Swaziland to Track Possible South African Rate Rise

Swaziland will probably track any interest-rate increase this year in South Africa, even as the government looks to slash spending and economic growth slows, central bank Governor Martin Dlamini said.

The kingdom, whose currency is pegged to the South African rand, tracks its larger neighbor’s interest-rate decisions, making its own announcement the next day. It reduced its benchmark rate by 50 basis points, as South Africa did, to 5.5 percent in November.

Africa’s last absolute monarchy is facing an economic crisis after a slump in receipts from a regional customs union that makes up 60 percent of government revenue. The state has said it will slash recurrent spending by 20 percent and fire thousands of employees. The International Monetary Fund estimates economic growth will slow to 0.5 percent this year, while Dlamini forecasts growth of 1 percent and inflation to accelerate to as much as 7 percent from 4.5 percent in 2010.

“I think interest rates have bottomed out and given the threat that we have just indicated of inflation, a time will come when our hand will be forced to look at increasing our interest rates,” Dlamini said in an interview on Feb. 14 in the capital, Mbabane. “We will have to be very cautious, particularly here in Swaziland given our low rates of growth.”

Swaziland’s benchmark rate will probably rise in the second half of the year, he said.

Bottomed Out

The central bank of South Africa, the continent’s largest economy, last month left its benchmark interest rate at a 30- year low of 5.5 percent and said there wouldn’t be any further rate cuts in the current cycle after three reductions in 2010. The rand has weakened 8 percent against the dollar so far this year, reversing last year’s gains and adding to increases in fuel prices that resulted from higher oil prices. Inflation is forecast to accelerate more than previously expected, South African Reserve Bank Governor Gill Marcus said on Feb. 4.

“We maintain that rates have bottomed and that the SARB is likely to start hiking rates toward the latter half of 2011,” Adenaan Hardien, chief economist at Cape Town-based Cadiz Asset Management, said in an e-mailed statement yesterday.

Swaziland plans to increase debt to help it through a fiscal crisis, brought on by a 62 percent drop in income last year from the Southern African Customs Union, Finance Minister Majozi Sithole said on Feb. 14. SACU shares customs revenue between South Africa, Namibia, Lesotho, Botswana and Swaziland. Majozi will release the country’s 2011-12 budget tomorrow.

Bond Auction

It will test market appetite in March after a 7-year bond auction last month sold only one-fifth of the 750 million emalangeni ($103 million) offered. The government will sell 3- year bonds with a yield above 8 percent, Dlamini said.

“We are still testing the market, but we are going to go for a less ambitious amount and obviously we’re going to do some research about the pricing of the bond,” Dlamini said. “Obviously there is a premium if you invest in Swaziland in a bond of that nature and that is obviously where more research has to be done because we do not want to make the servicing of that bond very expensive for the government.”

Investors would buy Swazi bonds only if it offers yields of about 14 percent, according to John Cairns, a strategist with FirstRand Ltd.’s Rand Merchant Bank.

“The private sector will not spend their money at the yields that they are prepared to give,” Cairns said in an interview in Johannesburg. “Clearly people are very skeptical about getting involved.”

To contact the reporters on this story: Franz Wild in Johannesburg at fwild@bloomberg.net; Vuyisile Hlathswayo in Mbabane at vshlathswayo@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.