwide fall in step or get ahead of economic vulnerabilities that threaten the financial sector. “The assessment from a financial stability
viewpoint reflects that risk emanating domestically and externally have elevated somewhat since the previous financial stability report,” said Central Bank of Eswatini Majozi Sithole in the Financial Stability Report released by the Central Bank. He stated that lethargic economic growth exacerbated by the changing landscape of globalization had resulted in contracting trade markets, volatile financial markets and slow global economic growth. These developments have made the financial sector more vulnerable to shocks emanating from outside the financial sector. “External threats that include manifesting protectionist policies in the advanced economies, slow down in global economic growth and major trading partners, particularly the Republic of South Africa, pose a risk
to financial stability in the medium term,” he said. Sithole further stated that the government was currently
faced with budget difficulties and had taken tough decisions to alleviate the pressure on its cash flow.
These decisions included lowered government expenditure, higher domestic taxation and higher user fees. Due to the measures taken by government, the fiscal deficit improved from an estimated outturn of -12.3 percent in 2016/17 to -8.3% in 2017/18. The fiscal deficit is forecast to improve further to -6.7 percent in 2018/19. The threat of the fiscal position to financial stability remains elevated, however, as government has resorted to domestic debt and
higher domestic taxation to reduce the fiscal debt. Government domestic debt increased over the year. Consequently, the sovereign debt-toGDP ratio increased to 21 percent in June 2018 from 14 percent in June 2017. The outlook in the medium term for government debt is on the upside due to the continued issuance of bonds, the listing of government bonds in the financial markets (SSX & in the future, JSE), and four Central Bank of Eswatini – Govenor’s
Speech FSR 2018 compliance of non-bank financial institutions to local asset requirements. According to the report, the household sector being a highly vulnerable sector is expected to be hard hit by the contractionary fiscal policies. Despite an observed fall in the household debt to disposable income ratio (from 136 percent in 2016 to 114 percent in 2017), risks from this sector have elevated. This assessment is at the back of weakened corporate profitability, falling government expenditure, rising utility prices and declining public sector disposable income and stagnation in other sectors. The Governor further submitted that downtime was experienced with the SAECH system in May 2018, but it was not a threat to financial stability. An important development to monitor in pursuit of financial stability is the level of interconnectedness of other economic sectors with the financial sector and the systematic significance of financial institutions. The pension and retirement fund industry continues to remain
systematically significant with a 49 percent industry asset to GDP ratio, said Sithole. Analysis reflects that these pension and retirement funds have increased their investment in long term insurance assets. Capital markets on the other hand are investing more in retirement funds, insurance companies and credit institutions. This
interconnectedness is continuously monitored to mitigate intrinsic risk to financial stability. “As such, the
central bank engaged the Toronto Centre to help with a crisis simulation exercise that will inform a crisis
binder”, he said. This is one way to identify gaps in the country’s crisis preparedness.

Financial inclusion has a positive but not significant impact on the stability of the financial systems in lower income countries. The situation, however, is reversed in upper middle and high income economies, where it has a significant positive impact on the stability of financial systems. This is according to the financial stability
report released by the Central Bank of Eswatini recently. It is anticipated that access to and use of affordable, quality and appropriate financial services for all the segments of the population can enhance the velocity of money and, hence, impact positively on economic growth. In January 2018, Eswatini launched the National Financial Inclusion Strategy (NFSI), which provides a framework through which the country intends to co-ordinate and monitor the implementation of the NFSI and transform the Micro Financial Unit (MFU) to the Centre for Financial Inclusion (CFI). The CFI has collaborated with the key actors to maintain financial stability, develop an all-inclusive
financial system, increase financial capability and enhance consumer protection. Furthermore, financial inclusion is most commonly thought of in terms of access to credit from a formal financial institution; but the concept has more dimensions. Formal accounts include both loans and deposits, and can be considered from the point of view of the frequency of use, mode of access, and the purposes of the accounts. Alternatives to formal accounts, such as mobile money via phones, have been on the rise have enabled more effective savings and product usage (MTN Mobile
Money’s total number of active customers increased from 46,036 in December 2011 to 513,287 as at December 2017, transacting over 5.9 million per month). Currently, MTN Mobile Money, FNB’s e-wallet and Standard Bank’s Instant Money are the key e-money financial inclusion products functioning in Eswatini. Key progress has been achieved
under this priority to overcome the challenges of eligibility and the barriers for the un-banked and under-served
population. The increase in financial inclusion illustrates the strengthening of the real sector in high-income countries. In addition, the increase in financial inclusion will be followed by the strengthening of the base deposit that can be used to improve the process of banking inter-mediation. A large proportion of the population in the country is still excluded from formal financial services, but according to the report, the percentage of excluded citizens will increase from 27 percent to 15 percent, and to grow the percentage of adults with access to two or more formal products from 43 percent to 65 percent to 65 percent. “To this end the Central Bank of Eswatini is in the process of creating a financial literacy program to raise awareness, create an enabling environment, and provide guidance and support on financial products and services so that financial inclusion initiatives can thrive,” reads the report.

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