· Web viewSADC Member States include the following countries: Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia

CONFIDENTIALFile ref: 17/7/4/1/3

Integrated Paper on Recents Economic Developments in SADC

Prepared for the Committee of Central Bank Governors in SADC1

by

BANK OF MAURITIUS

September 2017

Contents Page1 SADC Member States include the following countries: Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe

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Document 814/09/2017

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1. Introduction.................................................................................................... 3

2. Overview of the Economic Trends in 2016.................................................... 3

3. Economic Developments in SADC................................................................ 7

4. Intra-SADC trade ........................................................................................... 8

5. State of Macroeconomic Convergence in 2016.............................................. 8

6. Macroeconomic Convergence Challenges and Possible Solutions ................ 13

7. SADC Peer Review Process …………………………..……………………. 20

8. Sovereign Debt Ratings of SADC countries................................................... 22

9. Recent Exchange Rate Developments in SADC …………………………. 25

10. Outlook for 2017 ............................................................................................ 26

11. Medium-term Outlook for SADC ……..…………………………………….. 30

12. Conclusion………………………………………..………………………… 31

List of Tables

Table 1: Global Economic Growth (Percentage change), (2015-2018) …….. 5

Table 2: Overview of Convergence Criteria ………………………………… 13

Table 3: Rating of SADC countries’ debts …………………………………. 22

Appendix 1: Intra-SADC Trade Statistics ……………………………………. 32

List of Charts

Chart 1: Crude Oil Prices (2010-2017) ……………………………………. 5

Chart 2: Commodity Prices (2010-2017) …………………………………. 6

Chart 3: Inflation Rate Developments in SADC region (2014-2016) …….. 9

Chart 4: Budget Balance as a percentage of GDP (2014-2016) …………… 10

Chart 5: Public Debt as a percentage of GDP (2014-2016) ……………….. 10

Chart 6: Real GDP Growth Rates (2014–2016) …………………………… 11

Chart 7: Foreign Reserves in months of imports (2014-2016) ………….. 12

Chart 8: Current Account Balance as a percentage of GDP (2014-2016) … 12 Chart 9: SADC Member States’ Exchange Rate Index …………………… 26 1. Introduction

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The Southern Africa Development Community (SADC) Memorandum of Understanding (MoU) on macroeconomic convergence requires Member States to implement measures to achieve macroeconomic stability. Macroeconomic stability entails keeping inflation at low and stable levels, pursuing sound and prudent fiscal policies, keeping debt at sustainable levels, and eliminating structural hindrances to growth objectives. A list of macroeconomic criteria has been established by SADC and convergence of Member States towards these macroeconomic targets is diligently monitored, as outlined in the Regional Indicative Strategic Development Plan.

This paper provides an overview of recent economic developments within the SADC region. It evaluates the progress made by SADC Member States in meeting macroeconomic convergence targets and presents the outlook for 2017.

The rest of the document is organized as follows: Section 2 provides an overview of global economic trends in 2016. Section 3 reviews economic developments in SADC. Section 4 covers intra-SADC trade. Section 5 assesses the status of macroeconomic convergence criteria in 2016. Section 6 highlights some of the challenges that impinge on the progress of Member States and underscore possible solutions. Section 7 provides an overview of the findings of SADC peer reviews of three Member States in 2016-2017. Section 8 summarizes sovereign public debt ratings of some selected SADC economies by rating agencies. Section 9 analyses recent exchange rate developments in the region. Section 10 provides an outlook for each Member State in 2017 while Section 11 provides a medium-term outlook for SADC. Finally, Section 12 concludes the paper.

Information used in this report is sourced from respective SADC Central Banks through the Secretariat of the Committee Central Bank Governors (CCBG), and from the International Monetary Fund (IMF) April and July 2017 World Economic Outlook (WEO) and the Regional Economic Outlook (REO) April 2017, Bloomberg and Trading Economics websites.

2. Overview of Economic Trends in 2016

2.1 World Economic Developments

Global recovery continued in 2016, albeit at a rather lacklustre pace. In its July 2017 WEO Update, the IMF estimates 2016 world output growth rate at 3.2 per cent which is below its pre-crisis level. An important element supporting this growth estimate, according to the IMF, is better economic activity in the last quarter of 2016. Healthier global financial market conditions and the pick-up in global manufacturing and trade jointly supported this growth momentum.

Global fragilities witnessed in recent years have somewhat undermined the growth picture among the advanced economies in 2016, with several major economies embarking in rather slow growth trajectory. Growth picked up in the US in the second half of 2016 as inventories were run down to accommodate increasing demand, thereby marking the end of the inventory cycle. Sustained spending helped maintain the resilience of the British economy, despite initial uncertainties following the June 2016 referendum to exit the European Union. The Japanese economy maintained its growth pace, in part due to favourable net exports. Favourable domestic demand conditions helped support growth rates in several of the Euro Area core economies. However, productivity impediments and rising income inequalities

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have encouraged many countries in the advanced world to implement inward-looking policies, which could weigh on global integration prospects.

A rather more mixed picture is observed for emerging markets and developing economies. China registered strong growth in 2016, despite remaining sub-par compared to its pre-2016 levels, in part due to the rebound in infrastructure and real estate investment. While this may have positive spill-over effects on trade in the SADC region and on global commodity prices, it remains to be seen as to whether the economy’s transformational strategy will sustain growth prospects of commodity-exporters going forward. Economic growth in Brazil contracted sharply in 2015 and 2016, while India recorded a high growth of 7.1 per cent, albeit lower than its 2015 performance.

Macroeconomic conditions in Sub-Saharan Africa continued to remain challenging in some of the largest economies in the region in 2016 as a result of subdued commodity prices in 2016, along with geopolitical and episodes of domestic turmoil in few countries. Against this backdrop, export earnings and fiscal revenues in the region continued to face pressures. Nigeria’s economy contracted by 1.6 per cent because of disruptions to the oil sector, in turn resulting in fuel, power and foreign exchange shortages. South Africa’s economy slowed down to 0.3 per cent in 2016 from 1.3 per cent in 2015.

Global growth projections for 2017 and 2018 have remained unchanged at 3.5 and 3.6 per cent in the July 2017 update, compared to April 2017 edition of the WEO. This, however, conceals important developments at the regional and individual country level. The IMF now projects US economy to slow down, in part due to delays in implementation of its fiscal stimulus. Other major economies such as EU countries, China, Japan and several emerging nations, are now projected to experience more favourable economic conditions tied to domestic demand. The IMF nonetheless underscored the fact that downside risks to the medium-term growth outlook remain present. A return of financial turbulence impairing demand and undermining global financial fragility could occur in the absence of bold policy measures in some major economies. In the Eurozone which is predominantly an oil importing region, economic performance would be boosted by several factors, including accommodative monetary policy, low oil prices and, in some instances, real exchange rate depreciation. The IMF now projects higher growth rates for the Chinese economy compared to its April 2017 projections although the pace of growth will taper off as the year 2018 comes into full swing. For India, the IMF did not alter its outlooks for 2017 and 2018 growth rates. The Indian economy is projected to embark on a pathway of sustained increases in its growth rate, going forward.

Table 1 below shows global economic developments during 2016 and projections for 2017 and 2018.

Table 1: Global Economic Growth

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Percentage change over one year2015 2016 2017 2018

World Output 3.4 3.2 3.5 3.6Advanced Economies 2.1 1.7 2.0 1.9 United States 2.6 1.6 2.1 2.1

Euro Area 2.0 1.8 1.9 1.7

Japan 1.1 1.0 1.3 0.6 United Kingdom 2.2 1.8 1.7 1.5Emerging Market and Developing Economies 4.3 4.3 4.6 4.8 BRICS Brazil –3.8 –3.6 0.3 1.3 Russia –2.8 –0.2 1.4 1.4 India 8.0 7.1 7.2 7.7 China 6.9 6.7 6.7 6.4 South Africa 1.3 0.3 1.0 1.3 Sub-Saharan Africa 3.4 1.3 2.7 3.5

Source: IMF, WEO July 2017Update

2.2 Global Inflation

After remaining subdued in 2015 and most of 2016, global inflation had started to pick up towards the end of 2016 and beginning of 2017, with several regions of the world experiencing higher retail prices of gasoline and other energy-related products. Inflation in the advanced economies had reached above 2.0 per cent (more than double the average annual inflation rate of 0.8 per cent in 2016) in February 2017. In emerging economies and other parts of the developing world, the surge in headline consumer inflation occurred towards the end of the first quarter of the year. The July 2017 update of the WEO painted a rosier outlook for global inflation which had begun to soften as the impact of commodity price rebound had begun to fade away. According to the update, several emerging economies, namely Brazil and Russia, have been experiencing declining prices as of late.

Chart 1: Crude Oil Prices

2010 2011 2012 2013 2014 2015 2016 2017F0

20

40

60

80

100

120

Crude Oil (US $ per Barrel)

US $ per barrel

Source: IMF, WEO April 2017

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2.3 International Commodity Prices

The IMF’s commodity price index increased by 15 per cent between August 2016 and February 2017, partly due to stronger economic activity in the second half of 2016. Oil prices escalated in the second half of 2016 amid expectations of reinforced future global demand and further to the decision by Organization of the Petroleum Exporting Countries to cut down production. This trajectory thus represents a departure from the downward trend observed since 2015 on concerns about the sluggish resilience of global demand and investors’ loss of appetite for commodity investments (Chart 2).

Natural gas prices, which are linked to oil prices, have also followed suit in Europe, Japan and the US, although in the latter’s case, they were partially held back by mild winter prospects. The ongoing initiatives to catalyse investments in China have resulted in a hike in metal prices during 2016. Agricultural commodities, with the exception of rice, have generally witnessed price increases.

Chart 2: Commodity Prices

2010 2011 2012 2013 2014 2015 2016 2017F0

50

100

150

200

250

Composite Index

Industrial Input Energy Food and BeveragesSource: IMF, WEO April 2017

2.4 Financial Markets Developments

Market sentiment had strengthened in 2016. Global recovery and expectations of inflation, going forward, in several parts of the advanced world, have generated prospects of a less accommodative monetary policy. This tightening stance, coupled with expectations of a fiscal stimulus in advanced economies, have resulted in higher long-term nominal and real interest rates, more so since the outcome of the November 2016 US presidential elections. The US Federal Reserve raised interest rates in December 2016 and March 2017.

Growing consumer confidence and favourable economic outlook have coalesced to give impetus to global equity markets in the advanced world, emerging economies and developing economies, although they remain below their post-crisis peaks reached in 2011. The US dollar had strengthened in real effective terms between August 2016 and March 2017, buoyed in part by widening interest rate differential but weakened in the second quarter of 2017 amid US political concerns.

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3. Economic Developments in SADC

Amid rising but still subdued global commodity prices, macroeconomic conditions in SADC deteriorated sharply in 2016. A combination of external headwinds, domestic supply bottlenecks and adverse climatic conditions undermined the economies of several Member States, accentuating depreciating pressures on local currencies as a result of which inflation surged. Several central banks tightened monetary policy to restrain inflationary pressures and support their currencies. Fiscal deficits and public debt levels generally increased in SADC Member States in 2016.

In terms of economic growth, several resource-intensive countries, namely Angola, Democratic Republic of Congo, Mozambique, Namibia, South Africa and Zimbabwe, slowed down sharply. The negative impact from falling export revenues was compounded by adverse climatic conditions and power shortages in many economies, underlining persistence of weak economic structures and lack of diversification in SADC. Real GDP growth in Angola decelerated significantly from 3.0 per cent in 2015 to a marginal 0.l per cent in 2016 primarily due to the sharp slowdown in oil sector output. Similarly, growth in Democratic Republic of Congo and Mozambique slowed from 6.9 per cent and 6.6 per cent in 2015 to 2.4 per cent and 3.3 per cent, respectively, in 2016. Other Member States, notably, Botswana, Lesotho, Madagascar, Mauritius and Zambia recorded improved growth performances. In Madagascar, growth accelerated from 3.0 per cent to 4.2 per cent in 2016, essentially driven by agriculture, the export-processing zones, the banking and construction services. Zambia’s growth in the last few years has largely been driven by favourable developments in construction, manufacturing, financial intermediation and insurance, mining and agriculture sectors.

With respect to domestic prices, inflation surged in many countries on the back of significantly weakening currencies and supply bottlenecks for essential goods. In Angola, inflation soared threefold from 14 per cent in 2015 to 42 per cent in 2016, reflecting effects of the Kwanza depreciation, following contraction of oil export revenues associated with the decline in world oil prices. In the Democratic Republic of Congo (DRC), inflation soared to 18 per cent in 2016 due to significant depreciation of the Congolese Franc. Currency depreciation, natural disasters, along with political and military instability in Mozambique drove inflation up to 25 per cent in 2016, from nearly 11 per cent in 2015. In the case of Zambia, the acceleration in inflation rate from 10 per cent to 18 per cent between 2015 and 2016 was mainly a result of the pass-through from the sharp depreciation in the exchange rate, high production costs induced by power rationing, increase in electricity tariffs, and the decline in the supply of some food items given adverse weather conditions. Weaker exchange rates also adversely impacted Lesotho, Namibia, South Africa and Swaziland, causing inflation to rise noticeably in 2016. On the other hand, Mauritius and Botswana registered low inflation rates of 1.0 per cent and 2.8 per cent, respectively, benefiting mainly from relatively stable currencies, prudent monetary policies, and subdued international commodity prices.

On the external sector front, the considerable decrease in imports contributed to a narrowing of the current account deficit in most SADC Member States. Nonetheless, current account deficits stood at high levels and well above the SADC benchmark of 9 per cent in several countries, notably Malawi (17.1 per cent), Mozambique (26.7 per cent), Namibia (11.4 per cent) and Seychelles (18.0 per cent). Such external sector imbalances are a key source of external vulnerabilities which require urgent policy intervention. Notwithstanding

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increases in import cover noted for several countries, only Angola, Botswana, and Mauritius, attained the SADC target of 6 months of import cover in terms of foreign reserves.

With regards to public finances, fiscal deficits increased in most SADC economies on the back of lower fiscal revenue and rising expenditure. The public debt also generally rose, but most SADC countries posted debt levels below the target of 60 per cent of GDP. Public debt in Angola rose markedly from 47 per cent in 2015 to 62 per cent in 2016, due to a sharp decline in the collection of oil taxes. The significant deterioration in Mozambique’s public sector debt, from 88 per cent of GDP in 2015 to 131 per cent of GDP in 2016, is partly due to the impact of an acute depreciation of its currency on the external debt portion of total debt.

4. Intra-SADC Trade

Subdued commodity prices impacted negatively on trade between SADC and the rest of the world, while South Africa and Angola remained the two most important contributors in SADC to global trade flows. Total SADC goods exports decreased by 7.9 per cent fromUSD165.4 billion in 2015 to USD152.4 billion in 2016. Exports by South Africa and Angola accounted for the two largest share of these exports, having respective shares of 49 per cent and 18 per cent of total SADC exports in 2016. The individual shares of all other Member States were in the range of 1-7 per cent of total SADC exports. Intra-SADC exports amounted to USD35.7 billion in 2016 and represented 23.4 per cent of total exports of the SADC region, higher than 22.8 per cent in 2015. (See Appendix I for further details)

Total goods imports for the SADC region decreased by 13.6 per cent from USD189.6 billion in 2015 to USD163.9 billion in 2016. South Africa and Angola imports represented a share of 45 per cent and 17 per cent of total SADC imports, respectively, in 2016. The individual shares of all other Member States were in the range of 1- 6 per cent of total SADC imports. Intra-SADC imports amounted to USD30.2 billion, which represented 18.4 per cent of total imports of the SADC region, slightly higher than 17.8 per cent in 2015. Consequently, intra-SADC trade progressed mildly from 20.1 per cent in 2015 to 20.8 per cent in 2016. Compared to Europe and Asia where intra-trade exceeds 60 per cent, the current level of intra-SADC trade remains inadequate, holding back significantly the regional integration process. In this context, the SADC Industrialisation Roadmap 2015-2063 launched in April 2015 comes at an opportune time for Member States to redress the situation.

5. State of Macroeconomic Convergence in 2016

5.1 Primary Convergence Criteria

5.1.1 Inflation (between 3 per cent and 7 per cent by 2018)

The inflation performance of the SADC region worsened in 2016, mainly as a result of weakening of currencies of some Member States, weather-related shocks, and supply bottlenecks for essential goods. The SADC average inflation rate increased from 6.4 per cent in 2015 to 11.1 per cent in 2016. Of the 15 SADC Member States, five, namely, Angola, Malawi, Mozambique Democratic Republic of Congo, and Zambia recorded double-digit inflation, thereby missing the inflation target by far. It should be noted that these countries experienced significant depreciation of their respective currencies.

Weaker exchange rate performance also adversely impacted Lesotho, Namibia, South Africa and Swaziland, causing inflation to rise noticeably in 2016. In contrast, Zimbabwe recorded a

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deflation rate of 1.5 per cent mainly as a result of its dollarized economy and the appreciation of the US dollar in 2016, while Seychelles recorded a deflation rate of 1.0 per cent. Mauritius and Botswana registered inflation rates of 1.0 per cent and 2.8 per cent, respectively, benefiting mainly from their relatively stable currencies, prudent monetary policies and subdued international commodity prices.

Chart 3: Inflation Rate Developments in SADC region

Source: SADC central banks

5.1.2 Budget Balance (3.0 per cent of GDP, within a 1.0 per cent band)

Lower export revenues, resulting from muted commodity prices, and lower GDP growth impacting adversely on government revenue, coupled with mounting government expenditure in several SADC Member States raised the budget deficits above the SADC target. The SADC average budget deficit reached 5.2 per cent of GDP in 2016, compared to an average deficit of 3.3 per cent of GDP in 2015. Countries dependent on Southern African Custom Union (SACU) revenue were unfavourably affected by the falling SACU receipts.

Chart 4: Budget Balance in SADC

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Source: SADC central banks5.1.3 Public Sector Debt (less than 60 per cent of GDP)

Although the SADC average public sector debt remained well below the limit of 60 per cent of GDP at 48.7 per cent in 2016, it was nonetheless higher than the average of 44.2 per cent of GDP in 2015. A majority of Member States, notably Democratic Republic of Congo, Swaziland, Botswana, Tanzania, Madagascar, and Lesotho had public sector debt of less than 40 per cent of GDP. Public debt exceeded the 60 per cent target in several countries including Angola, Mozambique, Mauritius and Seychelles. The significant deterioration in Mozambique’s public sector debt from 88 per cent in 2015 to 131 per cent in 2016 is mainly due to the impact of an acute depreciation of its currency on the external debt portion of its total debt.

Chart 5: Public Debt in SADC


5.2 Secondary Convergence Criteria

5.2.1 Economic Growth (7.0 per cent minimum)

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The SADC region registered sharply lower growth in 2016. Member States continued to be adversely affected by global commodity price developments, climate change and supply bottlenecks. The SADC real GDP growth on average fell from 4.9 per cent in 2014 to 3.5 per cent in 2015, and further to 2.9 per cent in 2016. Moreover, for some Member States like Malawi, Swaziland and Mozambique, severe drought conditions weighed heavily on their important agricultural sector. It can be noted that the current rates of growth in SADC are well below levels required to meet the United Nations Sustainable Development Goals.

Chart 6: Real GDP Growth Rates

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2014 2015 2016


5.2.2 Foreign Reserves (greater than or equal to 6 months of imports)

SADC average import cover remained unchanged at 5.1 months in 2016. Botswana had the highest level of international reserves in SADC in terms of import cover, equivalent to nearly 17 months, followed by Angola with 10.5 months and Mauritius with 9.3 months. The other Member States did not meet the criterion of 6 months of import cover, with some of them even falling short of the IMF benchmark of 3 months of import cover.

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Chart 7: Foreign Reserves (in months of imports)

Source: SADC central banks5.2.3 Current Account Deficit of less than 9 per cent

Most of the SADC Member States met the current account deficit target of less than 9 per cent of GDP. Botswana posted a current account surplus of 20 per cent of GDP . Several Member States - Madagascar, South Africa, Democratic Republic of Congo, Mauritius, Tanzania, Zimbabwe and Zambia posted current account deficits of less than 5 per cent of GDP in 2016. However, Mozambique, Seychelles, Malawi and Namibia recorded current account deficits as percentage of GDP in double digits. The persistence of very high current account deficits in Mozambique in recent years is related to the large investments in natural resource projects financed by foreign direct investments. The SADC average current account deficit decreased from 7.8 per cent of GDP in 2015 to 5.5 per cent in 2016.

Chart 8: Current Account Balance as a percentage of GDP


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5.2 Summary of the Performance against the MEC criteria in 2016

At the end of 2016, no country managed to achieve the complete set of the six macroeconomic convergence (MEC) criteria as shown in the Table 2. Most of the countries had more difficulties in achieving the secondary criteria compared to the primary criteria. In fact, two countries, namely Madagascar and Tanzania met all the primary criteria. With respect to the secondary criteria, only Tanzania met the real GDP criterion and only Angola, Botswana and Mauritius met the 6 months of import cover criterion. The majority of countries managed to achieve the current account balance target.

Table 2: Overview of Convergence Criteria

Inflation range of 3-7%

Fiscal Deficit target of 3% of

GDP with a band of 1%

Public Sector Debt limit of 60% of GDP

Results over 3

criteria

Real GDP growth rate of not less

than 7%

International Reserves of not

less than 6 months of import

cover

Current Account deficit limit of 9%

of GDP

Results over 3

criteria

Angola No No No None No Yes Yes 2

Botswana Yes No Yes 2 No Yes Yes 2

DRC No Yes Yes 2 No No Yes 1

Lesotho Yes No Yes 2 No No Yes 1

Madagascar Yes Yes Yes All No No Yes 1

Malawi No No Yes 1 No No No None

Mauritius Yes Yes No 2 No Yes Yes 2

Mozambique No No No None No No No None

Namibia Yes No Yes 2 No No No None

Seychelles Yes Yes No 2 No No No None

South Africa Yes No Yes 2 No No Yes 1

Swaziland No No Yes 1 No No Yes 1

Tanzania Yes Yes Yes All Yes No Yes 2

Zambia No No Yes 1 No No Yes 1

Zimbabwe Yes No Yes 2 No No Yes 1

Primary Criteria Secondary Criteria


6. Macroeconomic Convergence Challenges and Possible Solutions6.1 Angola

The drastic fall in oil prices since mid-2014 has severely impacted on macroeconomic outcomes of Angola. GDP growth dropped from 4.8 per cent in 2014 to 3.0 per cent in 2015 and further to a marginal 0.1 per cent in 2016. Inflation rose from 7.5 per cent in 2014 to 14.3 per cent in 2015 and 42.0 per cent in 2016. Lower oil prices adversely impacted on export revenue and fiscal revenue which deteriorated public finances. In 2016, Angola registered a budget deficit of 5.9 per cent and public sector debt rose to 61.9 per cent of GDP. Angola did not meet any of the primary macroeconomic convergence criteria. Although the country had foreign exchange reserves of over six months of import cover and a current account deficit of less than 9 per cent of GDP, the external sector conditions remain vulnerable. Angola faced acute foreign exchange liquidity shortages amidst a wedge between the official and unofficial exchange rate persisting despite major policy interventions by the authorities.

To contain the foreign exchange rate liquidity shortages, inflationary pressures and correct macroeconomic imbalances, Banco Nacional de Angola (BNA) tightened monetary policy.

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BNA increased the reserve requirements on domestic currency deposits, from 15 per cent in 2014 to 25 per cent in 2015 and further to 30 per cent in 2016. BNA also increased the rediscount rate from 9.5 per cent in 2014 to 15 per cent in 2015 and further to 20 per cent in 2016. In spite of the significant tightening of monetary policy, inflation shot to decade-high rates as a result of the significant depreciation of the kwanza and supply shortages. Adjusting to limited availability of foreign exchange, imports had decreased by some 40 per cent in 2016. The Government also stepped up efforts to rationalize public expenditure so as to consolidate fiscal balances. It also initiated targeted programmes to protect the poor and diversify the economy into more non-oil sectors. The partial dollarisation of the economy and the loss of US dollar correspondent banking has put additional pressure on foreign exchange liquidity, but these concerns are being addressed by the authorities.

6.2 Botswana

Botswana satisfied two primary macroeconomic convergence criteria. On the external front, Botswana continued to post a current account surplus and large international reserves estimated at 17 months of import cover. However, real GDP growth was quite buoyant at 4.3 per cent in 2016. The decline in mining receipts, coupled with a decline in revenues from the Southern African Custom Union (SACU), has adversely impacted on public finances. Botswana recorded a fiscal deficit of 4.7 per cent of GDP in 2016. Inflation was stable at nearly 3.0 per cent in 2016, reflecting appropriate monetary policy, lower fuel prices and relatively stable Botswana pula.

Economic growth is projected to pick up in the next couple of years, supported by a gradual recovery in the global diamond market, low domestic interest rates, and the impact of the government’s Economic Stimulus Program. The authorities’ plan to return to fiscal surpluses will require both non-mining revenue mobilization as well as moderate growth in spending. In particular, while mining receipts are expected to recover gradually, SACU transfers are expected to remain subdued in the medium term, underscoring the importance of measures to broaden the domestic tax base. Further diversification of the non-diamond sectors and infrastructure projects are also expected to support real GDP growth.

6.3 Democratic Republic of Congo

Democratic Republic of Congo satisfied two of the primary macroeconomic convergence criteria. Being commodity-export-dependent, the economy has been adversely affected by the fall in commodity prices. Economic growth rate fell markedly to 2.4 per cent in 2016 from 6.9 per cent in 2015 and 9.5 per cent in 2014. The main vulnerability remains the low level of international reserves, estimated at 0.9 months of import cover in 2016. Moreover, the central bank had to intervene by reducing its reserves to supply the market with foreign exchange. Reflecting mainly the depreciation of the franc, inflation picked up from 4.2 per cent in 2015 to 18.2 per cent in 2016. Public finances are in order, with a fiscal deficit of 1.2 per cent of GDP and public sector debt as a percentage of GDP at 14.7 per cent in 2016. Democratic Republic of Congo posted a lower current account deficit of 3.9 per cent of GDP.

Going forward, the authorities would like to preserve the hard-won gains and build progress on the current momentum and diversify the economy. In particular, they envisage to:

(i) step up domestic revenue mobilization;(ii) reinforce the de-dollarization process and accumulate more international reserves;(iii) remove bottlenecks to private sector activity;

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(iv) strengthen governance and enhance transparency in the management of natural resources; and

(v) implement the measures identified in the 2014 Financial Sector Assessment Program aimed at promoting both the soundness and inclusiveness of the financial system.

6.4 Lesotho

Lesotho met two of the primary macroeconomic convergence criteria. Real GDP growth in Lesotho remained modest and inflation accelerated in 2016 partly as a result of the adverse spillover effects from the South African economy on which Lesotho is highly dependent. Real GDP growth stood at 2.6 per cent while inflation was at 6.6 per cent in 2016. Although public sector debt as a percentage of GDP remains relatively low at 39.7 per cent, Lesotho faces significant challenges with the fiscal deficit at 8.3 per cent of GDP, owing to falling SACU revenue and growing government expenditure. Government expenditure as a percentage of GDP is relatively high, in particular, with respect to the public sector wage bill. The current account deficit registered in 2016 was 8.7 per cent of GDP while the international reserves dropped from 6.3 months of import cover in 2015 to 5.1 months in 2016.

6.5 Madagascar

Madagascar met all of the primary macroeconomic convergence criteria. Political instability, which had characterised the country for many years, and weather-related shocks have constrained the economy from achieving high growth. Nonetheless, real GDP growth improved to 4.2 per cent in 2016 mainly on account of higher infrastructure investment by government following the implementation of the National Development Plan launched in June 2015. Inflation eased to 6.7 per cent in 2016 from 7.4 per cent in 2015. At the same time the fiscal deficit remained contained at 2.2 per cent of GDP and public sector debt stood at 32.9 per cent of GDP in 2016. The current account deficit was equivalent to 0.3 per cent of GDP while international reserves stood at 4.0 months of import cover in 2016.

Further measures aiming to strengthen stability and sustainability, particularly to improve revenue generation, the quality of fiscal spending, central bank operations, and the functioning of the foreign exchange market would consolidate current macroeconomic gains.

6.6 Malawi

Malawi met one of the primary macroeconomic convergence criteria. Weather-related shocks adversely impacted on Malawi’s economy. Prolonged effects of drought and past policy slippages made it difficult for Malawi to turn around its macroeconomic performance, thereby registering high inflation and low growth. In particular, the prolonged drought in 2016, the worst in Malawi’s history, placed 6.7 million people (40 per cent of the population) at risk of food insecurity. A second consecutive year of drought led to the cumulative 42 per cent decline in maize production since 2015. At the same time, the reduction in hydroelectricity generation and water shortages impacted negatively on agricultural production, manufacturing and trade.

Real GDP growth slowed further to 2.7 per cent while inflation remained high at 21.8 per cent as a result of supply shortages and lagged effects of a weak Malawian kwacha. Public sector debt as a percentage of GDP stood at 52.1 per cent, within the set limit of 60 per cent of GDP. However, the fiscal deficit rose to 4.7 per cent of GDP on account of lower GDP growth and rising government expenditure to meet the needs of food security. The current

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account deficit widened to 17.1 per cent of GDP and international reserves fell to 2.9 months of import cover in 2016.

In order to address these challenging economic conditions, Government is planning to increase capital expenditure as it scales down on the input subsidy programme to focus on infrastructure development. This includes improvements in water supply, electricity generation, road network and airport development that are expected to support GDP growth and help in rebuilding the economy.

6.7 Mauritius

The Mauritian economy is estimated to have grown at a marginally higher rate of 3.6 per cent in 2016, compared to 3.1 per cent in 2015. Except for the construction sector, all the remaining sectors posted positive growth rates. The construction sector registered zero growth in 2016, after contracting for five consecutive years. Inflation declined to its lowest level over nearly three decades at 1.0 per cent in 2016, reflecting low global commodity prices, weak global economic activity coupled with low global inflation and subdued domestic demand conditions. The budget deficit as a percentage of GDP is estimated at 3.5 per cent in 2015-16, compared to 3.2 per cent in 2014. Public sector debt trended upwards in recent years and stood at 64.5 per cent of GDP in 2016, but Government remains committed to fiscal consolidation and prudent debt management. The current account deficit as a ratio to GDP followed a general downward trend, from 5.0 per cent in 2015 to 4.3 per cent in 2016. Favorable terms of trade dynamics resulting from subdued global commodity prices and a buoyant tourism industry, which boosted tourism receipts, helped to reduce the current account deficit. International reserves remained high at 9.3 months of import cover in 2016.

Mauritius satisfied all the primary macroeconomic convergence criteria except that on public sector debt of less than 60 per cent of GDP. However, it may be noted that government securities were issued to mop up part of the excess liquidity in the banking sector, with the amount issued sterilised at the central bank. If those securities were excluded from the measurement of public sector debt, then Mauritius would have met the criterion of public sector debt. Mauritius is committed to fiscal consolidation and has initiated measures to reduce the public sector debt. Following announcements made in Budget 2016-17, the Government made an early repayment of USD120 million of government external debt in January 2017, demonstrating its firm commitment to remain on a prudent fiscal path.

6.8 Mozambique

Mozambique did not meet any of the primary macroeconomic convergence criteria. Real GDP growth fell from 6.6 per cent in 2015 to 3.3 per cent in 2016. Economic conditions deteriorated as a result of a fall in production due to military and political instability and extreme climatic events such as floods in the North and drought in the South of the country, which affected the performance of the agriculture sector, and suspension of foreign aid by partner countries. Inflation rose from 10.6 per cent in 2015 to 25.3 per cent in 2016, driven by currency depreciation, supply shortages and political instability. In 2016 the metical depreciated, in nominal terms, against the US dollar by 55.4 per cent, year-on-year, after depreciating by 36.6 per cent in the previous year. The acceleration of the metical depreciation during 2016 was mainly explained by the shortfall of foreign exchange as a result of the suspension of external aid, reduction of foreign direct investment, decrease of exports revenue and increase in external debt servicing.

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Given the heavy reliance on external debt and the depreciation of the metical, the public sector debt jumped from 88.1 per cent of GDP in 2015 to 130.8 per cent in 2016. The Government tightened its expenditure, reducing the fiscal deficit to 5.7 per cent of GDP in 2016 from 7.5 per cent of GDP a year earlier. The current account deficit narrowed to 26.7 per cent of GDP in 2016, following a larger decrease in imports than the fall in exports while international reserves were equivalent to 3.1 months of import cover.

In order to improve economic conditions, Mozambique needs to restore political and macroeconomic stability and reduce its exposure to volatility of commodity prices by increasing sector diversification. Looking ahead, the recent discoveries of natural gas and mineral coal reserves should help the country in attracting foreign direct investment to finance both fiscal and current account deficits.

6.9 Namibia

Namibia met two of the primary macroeconomic convergence criteria. Real GDP growth fell significantly from 5.3 per cent in 2015 to 1.0 per cent in 2016 on account of a decline in construction and mining activities as well as the fiscal consolidation measures. Spillover effects from South Africa also impacted on the economic outcome of Namibia. Inflation rose from 3.4 per cent in 2015 to 6.7 per cent in 2016 partly as a result of the weakening of the Namibian dollar. The depreciation of Namibian dollar against all major trading currencies can be attributed to, among others, the international price of export commodities, a weak economic growth outlook linked to South Africa’s adverse political events, which eroded business confidence in Namibia, and fears of sovereign credit downgrade in 2016.

The Government pursued tighter fiscal policy, causing fiscal deficit to fall from 7.8 per cent of GDP in 2015 to 6.7 per cent in 2016. Public sector debt remained low at 41.3 per cent of GDP, albeit higher than in 2015. International reserves were equivalent to 3 months of import cover in 2016, while the current account deficit narrowed to 11.4 per cent of GDP in 2016 compared to 13.6 per cent of GDP in 2015.

Namibia has identified specific intervention strategies in order to ensure compliance with the SADC MEC targets for the attainment of macroeconomic stability, fiscal prudency and inclusive and job-creating economic growth. With a view to safeguarding macroeconomic stability and addressing sovereign ratings weaknesses, Namibia would implement a balanced fiscal adjustment path, focusing on higher investment in public infrastructure and tax policy and administration reforms to mobilise domestic resources for development. Structural reforms and industrial development are key strategies for boosting competitiveness and economic diversification of the Namibian economy.

6.10 Seychelles

Seychelles met two of the primary macroeconomic convergence criteria. Benefitting from low international commodity prices, stable exchange rate and prudent monetary policy, Seychelles registered a deflation rate of 1.0 per cent in 2016. Real GDP growth slowed down from 6.5 per cent in 2015 to 5.9 per cent in 2016. The fiscal balance turned from a surplus of 1.2 per cent of GDP in 2015 to a deficit of 0.4 per cent of GDP in 2016. Public sector debt as a percentage of GDP rose from 60.2 per cent in 2015 to 65 per cent in 2016. International reserves stood at

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4.1 months of import cover and the current account deficit was 18.0 per cent of GDP in 2016, slightly lower compared to 2015, despite lower fuel import bill.

Seychelles remains vulnerable to external shock and climate change. Policies directed to build safeguards against these risks would support the country in sustaining current macroeconomic gains.

6.11 South Africa

South Africa met two of the primary macroeconomic convergence criteria. Real GDP growth has been dismal at 0.3 per cent in 2016 to a large extent as a result of supply bottleneck in electricity and other structural impediments in the economy as well as prevailing low international commodity prices. Inflation rose to 6.3 per cent in 2016 amid depreciation of the rand in the first half of 2016. The South African Reserve Bank has been prompt at tightening monetary policy in the wake of upticks in inflation. On the fiscal side, measures have been announced to bring public finances into order. The fiscal deficit turned out to be 4.2 per cent of GDP in 2016. Central government debt stood at 49 per cent of GDP in 2016. The current account deficit improved to 3.3 per cent of GDP and international reserves were equivalent to 5.4 months of import cover in 2016.

To unleash the growth potential of South Africa, it is imperative that the structural rigidities in the economy be addressed, in particular with respect to electricity supply. Despite South Africa’s strong institutions, perception of weak governance and uncertainty of policy directions had undermined the economy and occasionally the rand. Changes at the National Treasury leadership and subsequent rating downgrade by Fitch and Standard & Poor’s rekindled some uncertainties in policy direction and added pressure on the rand that could translate into higher inflation and input cost that would adversely impact on macroeconomic outcomes. Strong actions to reassure markets about policy direction and government’s commitment to fiscal consolidation and reorganization or even privatization of some State-Owned enterprises could rebuild confidence and potentially improve rating downgrades.

In order to dispel concerns related to the fiscal management of the economy, the new Finance Minister has reiterated its commitment to fiscal consolidation and to fiscal plans laid down by his predecessor.

6.12 Swaziland

Swaziland met only one of the primary macroeconomic convergence criteria. Spillover effects from South Africa, a severe drought and falling SACU revenue adversely impacted the Swaziland’s macroeconomic performance in 2016. Real GDP growth slowed down from 1.5 per cent in 2015 to 1.3 per cent in 2016. Rising government expenditure and falling revenue caused fiscal deficit to rise from 5.7 per cent of GDP in 2015 to 12.3 percent of GDP in 2016. The parity between the Swazi lilangeni and the rand meant that the downward pressure on the rand in the first half of 2016 was mirrored in the Swazi lilangeni. Inflation rate rose to 7.8 per cent in 2016 from 5.0 per cent in 2015. Nonetheless public sector debt remains low at 19.0 per cent of GDP in 2016. International reserves amounted to 3.6 months of import cover in 2016 compared to 3.8 months in 2015.

The key challenge in Swaziland is to restore order in public finances by expanding the tax base as well as finding new sources of revenue by diversifying the economy and rationalizing public expenditure.

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6.13 Tanzania

Tanzania met all the primary macroeconomic convergence criteria. Tanzania registered a real GDP growth rate of 7 per cent in 2016 on account of massive investment in infrastructure and stability of electricity supply. Improvement in tax revenue collections and higher non-tax revenue, together with lower recurrent expenditure, kept the fiscal balance under check in spite of higher capital outlays in 2016. The fiscal deficit was at 3.6 per cent of GDP in 2016,while public sector debt stood at 29.9 per cent of GDP. Prudent monetary policy, fiscal consolidation, stable Tanzanian shilling and subdued food and energy prices resulted in moderate inflation rate of 5.2 per cent in 2016. The current account deficit narrowed to 4.7 per cent of GDP on account of lower import of goods and services since exports remained relatively flat. International reserves were equivalent to 4.6 months of import cover.

Tanzania’s macroeconomic management has been commendable, supported by implementation of policies under the Second Five Year Development Plan (FYDP II). The Plan focuses on, among others, increasing supply of reliable power; rehabilitation and construction of the railway lines, ports, airports, and utility infrastructures; increase in foreign direct investment in construction of liquefied natural gas plants; recoveries of minerals including coal, iron, nickel; and setting up of new special economic zones.

6.14 Zambia

Zambia met only one of the primary macroeconomic convergence criteria. Low commodity prices and electricity supply bottleneck impacted adversely on the economy, translating into a moderate real GDP growth of 3.6 per cent in 2016. The volatility of the Zambian kwacha against major trading currencies and subsequent weakness, high production cost, food and electricity supply bottleneck caused inflation to rise to 18.2 per cent in 2016 from 10.1 per cent in 2015. The current account deficit deteriorated to 4.5 per cent of GDP while international reserves fell to 3.2 months of import cover in 2016. The fiscal deficit declined from 9.3 per cent in 2015 to 5.7 per cent in 2016 while the public sector debt as a percentage of GDP was contained at 52.7 per cent. Government is undertaking various policy initiatives such as an economic diversification strategy and promotion of investment in the Multi Facility Economic Zones, to steer growth in exports in non-traditional sectors and create jobs. In addition, policies aimed at maintaining macroeconomic stability and the allocation of resources towards infrastructure development is expected to sustain the growth momentum.

6.15 Zimbabwe

Zimbabwe met two of the primary macroeconomic convergence criteria. Real GDP grew by 0.7 per cent in 2016 almost half of the pace registered in 2015. The deceleration in economic activity was largely underpinned by persistent liquidity constraints, declining international commodity prices, infrastructural bottlenecks, subdued foreign direct investment inflows and the negative repercussions of erratic rains on agricultural output. Zimbabwe recorded a deflation rate of 1.5 per cent in 2016 as a consequence of dollarization of the economy and strengthening of the US dollar. The fiscal deficit rose to 8.7 per cent of GDP and public sector debt was equivalent to 60.0 per cent of GDP in 2016. The current account deficit stood at 3.9 per cent of GDP and international reserves were meagre at 0.8 month of import cover in 2016.

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A number of reform initiatives started by Government should help build levers to address macroeconomic imbalances. However, Zimbabwe remains vulnerable with the prevailing low level of international reserves amidst its dollarised economy.

7. SADC Peer Review Process

At the SADC Macroeconomic Convergence and Peer Review Panel meeting in Ezulwini, Swaziland, in July 2017, the reports of three peer-reviewed countries, namely Democratic Republic of Congo, Namibia and Zimbabwe were presented to the Panel of SADC Finance Ministers and Central Bank Governors. The Panel was also apprised of updates in implementation of policy recommendations made by countries that were peer-reviewed in 2015-2016 namely Angola, Swaziland and Tanzania.

7.1 An update on Implementation of Policy Recommendations for countries that were peer-reviewed in 2015-2016

Three countries – Angola, Swaziland, and Tanzania – have reaffirmed their commitment towards implementation of the recommendations of the review teams in 2016. Overall, due to the relative lack of diversification of their underlying economic structures, the three economies experienced hurdles in absorbing commodity price shocks in recent years with attendant strains on their fiscal and external positions. The issue of lack of growth inclusiveness was also a recurring source of concern.

7.1.1 Swaziland

Adverse economic conditions in South Africa and episodes of drought have combined to undermine fiscal revenues and external positions, in addition to constraining GDP growth rates. Negative supply shocks have also rekindled inflationary pressures. The authorities in Swaziland have made progress during 2016 in investing in infrastructure projects such as dams to mitigate the effects of droughts. Diversification efforts have accelerated and legislation has been passed to encourage private sector participation in infrastructure projects through PPPs. The tax base has been widened to further empower the Swaziland Revenue Authority. Regular Debt Sustainability Analysis are now conducted to ensure that debt absorptive capacity is maintained.

7.1.2 Angola

The economy has been affected by subdued oil prices due to weak demand for oil whereas irregular rain patterns have also affected agriculture. Despite ongoing fiscal consolidation efforts, growth in 2016 has been compromised by the decline in oil prices. The depreciation of the kwanza has flared up inflation during the year. Public debt has been on the rise, despite staying within SADC targets.

The authorities have made efforts at establishing a national development plan with a number of priority projects, including agricultural reforms. Several initiatives to improve revenue mobilization through an overhaul of tax legislation and modernization of the tax system are under way. Recruitment in civil service has been frozen. The authorities have also made

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progress in accelerating business facilitation and in encouraging foreign investments in new sectors.

7.1.3 Tanzania

The Tanzanian economy remains predominantly agriculture-based, despite growing importance of ICT and construction. Growth has been impressive in recent years but has been exposed to headwinds in the form of commodity price declines and adverse weather-related conditions.

Attempts by the authorities to foster industrialization and enhancing the economy’s resilience against weather hazards (e.g., investment in irrigation-related infrastructures) are underway. There are ongoing efforts to enhance fiscal revenues, coupled with measures designed to cut unnecessary expenditures. The authorities also aim to improve the business facilitation environment, including by reviewing the investment policy framework.

7.2 Countries Peer-Reviewed in 2016-17

During 2016-17 three SADC Member States were peer reviewed, namely, Democratic Republic of Congo, Swaziland and Zimbabwe. The following sections summarize findings and recommendations made by the Review Teams.

7.2.1 Democratic Republic of Congo (reviewed by Mauritius)

Key findings:a. Economic growth has been buoyant between 2012 and 2015 but receded substantially in

2016, on account of a major drop in commodity prices as the economy is predominantly driven by mining and services sectors.

b. Low and stable inflation has been recorded from 2012 to 2015, but surged substantially in 2016 due to a weaker exchange rate.

c. Improved fiscal management resulted in lower budget deficit and public debt ratios.

The review team has included the following recommendations for the authorities’ consideration:

a. Foster economy-wide and social inclusion;b. Enhance revenue mobilisation;c. Promote financial inclusion;d. Ease monetary policy; ande. Accelerate the de-dollarization process.

7.2.2 Namibia (reviewed by Malawi)

Key findings:a. Average annual real GDP growth rate exceeded 5 per cent during the past five years to

2015, driven by construction, government spending, and wholesale and retail sectors.b. Inflation had been moderate until 2015 but rose markedly during 2016 owing mainly to

administered prices, transport and non-food beverages.

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c. The fiscal deficit rose much faster than global averages signalling the need for enhanced fiscal consolidation to contain expenditure in the medium term and put public debt on a declining path.


a. Fiscal sustainabilityb. Target international reserves to provide sufficient buffer in case of future shocksc. Maintain the monetary policy rate at par with the SARB’s rate or with limited spread.

7.2.1 Zimbabwe (reviewed by Tanzania)

Key findings:a. The economy rebounded following adoption of the multiple currency system, cash

budgeting and removal of exchange controls.b. Low and negative inflation has been observed; it is expected to turn positive and

broadly subdued in 2017.c. Owing to a cash budgeting system, the country has recorded low budget deficits.d. Government debt has been increasing overtime but remained within the 60 per cent

convergence level. A substantial portion of the external debt (77.3 per cent) is arrears, making it difficult for the country to borrow offshore.


a. To address the arrears issue the government should expedite the re-engagement with creditors to clear the arrears;

b. In order to address the liquidity issue there is need to promote the use of plastic money in the economy and to maintain dollar and bond note parity;

c. There is a need for continued strong and proactive supervision to counteract any negative effects likely to emerge from the liquidity constraints and high credit risks; and

d. Several measures to create fiscal space and debt distress.

8. Sovereign Debt Ratings of SADC Countries

The following section presents the ratings of some SADC countries’ public debt by major rating agencies.

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Table 3: Rating of some SADC countries’ debts

Country

Rating AgenciesS&P Moody's Fitch

Note Perspectives Note Perspective

s Note Perspectives

Angola B- Stable B1 Negative B NegativeBotswana A- Negative A2 StableDem Republic of Congo C Stable Caa2 Stable

Lesotho B+ StableMauritius Baa1 StableMozambique SD N/A Caa3 Negative CC N/ANamibia Ba1 Negative BBB- NegativeSeychelles BB- StableSouth Africa BB+ Negative Baa3 Negative BB+ StableZambia B Negative B3 Negative B NegativeSD: Selectively Defaulted on some obligations.N/A: not availableSources: Bloomberg, Reuters & www.tradingeconomics.com

8.1 Angola

Moody's Investors Service has affirmed the B1 long-term issuer and senior unsecured ratings of the Government of Angola and maintained the negative outlook. The short-term issuer ratings remain unchanged at Not Prime. All country ceilings remain unchanged. The long-term local-currency bond and deposit ceilings remain at Ba1 while the long-term foreign-currency bond and deposit ceilings remain unchanged at Ba3 and B2, respectively. Angola's short-term foreign-currency bond ceiling also remains unchanged at Not Prime.

According to Standard & Poor’s, Angola’s downgrade to B- was mainly based on rising debt service cost and weak economic prospects. The stable outlook reflects the view that current account deficit will remain high but can be financed without dragging on Angola’s foreign exchange reserves.

8.2 Botswana

Moody's Investors Service affirmed Botswana's A2 long-term issuer and senior unsecured debt ratings, with stable outlook. The affirmation reflects Moody's view that despite pressure on some of the country's credit metrics, the challenges that the current external environment poses for the country are appropriately captured by the A2 rating. Botswana continued exceptional fiscal resilience, supported by government fiscal reserves (subset of Pula fund) at almost 25 per cent of GDP, low public debt and Moody's expectation that the country's track record of prudent fiscal policy over the medium term will continue, thus maintaining the stable outlook.

Standard & Poor's Ratings Services revised its outlook on Botswana to negative from stable and affirmed its 'A-/A-2' long- and short-term foreign and local currency sovereign credit ratings.

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Moody's Investors Service downgraded the long-term local and foreign currency issuer ratings of the government of the Democratic Republic of the Congo (DRC) to Caa2 from B3 and maintained the negative outlook.

The key drivers behind the two notch rating downgrade to Caa2 from B3 and the change in ceilings are: Moody's expectation that the DRC government will imminently default on its Eurobonds

and could remain in default for a protracted period of time; Increasingly acute liquidity pressures that could ultimately lead to sizeable losses for

private sector creditors in the coming years.

The negative outlook reflects the risks that private sector creditors could incur greater losses than are currently anticipated by Moody's Caa2 rating.

8.4 Lesotho

Fitch's credit rating for Lesotho was set at B+ with a stable outlook. Fitch has confirmed Lesotho’s long-term foreign currency (LTFC) and local currency Issuer Default Ratings at ‘B+’ respectively with stable outlook. However, the short term foreign currency rating was set at ‘B’.

Fitch Ratings also highlighted the country’s several strengths as well as weaknesses. Improved political stability, infrastructure investment, GDP growth and local currency peg to South African rand were some of the strengths that supported Lesotho’s rating. However, continuous dependence on volatile SACU revenues, and weakening remittances from South Africa posed certain risks to the economy.

8.5 Mauritius

Moody's credit rating for Mauritius was last set at Baa1 with a stable outlook. Mauritius' resilient economy and ample liquidity support its Baa1 rating. The Baa1 rating is supported by the high resiliency of the Mauritian economy which is reflected in Moody’s assessment of a `Moderate' economic strength, `Very High (-)' institutional strength, and `Moderate' fiscal strength.

The two main credit constraints stem from a relatively high government debt ratio of over 60 per cent of GDP, and risks posed by its financial sector to the balance of payments and government balance sheet. Downward pressure on Mauritius' Baa1 rating with a stable outlook would follow in case of any deteriorating trend in debt metrics or increased external vulnerabilities. On the other hand, a significant reduction in these vulnerabilities would support its ratings.

8.6 Mozambique

S&P Global Ratings has lowered its long-term ratings on Mozambique to Selective Default in January 2017, after the country missed an interest payment of USD59.8 million on its sovereign bond expected to mature in 2023. Moody's credit rating for Mozambique was last set at Caa3 with negative outlook. Fitch's credit rating for Mozambique was last reported at CC with no indication on the outlook.

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8.7 Namibia

Moody's Investors Service ("Moody's") has downgraded Namibia's long-term senior unsecured bond and issuer ratings to Ba1 from Baa3 and maintained the negative outlook. Namibia's long-term local currency bond and bank deposit ceilings were lowered to A2 from A1. The long-term foreign currency bank deposit ceiling was revised to Ba2 from Baa3, and the long-term foreign-currency bond ceiling to Baa2 from A3. The key factors for downgrading the rating are: Erosion of Namibia's fiscal strength due to sizeable fiscal imbalances and an increasing

debt burden; Limited institutional capacity to manage shocks and address long-term structural fiscal

rigidities; and Risk of renewed government liquidity pressures in the coming years

Despite the weakening of its creditworthiness, the country's key credit metrics in the economic, fiscal and external spheres are currently well aligned with those of Ba1-rated peers. The rating is also supported by the country's strong growth prospects in the coming years.

8.8 Seychelles

In its latest assessment, Fitch ratings agency noted a BB- for Seychelles long-term sovereign debt issues in foreign currency, with a stable outlook. Local currency debt was also upgraded, from ‘BB-’ to ‘BB’. The Short-Term Foreign and Local-Currency IDRs have been affirmed at 'B' and the Country Ceiling at ‘BB'. Fitch Ratings indicates the island nation’s economic stability and increased resilience amid global economic uncertainty. Policies adopted by the authorities appear to address vulnerabilities of the small economy that relies heavily on imports and tourism as the mainstay of the economy.

8.9 South Africa

Moody's Investors Service downgraded the long-term issuer and senior unsecured ratings of the Government of South Africa to Baa3 from Baa2 as well as the senior unsecured Shelf and MTN program ratings to (P) Baa3 from (P)Baa2, and assigned a negative outlook.The key drivers for the downgrade are:

The weakening of South Africa's institutional framework; Reduced growth prospects reflecting policy uncertainty and slower progress with

structural reforms; and The continued erosion of fiscal strength due to rising public debt and contingent

liabilities.

S&P Global Ratings lowered the long-term foreign currency sovereign credit rating on of South Africa to 'BB+' from 'BBB-' and the long-term local currency rating to 'BBB-' from 'BBB' in April 2017. The negative outlook reflects elevated political risks this year and also that policy shifts are likely, which could undermine fiscal and economic growth outcomes more than what has been projected.

Fitch’s downgrade to BB+ from BB- on both foreign and local currency debt follows that of S&P Global Ratings which also cut South African foreign debt to “junk” status.

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8.10 Zambia

Fitch Ratings has affirmed Zambia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B' with a negative outlook. The issue ratings on Zambia's long-term senior unsecured foreign- and local-currency bonds and short-term senior unsecured local-currency securities are also affirmed at 'B'. The Country Ceiling is affirmed at 'B+' and the Short-Term Foreign and Local Currency IDRs at 'B'.

The negative outlook by S&P reflects the downside risk that fiscal financing pressures will increase further in the face of high debt service over 2017 and weaker economic growth momentum.

9. Recent Exchange Rate Developments in SADC Member States

Except for a few countries (DRC, Mozambique , Madagascar and Malawi), most of the SADC Member States’ currencies have depicted relative stability or appreciation against the US dollar during the first half of 2017, compared to their December 2015 levels. A SADC average exchange rate index, computed with base December 2015, increased from 100 in December 2015 to 105.4 in December 2016 (reflecting depreciation compared to December 2015) before decreasing to 103.5 in May 2017 ( reflecting an appreciation compared to December 2016). An important factor in deteriorating inflation performance in 2016 has been currency weakness. In 2017, the relative stability of exchange rate would contribute in reversing the outcome and thus cause inflation to ease.

Chart 9 : SADC Member States’ Exchange Rate Index (Base December 2015)

80

90

100

110

120

130

140

150

160

Angola Botswana DRC Lesotho Madagascar

Malawi Mauritius Mozambique Namibia Seychelles

South Africa Swaziland Tanzania Zambia SADC Average

Source: Bank of Mauritius Staff computations

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10. Outlook for 201710.1 Angola

Angola continues to face economic challenges in 2017 amidst subdued oil prices on international markets. The Angolan economy is projected to grow by 2.6 per cent in 2017, higher than the rate of 0.1 per cent estimated for 2016. Oil revenue is projected to increase by 5.7 per cent in 2017 on account of measures taken by the Government of Angola to mitigate the effects falling international oil prices. The average oil price was adjusted to USD46 per barrel, which created a sizable fiscal deficit of 5.9 per cent of GDP. The Angolan Government is studying the implementation of a set of measures to increase the diversification of the Angolan economy. The CPI inflation is expected to rise by 15.8 per cent in 2017, much lower than the rate of 42 per cent in 2016. Monetary policy was restrictive in 2016 and is likely to maintain this trend during 2017 to contain inflationary pressures. Overall, better coordination between fiscal and monetary policies, combined with a higher dollar liquidity, is expected to address macroeconomic imbalances noted in 2016.

10.2 Botswana

The economy of Botswana is forecast to expand by 4.2 per cent in 2017. Despite being positive for both 2016 and 2017, the growth rate remains below the SADC growth target of not less than 7 per cent. Government launched the Economic Stimulus Package in 2016 to boost economic growth through increased government spending in selected sectors, diversify the economic base, and accelerate employment creation.

Inflation rose to 3.5 per cent in May 2017 and was within the central bank’s range of 3 to 6 per cent. The outlook for inflation remains positive over the medium term, on account of low domestic demand and continued stability in global oil prices.


The difficult external environment, coupled with uncertainties related to the domestic environment, continued to weigh on the economy of the Democratic Republic of Congo in 2016. Real GDP growth is nonetheless projected at 3.1 per cent for 2017. The Congolese franc, however, is still subject to significant depreciation pressures, exacerbating inflation risks in the economy.

10.4 Lesotho

The economy of Lesotho is forecast to grow by 2.2 per cent in 2017, compared to 2.6 per cent in 2015. Private investment as a percentage of GDP is expected to rise significantly from 3.8 per cent in 2016 to 16.0 per cent in 2017, thereby giving an impetus to economic activity. The priority policy for Lesotho is to broaden fiscal revenue sources and contain mounting government expenditure.

10.5 Madagascar

The economy of Madagascar is projected to grow by 4.5 per cent in 2017. Domestic investment as a percentage of GDP is estimated at 18.6 per cent. Inflation is forecast to pick up from 6.7 per cent in 2016 to 7.3 per cent in 2017. The current account balance as

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percentage of GDP is projected at -3.7 per cent, a marked deterioration from -0.3 in 2016. The import cover is expected to be 3.4 months in 2017.

10.6 Malawi

The economy is projected to rebound and grow by 6.1 per cent in 2017, on the assumption of normal harvesting season and a more stable macroeconomic environment. After facing difficulties in 2016 following the drought that affected the country, the utilities sector is expected to grow by 2.2 per cent in 2017 on account of modernisation of the sector’s infrastructure and increase in capacity. The transport and road infrastructure sector is expected to expand at a relatively higher rate of 6.3 per cent in 2017.

The downward trend in inflation, observed from August 2016 to the first quarter of 2017, is expected to persist somewhat in 2017 on account of better harvest and relative stability of both the exchange rate and international oil prices. Inflation is projected to decline to 14.1 per cent in 2017.

The current account deficit is expected to moderate to 11.4 per cent of GDP in 2017 in anticipation of bumper crop harvest. The import cover of the international reserves is expected to slightly rise to 3.1 months in 2017 from 2.9 months in 2016.

10.7 Mauritius

After performing relatively well in 2016 with a growth of 3.6 per cent in a context of subdued global economic environment and to some extent the adverse effects of the Brexit on the export sector, domestic economic activity in Mauritius is expected to improve further in 2017. The medium-term economic outlook remains favorable, with the implementation of major public sector projects, strong construction activity and a thriving tourism sector. The economy is projected to grow by 3.7 per cent in 2017 by Statistics Mauritius. The inflation rate for 2017 is forecast to rise to around 4.0 per cent, reflecting mainly higher prices of vegetables, petrol and increases in excise taxes on alcohol and tobacco following the 2017/18 Budget.

10.8 Mozambique

The suspension of foreign aid to Mozambique will continue to have an impact over the next few quarters of 2017 and economic growth is expected to be modest. The economy is nonetheless expected to register a growth of 5.5 per cent, higher than the 3.3 per cent registered in 2016. In general, the return to the political stability, the increase in export revenues as a result of planned investments in the natural resources sector, and the rise in foreign direct investments could increase the growth rate closer to the benchmark set by SADC.

Inflationary pressures are expected to subside in 2017 to around 14.0 per cent in 2017, nonethless remaining in double digits. The tight monetary policy stance and the reduction in exchange rate pressures largely explain recent decline in inflation.

The current account deficit as a percentage of GDP is projected to rise to 34.5 per cent, relative to 26.7 per cent in 2016. The import cover is expected to remain stable at 3 months in 2017. On the fiscal front, the budget deficit as a percentage of GDP could rise to 6.1 per cent, from to 5.7 per cent in 2016.

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10.9 Namibia

Economic growth in Namibia is projected to improve from 1.0 per cent in 2016 to 2.9 per cent in 2017 and further to 3.7 per cent in 2018, mainly driven by growth in the tertiary sector and continued robust growth in the tourism subsector. Growth in secondary industries is expected to remain subdued, as the construction industry adjusts to the normalization of the spike in activity in the sector. On the demand side, growth is expected to be driven by higher exports, recent major investment projects and improvement in domestic demand conditions. Future growth will be driven by the projected recovery in primary industries – in particular higher output in the mining sector, recovery in the agricultural subsector as the drought condition subsides. Inflation is anticipated to be contained in 2017 as food prices normalise. Expected recovery in commodity prices in 2017 should help Namibia improve its macroeconimic performance. The Governement’s tightening of fiscal policy would continue to contain the fiscal deficit but might adversely impact on economic growth.

10.10Seychelles

Growth outlook in Seychelles for 2017 remains positive on account of foreign investments and the growing tourism sector. Inflationary pressures are expected to be relatively subdued for the first quarter of 2017. However, the upward trend in international fuel prices along with fiscal measures on taxes, income and credit announced for 2017 are expected to raise aggregate demand and could exert upward pressures on inflation in the medium term. International reserves are expected to remain at an adequate level, anchored by strong macroeconomic policies. Downside risks to the outlook stem largely from the external sector.

Although stable, the Seychelles rupee depreciated gradually since 2016. This trend could continue, should there be a rise in demand for foreign exchange. In the light of the foreseeable domestic and external developments, the central bank has opted to maintain the tight monetary policy stance for the first quarter of 2017.

10.11South Africa

The South African economy is expected to grow by 1.0 per cent in 2017 supported by favourable weather conditions, stronger global demand and recovering business and consumer confidence. Inflation is projected to hover at 5.7 per cent in 2017. Given expectations of a bumper maize crop in 2017, domestic maize prices have receded, and should help lower food inflation. The current account deficit as a percentage of GDP is estimated to decline slightly from 3.3 per cent in 2016 to 3.1 per cent in 2017.

10.12Swaziland

Economic growth is projected to decelerate further to 1.0 percent in 2017 from the estimate of 1.3 percent in 2016, against the backdrop of weak activity in South Africa and ongoing fiscal challenges. Slower growth is mainly expected in wholesale and retail and financial services. However, growth is projected to strengthen in the medium term outlook as a result of the recovery of the agriculture sector and positive prospects for the construction sector with the implementation of infrastructural projects.

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Inflationary pressures are expected to remain elevated in the short-term with the effect of the drought on food prices lasting until mid-2017. Overall, consumer price inflation is projected to decelerate in 2017, averaging 7.4 per cent, due to high base effects of 2016 and an ease in food prices later in the year backed by better rainfall. However, anticipated adjustments in administered prices such as electricity, water and bread present an upside risk to inflation. Government fiscal position is expected to remain relatively the same unless there is fiscal consolidation in the medium term.

10.13Tanzania

The macroeconomic outlook for Tanzania remains favourable. Real GDP growth is projected to remain at around 7 per cent in 2017 and beyond. The economy will be supported by Government initiatives to promote further infrastructure investments in energy, transportation and industrialisation under the Five FYDP II, 2016/17-2020/21. Other factors bolstering growth prospects of Tanzania are better growth outlook for most advanced countries, contained global oil prices, and continued investments in exploitation of natural gas in Tanzania.

Inflation is projected to remain around the medium-term target of 5 per cent, supported by moderation in energy costs on account of increased use of natural gas for power generation, prudent fiscal and monetary policies, subdued global oil prices, and continued stability of the value of Tanzania shilling against the US dollar. Upward risks remain on account of weather dependent food supply and potential rise in oil prices.

The current account deficit is projected to improve further, driven largely by sustained progress in manufactured exports, receipts from tourism and transportation services, and low import bill. The declining import bill and strong export performance have helped to ease pressure on foreign reserves and enhanced stability of the currency. These macroeconomic gains provide the prerequisites for improved performance in the medium term.

10.14Zambia

The outlook for the Zambian economy in 2017 remains favourable. Economic growth prospects are underpinned by expectations of better performance of the agricultural sector due to favourable weather conditions, increased energy supply and mineral production. A further rise in productivity in some economic sectors will also support growth. Government’s fiscal consolidation measures are expected to support the realisation of the growth forecast. The improving external sector will also provide a conducive environment to support growth and general macroeconomic stability.

Economic growth is expected to improve to 4.3 per cent in 2017, from 3.6 per cent in 2016. Zambia’s potential for achieving and sustaining high inclusive growth depends on the continuous implementation of sound economic policies, on reforms to boost productivity across sectors and improvement of the country’s international competitiveness.

Inflation is expected to decline from 18.2 per cent in 2016 to single digit levels in 2017, with inflation forecast at around 7.0 per cent. The tight monetary policy stance of the central bank has assisted in curtailing domestic demand, as credit to households and the private sector contracted.

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10.15Zimbabwe

Economic growth in Zimbabwe is expected to rise to 3.7 per cent in 2017, from 0.7 per cent in 2016, on account of improvement in weather conditions which is expected to boost the primary sector, recovery of some commodity prices, and the ease of doing business reforms, among other factors. However, reliance on SACU receipts remains a threat to the economy and public finances. In order to address the deep macroeconomic challenges holding back the economy, the Government is undertaking structural reforms to address impediments to investment, foster sustainable private sector-led growth, and achieve development goals such as poverty reduction.

After remaining in negative territory during 2016 reflecting the persistence of underlying deflationary pressures in the economy, inflation picked up to 0.3 per cent in June 2017. This upward trend is expected to continue in 2017 underpinned by the anticipated increases in international oil prices, appreciation of the South African rand against the US dollar as well as pass-through effects of the surge in South African inflation.

11. Medium-term Outlook for SADC

In the short to medium term, the macroeconomic performance of the SADC region is expected to improve somewhat against a backdrop of stabilizing global commodity prices in the rest of 2017 and in 2018, better weather conditions that would support agricultural output, implementation of infrastructure development programmes as well as more optimal exploitation of natural resource deposits. However, the overall growth outlook is expected to remain subdued, in particular for commodity exporters, in view of large lingering imbalances and muted recovery in global commodity prices. The SADC average real GDP growth is expected to improve from 2.7 per cent in 2016 to over 3.5 per cent in 2017 and 2018.

On the inflation front, relative stability in currency evolution in 2017 for most SADC countries and improving climatic conditions are expected to improve the inflation performance of the region in the medium-term. Moreover, policy measures adopted in 2016 to restore macroeconomic balance in crisis-hit countries are expected to bring down sharply price pressures in these countries. However, Angola, DRC, Malawi and Mozambique could still record double-digits inflation rates. The SADC inflation average that reached a high of 11 per cent in 2016 is expected to ease to less than 10 per cent in 2017 and 2018.

Public finances in SADC are also projected to improve, though fiscal deficits would remain high. With a rebound in real GDP growth in several SADC Member States as well as easing of inflation and implementation of more prudent fiscal policies, the SADC average fiscal deficit is expected to ease from 5.2 per cent in 2016 to closer to 4 per cent in the medium-term.

The macroeconomic outlook in SADC is subject to uncertainties and downside risks stemming both from the external environment and domestic factors. Faster-than-expected normalization of monetary policy and a sharp appreciation of the U.S. dollar could hurt the external and fiscal positions of several countries. Political disturbances and security issues in several Member States would continue to pose significant risks to their macroeconomic performances.

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12. Conclusion

Macroeconomic conditions in several SADC Member States have deteriorated noticeably in 2016, against the backdrop of the muted global commodity prices, adverse climatic conditions and structural rigidities. As a result, the overall performance with respect to the SADC Macroeconomic Convergence targets has been lacklustre. Some Member States even recorded acute depreciation of their currencies, thereby causing inflation to rise briskly. Such adverse developments point to inherent weaknesses in the economic structures of several countries, which are highly dependent on commodity exports. SADC Member States have responded with policy actions, including tightening monetary policy, to mitigate the macroeconomic imbalances.

Overall growth prospects in SADC in 2017 are projected to improve amid the rising global growth momentum, partial recovery of commodity prices and lagged impact of policy measures undertaken in recent years. However, Member States should intensify efforts aimed at consolidating and diversifying their economic structures with a view to achieving and sustaining high growth rates, critical for attaining the United Nations Sustainable Development Goals. A robust and effective industrialisation strategy, as advocated by SADC Summit, is key for expanding manufacturing capabilities of SADC member countries in order to increase value addition with emphasis on developing key infrastructure and technology.

SADC countries should step up efforts aimed at strengthening their tax collection and administration systems to raise additional resources needed for investment in key economic and social infrastructure and human capital, to create jobs for its growing working-age population. The mining sectors could make a fairer contribution to government revenue, in line with their importance in the economy. Policies aimed at improving the efficiency of government expenditure, financial inclusion and financial sector development could contribute to more resilient and inclusive growth, going forward.

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Appendix I: Intra-SADC Trade Statistics, 2013-2016

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Documents

· Web viewSADC Member States include the following countries: Angola, Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia