eSwatini, formerly Swaziland’s long-term issuer rating has been downgraded to B3 from B2 by Moody’s, on increasing downward pressure on the country’s debt burden and affordability.
The rating agency has however changed the outlook to stable from negative, underpinned by the country’s diversified economy and high income levels.
eSwatini’s persistently large fiscal deficits have contributed to a steady rise in the debt burden and deterioration in the sovereign’s fiscal strength.
In the absence of fiscal consolidation, eSwatini’s debt burden increased to 43.3% of gross domestic product (GDP) in the 2019 fiscal year, up from just 14.9% in 2015.
The economic and financial implications of the coronavirus disease 2019 (COVID-19) pandemic have also worsened eSwatini’s fiscal challenges.
Moody’s expects the fiscal deficit to widen to 10% of GDP in the 2020 fiscal year, as the economy contracts significantly, resulting in a decline in domestic tax revenue.
eSwatini has taken steps to limit the rise in spending, which include hiring freezes and limiting travel expenditure.
However, the spending structure remains relatively rigid, with a large wage bill and high level of transfers, which will slow the pace of expenditure-led fiscal consolidation.
Larger fiscal deficits will contribute to a faster and further deterioration in eSwatini’s debt burden and debt affordability.
Moody’s expects the debt-to-GDP ratio to increase to 58% by the end of 2021, with the interest-to-revenue ratio rising to 13%, up from just 4.4% in the 2015 fiscal year.
eSwatini faces a long-standing challenges related to reliance on Southern African Customs Union (SACU) revenue.
Higher SACU revenue will have a temporary stabilising influence in 2020, but will have the opposite effect in future years – as lower SACU revenue weighs on total revenue collection.
The government’s financing plans for the 2020 fiscal year include a financing gap of 5% of GDP, which Moody’s expects to result in a further accumulation of arrears.
Gross financing needs are large, at around 18% of GDP, consisting mainly of treasury bills, central bank advances, and the stock of arrears, with very little in external amortisations.
The fiscal deficit represents the remainder of the gross borrowing requirements, which the rating agency expects will remain around 9% to 10% of GDP over the next two years.
eSwatini benefits from a broad domestic financial sector, which beside commercial banks includes sizeable insurance and pension funds.
However, Moody’s forecasts limited scope for the domestic financial sector to absorb further increase in government financing needs in 2020 and 2021.
Commercial banks, which remain the largest holders of government treasury bills, have shown limited willingness or capacity to increase holdings of government securities much beyond 10% of total assets.
Meanwhile, non-bank financial services companies, mainly pension funds and insurance companies have already increased their holdings of government securities, taking 50% of total domestic debt, as of December 2019.
The government has put forward plans to clear a significant portion of previously accumulated arrears, which Moody’s estimates at almost 8% of 2019 GDP, which includes securing an external loan.
eSwatini’s economy has experienced several years of low growth, averaging just 1.9% over the past five years.
Moody’s expects eSwatini to return to this trend of relatively low growth over the foreseeable future, after a significant contraction in 2020 as a result of the COVID-19 shock.
Beyond the impact of the COVID-19 crisis, growth remains constrained by a number of structural impediments related to the poor business environment for private investment.
Prevailing poverty and income inequality also weigh on the economy’s growth potential, with about 60% of the population living below the poverty line, while 38% live in extreme poverty.
The high levels of poverty and inequality undermine the shock-absorption capacity of the economy relative to that conveyed by income levels.
eSwatini’s external position remains fragile, with reserves coverage providing around three months of import coverage.
Moody’s expects the current account surplus to narrow, resulting in a decline in international reserves, increasing external vulnerability.
eSwatini’s principal repayments coming due over the next two to three years and short-term external debt are low, meaning reserve coverage of debt payments remains adequate.
Moody’s would upgrade the rating if there is a credible fiscal adjustment plan that contains liquidity pressure and stabilises government debt at lower levels, accompanied by stronger medium-term growth prospects.
The rating agency may consider a downgrade in the event of a deterioration in fiscal performance that leads to a substantially larger than expected increase in debt.
Moody’s may also downgrade eSwatini in the event of a fall in international reserves which jeopardises the peg to the South African rand.
Meanwhile, Moody’s has maintained eSwatini’s local-currency bond and deposit ceilings at Ba3 and the foreign-currency bond ceiling at B1. The rating agency has also lowered eSwatini’s foreign-currency deposit ceiling to Caa1 from B3.