Tuesday, November 14, 2017 8:59 AM / BMI Research
BMI View: A rebound in agricultural sector production coupled with the ramping up of a number of infrastructure projects will support real GDP growth in Swaziland in the coming quarters. That said, changing European Union agricultural regulations and subdued South African demand for Swazi textiles will weigh on long-term growth.
Swaziland will see growth accelerate modestly in the coming quarters on the back of continued government spending on construction projects, improving weather conditions and modest growth in textile manufacturing.
Indeed, we forecast that the economy will grow by 0.7% in 2017 and average 1.0% between 2018 and 2020. However, while this marks an improvement from the estimated 0.3% contraction recorded in 2016, growth is likely to remain well off its 10-year average, stymied by a series of structural headwinds.
Construction Growth Vulnerable To Fiscal Consolidation
The construction sector will see a ramping up of growth in the near term. The number of passed building plans increased notably in Q217, suggesting building activity will likely accelerate in the final months of the year.
This will be sustained on the back of a number of projects in the pipelines including work on the Swazi rail link, Ezulwini sustainable water and sanitation project, Big Bend-Lukhula-Siteki road, Manzini-Mbadlane road, Nhlangano-Sicunusa road and the lower Usuthu smallholder water project among others. That said, even as constructions sector activity remains fairly well supported for now, we believe headwinds will become increasingly prominent over a multiyear time horizon.
Namely, while fiscal policy remains expansionary at present, Swaziland's rising debt burden suggests that the government will be forced to begin paring back spending growth over the medium term. Much of the pullback in spending would likely be aimed at recurrent spending, but some may fall on the capital side as well, and with limited private sector investment, this move toward fiscal consolidation would significantly stymie construction growth.
Agricultural Recovery In 2017, Headwinds Thereafter
The agricultural sector is also likely to see fairly strong growth in 2017, following drought in 2016. Indeed, the return to more favourable weather conditions this year will bolster maize and sugar harvests. That said, a September 2017 change in EU regulation could offer multiquarter headwinds. Namely, EU quotas had long limited the production and export of sugar by European producers, but this system has been allowed to lapse, limiting the need for the EU to import sugar from Africa.
Historically, Swaziland has sent between one-quarter and one-half of its sugar exports to the EU and there is limited scope for a sufficient increase in domestic consumption to offset the impact of reduced European demand given the small market size. As such, we see downward pressure on the sector in the years ahead, as producers struggle to find new markets.
Slow South African Growth Will Weigh on Textile Manufacturing
Finally, manufacturing will grow, albeit at a subdued pace, weighed down by weak demand in key consumer markets. In South Africa, elevated political uncertainty is likely to dampen investment and constrain employment opportunities, tempering consumer confidence and spending.
Indeed, while we forecast modest
acceleration in South Africa's headline growth, it will remain notably subdued
compared to its historical average. Meanwhile, we see little growth in textile
demand from the US, following Swaziland's suspension from the preferential
trade agreement, Africa Growth Opportunity Act in 2015.