MONETARY POLICY CONSULTATIVE COMMITTEE (MPCC)

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1 MONETARY POLICY CONSULTATIVE COMMITTEE (MPCC) ECONOMIC REVIEW AND INFLATION REPORT PREPARED BY: ECONOMIC POLICY, RESEARCH AND STATISTICS DEPARTMENT January

2 SWAZILAND SELECTED INDICATORS Real GDP: Real GDP growth is expected to contract by 0.6 per cent in from a revised estimate of 1.9 per cent in 2015 (previously 1.7 per cent). Decreases are expected mainly in the primary and secondary sectors. Foreign reserves: Over the past two months, Gross Official Reserves declined by 5.4 per cent to reach E7.7 billion at the end of December. The fall in Reserves was mainly due to payment of Government s external obligations. At that level, the Reserves represented an estimated 3.7 months of imports, lower than the 3.9 months covered at the end of October. Compared over the year, the Gross Official Reserves declined by 9 per cent. Exchange rate: The external value of the Lilangeni strengthened against major currencies but weakened against the Pound Sterling during the months of November and December. Over the two months period the domestic unit strengthened by 0.72 per cent to average E13.85 against the US Dollar and by 4.94 per cent to average E14.62 to the Euro. However, the local unit weakened by 0.64 per cent to E17.32 against the Pound. Inflation: The country s annual consumer price inflation accelerated to 8.6 per cent in November rising from 8.2 per cent recorded the previous month. Inflation forecasts shows that the average for 2017 will be 7.3 per cent, lower than the average of 7.8 per cent recorded in. Credit Extension: Over the two-months under review, year-on-year credit extended to the private sector increased from 10.9 per cent in September to 15.5 per cent at the end of November. The increase in credit was reflected in both the Household and Business sectors.

3 1.0 GLOBAL ECONOMIC CONDITIONS According to the World Bank Global Economic Prospects Report published in January 2017, stagnant global trade, subdued investment, and heightened policy uncertainty marked another difficult year for the world economy. Global growth in is estimated at a postcrisis low of 2.3 per cent and is projected to rise to 2.7 per cent in Growth in emerging market and developing economies (EMDEs) is expected to pick up in 2017, reflecting receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers. Weak investment and productivity growth are, however, weighing on medium-term prospects across many EMDEs. Downside risks to global growth include increasing policy uncertainty in major advanced economies and some EMDEs; financial market disruptions; and weakening potential growth. However, fiscal stimulus and other growth enhancing policies in key major economies, in particular the United States, could lead to stronger than expected activity and thus represent a substantial upside risk to the outlook. The headline JP Morgan global manufacturing PMI increased for the fourth consecutive month to 52.7 points in December from 52.1 points in November, its highest level since February Growth was driven mainly by the US and Western Europe, with the US and the Eurozone indices reaching 21 and 68-month highs. The UK PMI was also at a two and a half year high. The Asian performance also improved with Japan, China, Taiwan, Vietnam, Philippines and Thailand recording improvements (SA Nedbank Weekly Monitor, 9 January 2017). The US economy advanced to an annualized 3.5 per cent quarter-on-quarter in the three months to September, up from 1.4 per cent growth in the previous period and better than the 3.2 per cent expansion in the second estimate. It is the highest growth rate in two years as personal consumption, investment in structures and intellectual property products and government expenditure rose faster than anticipated. Exports were also boosted by a boom in soya bean shipments (Trading Economics, 2017). It is the strongest growth rate since the third quarter of 2014, as exports grew the most in nearly three years. The US Federal Reserve raised the target range for its federal funds by 25 basis points from 0.5 per cent to 0.75 per cent, during its December meeting. Policymakers said that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Inflation is expected to rise to 2 per cent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labour market strengthens further. The decision was unanimous and widely expected. Central Bank of Swaziland 3

4 Minutes from the Federal Open Market Committee (FOMC) meeting held on December highlight that the Federal Reserve might need to raise rates faster than previously anticipated as the "undershooting of the unemployment rate might help return inflation to the 2 per cent target. Policymakers emphasized their uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives. Consumer prices in the United States increased by 1.7 per cent year-on-year in November, following a 1.6 per cent rise in October and in line with market expectations. It was the highest inflation rate since October 2014, mainly boosted by higher energy costs while food prices continued to fall. Annual core inflation, which excludes food and energy, was recorded at 2.1 per cent, the same as in October and missing market consensus of 2.2 per cent (Trading Economics, 2017). The final US Manufacturing PMI increased to 54.3 in December from 54.1 index points in November. It is the highest value since March 2015, boosted by rises in new orders and production volumes and the fastest upturn in payroll numbers since June 2015 (Trading economics, 3 January 2017). According to the latest data from trading economics, US unemployment rate rose to 4.7 per cent in December from a nine-year low of 4.6 per cent in the previous month and in line with market expectations (Trading economics, 3 January 2017). The Eurozone economy expanded by 0.3 per cent on quarter in the three months to September, the same as in the previous quarter and in line with market expectations (Trading Economics, 2017). The German economy expanded by a seasonally-adjusted 0.2 per cent in the third quarter of, slowing from 0.4 per cent expansion in the preceding quarter and matching preliminary estimates. It was the weakest growth since the third quarter of 2015, mainly supported by domestic demand while investment stagnated. The European Central Bank (ECB) held its benchmark refinancing rate at 0 per cent for the seventh straight time on 8 th December, as widely expected, and extended its programme of quantitative easing until December Policymakers decided to continue its purchases under the asset purchase programme (APP) at the current monthly pace of 80 billion until the end of March From April 2017, the net asset purchases are intended to continue at a monthly pace of 60 billion until the end of December 2017, or beyond, if necessary. Central Bank of Swaziland 4

5 According to a statement issued by the ECB Governor, Mario Draghi, the Governing Council decided to adjust the parameters of the APP as of January 2017 as follows. First, the maturity range of the public sector purchase programme will be broadened by decreasing the minimum remaining maturity for eligible securities from two years to one year. Second, purchases of securities under the APP with a yield to maturity below the interest rate on the ECB s deposit facility will be permitted to the extent necessary. Consumer prices in the Eurozone are expected to rise by 1.1 per cent year-on-year in December following a 0.6 per cent increase in November. It is the highest inflation rate since September 2013 and above market expectations of 1 per cent, mainly boosted by a rebound in energy prices. Excluding energy only, the inflation rate accelerated to 1 per cent from 0.8 per cent in the previous month. The final Eurozone Manufacturing PMI came in at 54.9 points in December, in line with flash estimates and following 53.7 points in November. The reading pointed to the strongest expansion in factory activity since April 2011, reflecting a steep increase in output, new orders, and employment. Producers reported that orders were buoyed by increased competitiveness resulting from the depreciation of the Euro. The seasonally adjusted unemployment rate in the Eurozone stood at 9.8 per cent in November, unchanged from the previous month and lower than 10.5 per cent recorded a year earlier. It was the lowest unemployment rate since July 2009 (Trading Economics, 9 January ). Among the Member States, the lowest unemployment rates were recorded in the Czech Republic (3.7 per cent) and Germany (4.1 per cent). The highest unemployment rates were observed in Greece (23.1 per cent in September ) and Spain (19.2 per cent). The UK economy advanced by 0.6 per cent quarter-on-quarter in the three months to September, the same as in the previous period and better than the second estimate of 0.5 per cent expansion. Household expenditure continued to grow while fixed investment rose at a slower pace and net external demand contributed negatively. Compared with the same period of 2015, the economy advanced by 2.2 per cent following a downwardly revised 2 per cent expansion in the preceding quarter and missing the second estimate of 2.3 per cent gain (Trading Economics, 2017). The Bank of England Monetary Policy Committee voted unanimously to hold the Bank Rate at a record low of 0.25 per cent and to leave the stock of purchased assets at 435 billion on 15 Central Bank of Swaziland 5

6 December, in order to meet the 2 per cent inflation target, in a way that helps to sustain growth and employment. Policymakers reiterated that the path of monetary policy would depend on the evolution of the prospects for demand, supply, the exchange rate, and therefore inflation. UK consumer prices rose by 1.2 per cent year-on-year in November, compared with 0.9 per cent growth in October and above market expectations of 1.1 per cent gain. It was the highest inflation rate since October 2014, boosted by cost of clothing and footwear, recreation and culture and furnishings. The core index which excludes prices of energy, food, alcohol and tobacco advanced by 1.4 per cent on the year. On a monthly basis, consumer prices edged up by 0.2 per cent, in line with market consensus. UK Manufacturing PMI rose to 56.1 in December from 53.6 in November, beating market expectations of It is the highest reading since June 2014 as improved domestic and external demand boosted output and new order growth. The UK unemployment rate declined to 4.8 per cent in the three months to October from 4.9 per cent over the May to July period and 5.2 per cent a year earlier. The figure came in line with market expectations and hit the lowest level since July to September 2005 (Trading Economics, 2017). The Japanese economy advanced by 0.3 per cent quarter-on-quarter in the three months to September, below preliminary estimates of 0.5 per cent expansion, following 0.2 per cent expansion in the previous quarter. Domestic demand was flat and net trade contributed less to growth than initially estimated (Trading Economics, 2017). The Bank of Japan left the interest rate unchanged at -0.1 per cent at its December meeting, as widely expected. Policymakers also decided to maintain its 10-years government bond yield target around zero per cent and viewed a moderate recovery trend in the economy had continued while exports had picked up. Overseas economies have continued to grow at moderate pace, although emerging economies remain sluggish in part, hence the mild pick up in exports. Consumer prices in Japan increased by 0.5 per cent year-on-year in November, following a 0.1 per cent growth in the previous month. It is the highest inflation rate since May 2015, boosted by higher fresh food prices. However, core consumer prices which exclude fresh food Central Bank of Swaziland 6

7 went down by 0.4 per cent, the ninth straight month of annual declines and worse than market expectations of a 0.3 per cent drop. Japan Final Manufacturing PMI rose to 52.4 in December from 51.3 in November. It was the highest reading since December 2015, as output and new orders both expanded to a oneyear high while new export orders rose for the fourth straight month. US unemployment rate rose to 4.7 per cent in December from a nine-year low of 4.6 per cent in the previous month and in line with market expectations. The number of unemployed persons was almost unchanged at 7.5 million while the labour force participation rate increased by 0.1 percentage point to 62.7 per cent. 1.1 Emerging Markets: BRIC Countries The Brazilian economy shrank by 0.8 per cent quarter-on-quarter in the three months to September, in line with market expectations. It is the seventh straight quarter of contraction as consumer spending continued to fall and public expenditure and investment shrank. Consumer spending went down by 0.6 per cent, following a 1 per cent fall in the previous three months, marking the seventh straight quarter of declines. Year-on-year, the economy shrank by 2.9 per cent, compared to expectations of a 3.2 per cent decline. Meanwhile, the economy is expected to contract by 3.5 per cent in and to grow by 0.98 per cent in The Central Bank of Brazil lowered its benchmark SELIC rate to per cent on the 30 th November, its lowest in over a year. The decision was widely expected by markets, as policymakers aim to bring inflation back to target amid a deep economic recession and a new political scandal. The central bank began easing monetary policy during its October meeting, as it lowered its interest rate for the first time in four years. Consumer prices in Brazil rose by 6.99 per cent year-on-year in November, down from an increase of 7.9 per cent in the previous month and below market consensus of a 7.1 per cent gain. It was the lowest inflation rate since December 2014, as prices for food, housing and transportation rose at a slower pace. Still, inflation remained above the central bank's official target of 4.5 per cent. Brazil Manufacturing PMI dipped to 45.2 in December from 46.2 in November, slightly above market expectations of 45. It was the weakest figure since June and the 23rd straight month of contraction, as a steeper fall in new work led to sharp reductions in Central Bank of Swaziland 7

8 production, quantities of purchases and employment. The unemployment rate in Brazil rose to 11.9 per cent in the three months to November from 11.8 per cent in the previous period. It hit a new record high since the series began in 2012, in line with market expectations. The number of jobless people also reached a record high while employment rose for the first time in six months. The Russian economy shrank by 0.4 per cent year-on-year in the third quarter of, following a 0.6 per cent fall in the previous period. It was the smallest contraction in seven quarters, driven by lower drop in construction, public administration, transport and accelerated growth for mining and quarrying, and agriculture. Russia remained stuck in recession, led by low oil prices. The Central Bank of Russia kept its benchmark one-week repo rate unchanged at 10 per cent on the 16 th December and signalled the possibility of further cuts in the first half of Policymakers also said that the dynamics of inflation and economic activity were overall in line with the forecast and inflation risks have subsided somewhat. Growth in consumer prices was slowing down in part under the influence of temporary factors, while deceleration in inflation expectations remains unsteady. The Bank expects that by as at the end of, output of goods and services will decrease by per cent with a slight growth in quarterly GDP to be realised in the fourth quarter. The Bank further expects moderate economic growth of less than 1 per cent in 2017 and an increase to per cent in Risks that the Bank will fail to achieve a 4 per cent inflation target in 2017 have subsided somewhat. Consumer prices in Russia increased by 5.4 per cent year-on-year in December, following a 5.8 per cent rise in the previous month and below market expectations of 5.6 per cent. It was the lowest inflation rate since June On a monthly basis, prices went up by 0.4 per cent, at the same pace as in November. Russia Manufacturing PMI rose to 53.7 points in December from 53.6 points in November. It is the highest level in 69 months, driven by substantial increases in output and new order amid healthier labour market, with job creation growing at the fastest pace since March At the same time, new export orders contracted at the weakest pace in 40 months. Goods producers continued to reduce their inventory holdings while backlogs of work broadly stabilised. Central Bank of Swaziland 8

9 Russian unemployment rate decreased to 5.4 per cent in November compared to 5.8 per cent a year ago and in line with market expectations. In the previous month, the jobless rate was recorded at 5.4 per cent. The Gross Domestic Product (GDP) in India expanded by 1.8 per cent in the third quarter of from 1.4 per cent in the second quarter (Trading Economics, 2017). The Reserve Bank of India unexpectedly left its benchmark repo rate unchanged at a six-year low of 6.25 per cent during the meeting held on 7 th December despite wide expectations of a rate cut, following a severe cash crisis. The central bank also held its reverse repo rate steady at 5.75 per cent and the marginal standing facility and the bank rate at 6.75 per cent. Consumer prices in India increased by 3.63 per cent year-on-year in November, following a 4.2 per cent rise in October and well below market expectations of 3.9 per cent. It was the lowest inflation rate since November 2014, as food inflation eased for the fourth straight month to 2.56 per cent. On a month-onmonth basis, consumer prices fell by 0.15 per cent. The Chinese economy advanced by 1.8 per cent quarter-on-quarter in the third quarter of, compared to an upwardly revised 1.9 per cent growth in the previous three months and in line with market estimates. Many uncertain factors in the economy remain, the National Bureau of Statistics said in a statement on its website. It also acknowledged that the foundation for sustained growth is not solid. Year-on-year, the economy advanced by 6.7 per cent in the third quarter of, the same pace as in the previous two quarters and matching consensus. For, the Chinese government is targeting the economy to grow between 6.5 to 7.0 per cent. The PBoC has been making efforts to support the currency amid concerns over capital outflows (Trading economics, 6 January 2017). The PBoC continues to conduct open market operations on a daily basis, aiming to improving operational effectiveness. Consumer prices in China rose by 2.1 per cent year-on-year in December, compared to a 2.3 per cent rise in November while markets expected a 2.3 per cent gain. The politically sensitive food prices increased by 2.4 per cent while non-food cost rose at a slower 2.0 per cent. Cost of consumer goods gained 1.8 per cent and those of services advanced by 2.5 per cent. On a monthly basis, consumer prices rose by 0.2 per cent, following a 0.1 per cent rise in a month earlier. It was the second straight month of increase but below market consensus of a 0.3 per cent gain. For the whole year of, inflation was 2 per cent, below government target of around 3 per cent (SA Nedbank Daily Market commentary, 10 January 2017). Central Bank of Swaziland 9

10 The Manufacturing PMI in China rose to 51.9 in December from 50.9 in November, beating market consensus of It was the sixth straight month of growth and the highest reading since January 2013, as output and new orders both hit multi-year highs while new export orders remained unchanged. In December, output rose the most in 71 months while new orders increased at the fastest pace since July Unemployment rate in China fell slightly to 4.04 per cent in the third quarter of from 4.05 per cent in the June quarter. 1.2 ECONOMIC DEVELOPMENTS IN SOUTH AFRICA The South African economy expanded by an annualized 0.2 per cent quarter-on- quarter in the three months to September, compared to an upwardly revised 3.5 per cent growth in the June quarter and below market estimates of a 0.5 per cent expansion. It was the second straight quarter of growth, mainly supported by mining, general government services and real estate activities while manufacturing shrank. The largest contributor to GDP growth was mining and quarrying, growing by 5.1 per cent and contributing 0.4 percentage point. Yearon-year, the economy grew by 0.7 per cent, the same as the upwardly revised figure in the second quarter. The South African Reserve Bank (SARB) left its benchmark repo rate on hold at 7 per cent at its November meeting, as widely expected (Nedbank Weekly Economic Monitor, 28 November ). Policymakers said growth in the third quarter is expected to be positive, but below the level of June quarter, while left the GDP forecasts unchanged from September. The bank also noted that the Rand will be sensitive to changes in the stance of the US monetary policy. According to the South African Reserve Bank Governor, Lesetja Kganyago, the domestic economic growth outlook remains subdued, while the low point of the cycle seems to have passed. The Bank s forecast remains unchanged at 0.4 per cent for, and 1.2 per cent and 1.6 per cent for the next two years, respectively. While the estimate for potential GDP growth was revised down marginally to 1.3 per cent, and rising to 1.5 per cent by 2018, the output gap is expected to remain negative over the forecast period. The Bank s composite leading business cycle indicator improved in August and September, continuing a recent generally positive but gradual upward trend (Trading Economics, ). Consumer prices in South Africa rose by 6.6 per cent year-on-year in November, following a 6.4 per cent increase in October and in line with market expectations. Month-on-month, consumer prices went up by 0.3 per cent following a 0.5 per cent gain in the previous month. Overall inflation is now projected to peak at 6.7 per cent (previously 7.1 per cent) in the fourth Central Bank of Swaziland 10

11 quarter of, while core inflation is now expected to peak at 5.9 per cent (previously 6.1 per cent) in the fourth quarter of this year. Manufacturing PMI in South Africa increased to in November from in October. The unemployment rate in South Africa went up to 27.1 per cent in the third quarter of from 26.6 per cent in the second quarter, reaching the highest unemployment rate since 2004 (Trading Economics, 2017). Figure 1: South African Inflation and Repo Rate (Jan to December ) Repo rate CPI SARB Target Range for Inflation Source: Statistics South Africa 1.3 DEVELOPMENTS IN THE DOMESTIC ECONOMY Real GDP Developments Real GDP growth is expected to shrink by 0.6 per cent in from a revised estimate of 1.9 per cent in 2015 (previously 1.7 per cent). Decreases are expected mainly in the primary and secondary sectors. The projected deceleration in output is mainly informed by the drastic effects of the drought which had devastating effects on agriculture, agro-processing, power generation and water supply. This is projected to be further compounded by lower SACU inflows for the /2017 fiscal years which will compromise government activity in the short to medium term The Primary Sector The country experienced a mild drought in 2014/15 season which further worsened in 2015/16 season due to a strong El Nino event which resulted in rainfalls dipping to their lowest levels in more than two decades. This affected both rain-fed crops (particularly maize and cotton) as Central Bank of Swaziland 11

12 well as irrigated farms (particularly sugarcane) as dam levels fell to significantly low levels to support effective irrigation. Maize production on Swazi Nation Land (SNL) is estimated to have dropped by 60 per cent to 33,460 metric tonnes in harvest whilst cotton production fell below 200 metric tonnes. Sugarcane production which is mainly grown on Individual Tenure Farms (ITFs) is projected to decline by about 20 per cent whilst growth remains muted in the citrus sub-sector due to narrowing profit margins and changing market landscape which leads to continuous diversification away from citrus production. On a positive note, modest growth is expected in the livestock, forestry, and mining and quarrying subsectors. Despite high mortality rates induced by the drought on livestock, more farmers were persuaded to sell their cattle in 2015 and the trend remained positive in the first half of thereby reflecting positive performance for this sector. For the medium term ( ) the primary sector is projected to recover mainly buoyed by anticipated improvement in weather conditions as above normal rains are expected for /17 planting season. The forestry sub-sector is also expected to record significant growth especially in 2017 as trees planted after the 2007/08 forest fires would be available for harvest and thereby raising output for this sector The Secondary Sector The secondary sector (which comprise manufacturing, electricity supply and water supply and construction) is projected to decline by 2 per cent in largely reflecting effects of drought on agriculture-related processing, electricity supply and treated water supply. Manufacturing of food products is projected to decline by 2 per cent mainly due to a 25 per cent decrease expected in sugar production. However, other manufacturing components not linked to agroprocessing such as manufacturing of beverages and textiles are expected to remain positive in the short to medium term mainly benefiting from exploration of new markets in the region. Electricity supply which is dominated by hydro-power generation was severely affected in the first half of due to the drought conditions but is expected to recover in the medium term with above normal rains driven by another weather phenomenon, La-Nina. Similarly, treated water supply in the country particularly in the Northern Region was not spurred from the severe impact of the drought. The construction sector which has been performing well in the post fiscal crisis of 2010/2011 is yet again threatened by a deterioration in the government s fiscal position following a significant fall in SACU revenues in /17 fiscal year. This is expected to slow down Central Bank of Swaziland 12

13 implementation of government capital program and thereby affect activity in the construction sector. Like the primary sector, the secondary sector is expected to recover in the medium term from the negative performance observed in. The recovery of the secondary sector would however be more gradual but robust in the outer years with construction activity expected to recover significantly if projects in the pipeline (such as the Rail link project) are implemented The Tertiary Sector Performance in the tertiary sector is generally mixed in. Services sectors linked to the primary and secondary sectors such as transportation and financial sector are expected to record negative growth reflecting indirect effects of the drought. Positive growth is only expected in wholesale and retail trade, tourism, education, health and other services. Though the tertiary sector is expected to remain positive throughout the medium term, it is expected to grow at slower rates largely due to slowdown in economic activity expected in wholesale and retail trade and real estate subsectors. Figure 2: Sectorial Growth Rates (%) SECTOR Primary sector Secondary sector Tertiary sector GDP at constant 2011 prices Source: CSO ( ), Macro-forecasting team ( ) Electricity Consumption. On a quarter-to-quarter basis, electricity consumption declined by 2 per cent (seasonally adjusted) in the quarter ended September compared to a 4 per cent contraction in quarter ended June. This decline was mainly driven by a 6 per cent decline in the irrigation power and bulk category mainly attributable to the effects of the drought experienced in 2015/16. The drought resulted in a depletion of water reserves in rivers and dams which compromised irrigation activities for crops such as sugar cane, hence the drop in electricity consumption by the irrigation and bulk power customers. On the other hand, electricity sales for the commercial category rose by 5 per cent reflecting an improvement in economic activity in Central Bank of Swaziland 13

14 GWh non-agricultural activities. The domestic category also recorded a positive growth of 3 per cent on quarter-to-quarter basis in the same period. On a year-on-year basis, electricity consumption declined by 3 per cent with a significant 8 per cent decrease coming from the irrigation power and bulk category, emphasising the slower economic activity particularly in the agricultural sector and agro-processing. Figure 3: Electricity Consumption Seasonally Adjusted(2015q1-q2) Q1 2015Q2 2015Q3 2015Q4 Q1 Q2 Q3 Source: Swaziland Electricity Company Water Consumption Treated water consumption reflected a marginal recovery in the quarter ended September rising by 1 per cent (seasonally adjusted) compared to a 3 per cent decline in the quarter ended June. The dry weather conditions affected water levels in local dams and rivers, causing the Swaziland Water Services Corporation (SWSC) and some consumers to take water saving measures especially in the capital city. This affected water consumption in by domestic customers which dropped by a seasonally adjusted 2 per cent in the quarter ended September following another decrease of 4 per cent in the previous quarter. However, activities in the commercial category were not affected in the quarter under review as water consumption by commercial customers increased by a seasonally adjusted 3 per cent in the third quarter of, reflecting improved economic activity in the manufacturing sub-sector. On year-on-year basis, treated water consumption decreased by a seasonally adjusted 6 per cent, with the commercial category falling by 7 per cent while the domestic category fell by 4 per cent. In terms of number of customers, there was a 3.1 per cent growth from 38,854 at the end of the second quarter to 40,077 at the end of September. Increases in number of customers were observed in both domestic and commercial categories. Central Bank of Swaziland 14

15 Fuel Import volumes Index Jan 2008=100 Million kilolitres M³ Figure 4: Total Water (million kilolitres) M 3 _Seasonally Adjusted(2015q1-q3) Q1 2015Q2 2015Q3 2015Q4 Q1 Q2 Q3 Source: Swaziland Water Services Corporation (SWSC) Fuel Imports Total fuel import volumes grew by a seasonally adjusted 1.1 per cent month-on-month in September which is an improvement from a decrease of 1.7 per cent observed in August. On year-on-year basis, the volumes grew by a seasonally adjusted 6.8 per cent in September. Petrol volumes increased by a seasonally adjusted 8.2 per cent and diesel volumes by 7.1 per cent. The lower fuel prices observed in have been favourable for fuel import volumes and has kept costs of production for most industries at relatively contained levels. The increases in imported fuel volumes also reflects increased activity in the transportation sector. Figure 5: Fuel Import Volumes Index - Seasonally Adjusted (September 2015 September ) SEPT OCT NOV DEC JAN FEB MAR APR MAY JUNE JULY AUG SEPT 2015 Source: Ministry of Natural Resources and Energy. Central Bank of Swaziland 15

16 1.3.8 Construction. Preliminary figures from the municipalities and town boards show that, following a significant increase of 22 per cent recorded in the quarter ended June, building plans approved declined by 6 per cent in the quarter ended September. The total number of building plans approved dropped to 221 units in the third quarter of from 235 units in the previous quarter. Notable decreases were observed in industrial and other building plans approved. Residential building plans on the other hand, remained on an upward trend rising by 9 per cent to 184 units in the quarter ended September. In terms of value, total buildings plans approved grew by 13 per cent amounting to E259.2 million in the quarter ended September 2015 from E229.4 million recorded in the previous quarter with residential sector accounting for 65.6 per cent of the total value. 2.0 Inflation Developments The country s annual consumer price inflation accelerated to 8.6 per cent in November rising from 8.2 per cent recorded the previous month. Whilst prices for services remained muted at 3.8 per cent, the prices for goods continued to climb recording 14.4 per cent in November compared to 13.4 per cent the previous month. The increase in the growth rate for consumer prices for goods mainly resulted from the sustained increases in food prices as well as increases in prices for semi-durable goods. On a year-on-year basis, international food prices continue to climb while regional developments observed from South African food inflation reflect that food prices had stabilized amid at elevated levels. In line with developments observed on international food prices, Swaziland food inflation stayed on an uptrend rising to 18.7 per cent in November compared to 17.6 per cent the previous month. An analysis of the food sub-components indicates that significant increases were observed in prices of sugar and sugar products, meat and oils and fats. On year-on-year basis sugar prices rose by more than 30 per cent in November whilst prices for oils and fats and meat products rose by 16 and 7 per cent, respectively. Further notable increases were observed in the prices of fresh potatoes and frozen processed vegetables. Month-on-month inflation figures show 0.6 per cent increase in November compared to 0.1 increase in October. Increases were noted in the price indices for food and nonalcoholic beverages (which grew by 1.3 per cent), furnishing and household equipment (which grew by 3.5 per cent) and recreation and culture (which grew by 1.1 per cent). These Central Bank of Swaziland 16

17 Year-on-year % change increases were partially offset by slower growth of 0.5 per cent in the price index for miscellaneous goods and services and 0.5 per cent in the price index for clothing and footwear. Year-on-year core inflation movements depicted a modest upward trend in November. Non-food inflation rose from 4.7 per cent in October to 4.9 per cent in November. CPI excluding food and non-alcoholic beverages (FNAB), auto fuel and energy (which is a more generally used measure for core inflation in many countries) also ticked up slightly from 4.6 per cent in October to 4.8 per cent in November. The modest upward trajectory in measures of core inflation reflect that there are modest demand pressures on inflation which are reinforcing supply factors largely dominated by the effects of drought experienced in the previous season. Figure 6: Inflation Trends; November 2015 to November (5.00) Nov- Dec- Jan-16 Feb- Mar- Apr- May- Aug- Sep- Nov- Jun-16 Jul-16 Oct Food Transport (1.96 ( Overall Other Source: Central Statistics Office 2.1 Inflation and Interest Rates Trends in Swaziland Monetary policy has been tightening since January, however, the discount rate has remained unchanged at 7 per cent since June. Inflationary pressures might lead to a change in the discount rate. South Africa s consumer inflation accelerated to 6.6 per cent in November from 6.4 per cent in October. The Reserve Bank has left the repo rate unchanged at its past four meetings to help support an economy forecast to expand at 0.4 per Central Bank of Swaziland 17

18 cent in, the slowest pace since the 2009 recession, even as it projected a temporary acceleration in inflation due primarily to low base effects from a year earlier. The Reserve Bank anticipates inflation to return to within the target by the second quarter of The domestic interest rates have remained at par with South Africa s repo rate since May to curb capital flight and harmonise interest rates in the Common Monetary Area (CMA). Interest rates are expected to increase in South Africa as inflationary pressures increase and also due to the Federal Reserves decision to increase its interest rate. Figure 7: Inflation and Discount rate (Jan Nov ) Inflation SD Discount rate Source: Central Bank of Swaziland 3.0 Reserves, Money and Credit Aggregates Over the past two months, Gross Official Reserves declined by 5.4 per cent to reach E7.7 billion at the end of December. The fall in Reserves was mainly due to payment of Government s external obligations. At that level, the Reserves represented an estimated 3.7 months of imports, lower than the 3.9 months covered at the end of October. Compared over the year, the Gross Official Reserves declined by 9 per cent. As at 06 January 2017, the Reserves increased notably to E8.9 billion due to the inflow of SACU revenue for the last quarter of the fiscal year /2017. Consequently, the import cover rose to 4.3 months. Central Bank of Swaziland 18

19 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Per cent Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec Jan-17 E'Billion Months Figure 8: Gross Official Reserves & Import Cover (December January 2017) GOR Import Cover Source: Central Bank of Swaziland. Over the two-months under review, year-on-year credit extended to the private sector increased from 10.9 per cent in September to 15.5 per cent at the end of November. The increase in credit was reflected in both the Household and Business sectors. Growth in credit extended to Businesses turned around from -0.3 per cent recorded in September to a high of 4.4 per cent in November. The rise in credit to businesses was mainly discernible in the Distribution & Tourism (mainly sugar), Community, Social & Personal Services and Mining & Quarrying sectors. However, a fall in credit was recorded in the following sectors; Agriculture & Forestry, Manufacturing and Construction. Figure 9: Private Sector Credit: Annual Changes (November November ) Credit to Households Credit to Businesses PSCR Source: Central Bank of Swaziland Central Bank of Swaziland 19

20 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Per cent Credit extended to the Household sector went up from 18.4 per cent in September to 22.1 per cent in November. An analysis of credit within the household sector showed that other personal loans accelerated by 59.2 per cent in November from 54.4 per cent in September. Housing loans grew by 14.9 per cent in November from 6.5 per cent in September. Growth in motor vehicle finance, however, decelerated from 14.8 per cent in September to 11.3 per cent in November. Figure 10: Household Credit by Product: Annual Changes (November November ) Motor Vehicle Housing Other Source: Central Bank of Swaziland In line with the rise in credit extended to the private sector, year-on-year broad money supply (M2) grew by a higher 26 per cent in November compared to 10.9 per cent in September. The increase in broad money supply was discernible in both quasi money and narrow money. Quasi money supply grew by 33.4 per cent in November compared to 14.3 per cent in September. Narrow money supply growth went up from 4.6 per cent in September to reach 12.7 per cent in November. Central Bank of Swaziland 20

21 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Per cent Figure 11: Money Supply: Annual Changes (November November ) (5.0) Quasi Money M2 M1 Source: Central Bank of Swaziland 4.0 Exchange Rate Developments The external value of the Lilangeni strengthened against major currencies but weakened against the Pound Sterling during the months of November and December. Over the two months period the domestic unit strengthened by 0.72 per cent to average E13.85 against the US Dollar and by 4.94 per cent to average E14.62 to the Euro in the month of December. However, it weakened by 0.64 per cent to E17.32 against the Pound. The Lilangeni gained value against the US Dollar in this period, in part due the rating agencies decision to keep South Africa s rating, even though the rating of the currency was downgraded to BBB and the firming demand for commodities in global markets. The local unit ended the period under review at E13.63 to the US Dollar, E16.73 to the Pound Sterling and E14.35 to the Euro. Central Bank of Swaziland 21

22 Emalangeni Figure 12: Average Lilangeni against Major Currencies (December 2015 December ) Dec Jan- Feb- Source: Central Bank of Swaziland. Mar- Apr- May- 5.0 Swaziland Inflation Projections 5.1. Inflation Outlook-Assumptions and Projections Swaziland s inflation fell from a high of 8.5 per cent in April to 7.4 per cent in August. However, it rose to 8.4 per cent in September, reaching a high of 8.7 per cent in December. The annual inflation for averaged 7.8 per cent, rising from an average of 5.0 per cent recorded in The drought effects pushed up food prices with a weight of per cent in the consumer price inflation basket of goods and services. Inflation is expected to average 7.5 per cent in the first quarter of 2017 falling from an average of 8.5 per cent recorded in the last quarter of. The continued elevation of food prices and the increases in the petrol prices in South Africa in October in response to the international oil prices breeching the US$ 50 mark on the back of OPEC cutting supply resulted in a higher inflation outturn in the last quarter of. Inflation is expected to slow down in 2017 due to the previous year s base effects of high inflation in and expected improvements in the drought conditions. The Jun- Jul- projected annual average inflation for 2017 is 7.3 per cent. Aug- Sep- Oct- Nov- Dec- Dollar Pound Euro Central Bank of Swaziland 22

23 Figure13: Inflation Fan Chart (Jan - Dec 2017) Dec-17 Nov-17 Oct-17 Sep-17 Aug-17 Jul-17 Jun-17 May-17 Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16 May-16 Apr-16 Mar-16 Feb-16 Jan-16 Source: Central Bank of Swaziland 6.0 Conclusion Global Economy: Stagnant global trade, subdued investment, and heightened policy uncertainty marked another difficult year for the world economy. Global growth in is estimated at 2.3 per cent and is projected to rise to 2.7 per cent in Growth in emerging market and developing economies (EMDEs) is expected to pick up in 2017, reflecting receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers. Weak investment and productivity growth are, however, weighing on medium-term prospects across many EMDEs. Downside risks to global growth include increasing policy uncertainty in major advanced economies and some EMDEs; financial market disruptions; and weakening potential growth. However, fiscal stimulus and other growth enhancing policies in key major economies, in particular the United States, could lead to stronger than expected activity and thus represent a substantial upside risk to the outlook. South Africa: The South African economy expanded by an annualized 0.2 per cent quarter-onquarter in the three months to September, compared to an upwardly revised 3.5 per cent growth in the June quarter and below market estimates of a 0.5 per cent expansion. It was the second straight quarter of growth, mainly supported by mining, general government services and real estate activities while manufacturing shrank. Year-on-year, the economy grew by 0.7 per cent, the same from an upwardly revised figure in the second quarter. The South African Reserve Bank (SARB) left its benchmark repo rate on hold at 7 per cent at its November Central Bank of Swaziland 23

24 meeting, as widely expected. The bank also noted that the Rand will be sensitive to changes in the stance of the US monetary policy. Domestic Economy: Real GDP growth is expected to contract by 0.6 per cent in from a revised estimate of 1.9 per cent in 2015 (previously 1.7 per cent). Decreases are expected mainly in the primary and secondary sectors. The projected deceleration in output is mainly informed by the drastic effects of the drought which had devastating effects on agriculture, agro-processing, power generation and water supply. Credit extended to the private sector trended upwards from 10.9 per cent in September to 15.5 per cent in November. Annual average inflation for 2017 is expected to fall to an average of 7.3 per cent due to the high base effects of. Food price increases are expected to ameliorate as the effect from the drought dissipates as shown by the month on month changes in food inflation regardless of the year on year effect which are pushed up off late by lower base effects of Central Bank of Swaziland 24