Sunday 11, February 2018 by Matthew AmlĂ´t

Moody's: Swaziland's credit profile reflects its low economic and institutional strength

Swaziland's (B2 negative) credit profile reflects its low economic strength and institutional capacity, balanced by low debt and relatively strong debt affordability, Moody's Investors Service said in an annual report this week.

“Swaziland's credit weaknesses include its relatively small economy and ongoing government liquidity pressures. The sovereign has been experiencing low real GDP growth levels in recent years in line with the regional slowdown in growth,” said Zuzana Brixiova, a Moody's Vice President -- Senior Analyst and the report's author.

While growth has partly recovered recently as the effects of a regional drought have started to subside and construction revived, the country's growth prospects are subject to risks from the weakened economic picture in South Africa, its main export destination, migration destination and source of investment. Moody's expects annual real GDP growth to rise to 2.5 per cent in 2018 and remain roughly at this level in the next two to three years.

Swaziland's very low institutional strength reflects its dual governance system where modern and traditional systems co-exist, with the King at the top of each system. Reforms are often stalled as agreement requires complex interactions between the two systems. The country also has weak public financial management.

While the country's debt-to-GDP is low, the ratio has the potential to accumulate relatively rapidly given the large borrowing needs outlined in the current budget, low growth and rising interest rates. At the same time, given the relatively underdeveloped financial sector, it is unlikely that the government will be able to secure such funding and the resulting deficit is likely to be lower.

Swaziland's reliance on volatile revenues related to the Southern African Customs Union (SACU), which have accounted for up to 60 per cent of government revenues in the past, have created risk for the government finances and the balance of payments. As a member of the Common Monetary Area with South Africa, Namibia, and Lesotho, Swaziland has lost independence of monetary and exchange rate policy flexibility and has limited macroeconomic policy tools to mitigate shocks.

The negative outlook on Swaziland's sovereign rating indicates that the balance of risks to the country's credit profile are tilted to the downside due to the ongoing government liquidity challenges and, absent of significant fiscal measures, the risk that public sector debt increases beyond what is currently incorporated in the B2 rating.


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