Wednesday, August 30, 2017 8:55 AM / BMI
BMI View: Swaziland's real GDP growth will return to positive territory in 2017 on the back of recovering agriculture output, but the good news for the economy ends there. Weak growth in neighbouring South Africa will weigh on fiscal spending and export growth while higher inflation in Swaziland than in South Africa will erode the purchasing power of fiscal revenues and exacerbate weak South African demand for Swaziland's exports.
Although Swaziland's economy will return to positive growth in 2017 as the agriculture sector sees improved weather conditions, the economy will continue to face significant challenges over the coming quarters. We are forecasting that real GDP growth will remain below 1.5% in both 2017 and 2018.
Weak growth in South Africa will weigh on revenues from the South African Customs Union (SACU) which will constrain Swazi fiscal spending while South African demand for Swazi exports will also be tepid. Matters will be made worse as Swaziland's inflation remains higher than that of South Africa, weighing on the real value of SACU revenues and exacerbating weak South African demand for exports.
SACU Declines Will Weigh Heavily On The Economy
Swaziland's real GDP growth will scrape back into positive territory in 2017 on the back of recovering agricultural output. Indeed, farming output fell sharply in 2016 on the back of a severe drought, but is set to improve in 2017 as rains return. Production of sugarcane, the country's main crop, fell by 15% in 2016 but is forecast by the US Department of Agriculture to rise by 17% in 2017.
However, a range of factors will continue to buffet economic activity. Chief among these will be continued falls in revenues from SACU, a common excise and tariff area that includes South Africa, Botswana, Namibia, Lesotho and Swaziland. All customs and excise collected in the union are pooled by the South African Revenue Service and then disbursed to member states according to a revenue-sharing formula, with Swaziland's share of this income traditionally accounting for just under half of government revenues.
The total SACU intake depends largely on the performance of the South Africa economy with a slowdown in South African real GDP growth typically being followed by weaker SACU inflows over the next one-to-two years. For example, South Africa's economic contraction in the aftermath of the global financial crisis led to sharp falls in SACU revenues received by Swaziland in the 2010/11 and 2011/12 fiscal years.
With the South African economy slowing steadily over the last several years and set to remain weak (see 'Economic Stagnation Ahead', June 27), we believe that SACU revenues received by Swaziland will continue to decline over the next two years.
Weak growth in South Africa will also weigh on demand for Swaziland's exports given that over half of these, which are largely comprised of textiles, sugarcane and sugar-derived soft drink concentrates, end up in the larger neighbour.
Inflation Differential Will Exacerbate Headwinds
Headwinds from weak fiscal revenues and export demand will be exacerbated by the fact that inflation in Swaziland is set to remain above that of South Africa over the next two years on the back of still-high food prices and rising fuel and electricity costs. The Swazi lilangeni is pegged one-to-one to the South African rand and so the local currency value of SACU revenues will not fluctuate on currency movements but its purchasing power in Swaziland will be eroded more quickly if Swazi inflation is higher than in South Africa.
Similarly for exports, although currency fluctuations will not play a part, higher inflation in Swaziland than in South Africa will increase the rand cost of those exports, which will weigh on demand. As such, relatively elevated inflation in Swaziland will not only weigh on purchasing power of households but also on the real value of fiscal revenues and on exports which will provide an additional headwind to the Swazi economy.
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