Africa-Press – Eswatini. Risks in the non-bank financial institutions (NBFI) — comprising of building societies, pensions, insurance and capital markets — eased but remain elevated in 2023.
This is according to the Central Bank of Eswatini (CBE) 7th Edition of the Financial Stability Report (FSR), which presents the banks’ assessment of vulnerabilities and systemic risks that threaten the financial stability of Eswatini. The report outlines how the country’s financial system is prepared to withstand these risks and vulnerabilities. In the report, the CBE Governor, Dr Phil Mnisi, stated that concentration risk, household indebtedness, mostly unsecured, to the NBFIs and tight trading conditions in the capital markets remained the main sources of risks.
The governor noted that the banking sector remained stable and resilient, supported by strong capital and liquidity buffers. He said the rise in interest rates positively impacted bank margins, leading to improved earnings and profitability. He said even so, the combination of high interest rates and inflationary pressures led to increased non performing loans (NPL) and impacted liquidity ratios and deposits levels negatively.
Overall, the governor assured that the financial sector remained safe and resilient to the economic and constrained market conditions that prevailed in 2023.
Improvement
He noted that during this reporting period, there was an improvement in domestic economic productivity. The governor added that, however, vulnerabilities, primarily from the fiscal sector, persist. He said public debt increased since the 2022 assessment and gross financing needs exceeded the observed benchmarks. He said moreover, the costs of short-term borrowing for the public sector increased, indicating a lower uptake of treasury bills. Dr Mnisi said the country’s gross official reserves remained under pressure as they consistently remained below adequacy levels over the review period.
The governor further explained that vulnerabilities arising from global economic conditions eased somewhat in 2023, as most economic indicators showed broad economic recovery post the COVID-19 pandemic. He said this was despite the presence of Russia-Ukraine war, the Israeli-Hamas war and other geopolitical tensions that continue to threaten global economies with potentially devastating impact on global financial system stability.
Dr Mnisi explained that the CBE employs the cobweb model to monitor the movement of risks across corresponding periods annually. This model serves as a comprehensive summary of the key areas of surveillance outlined in the CBE’s Financial Stability Report. The cobweb presented below illustrates the movement of risks between the current assessment period and the preceding period.
The cobweb indicates that there has been an observed decrease in risks stemming from the domestic economy throughout the year, primarily driven by improved economic productivity and more favourable financial conditions. The continued implementation of a contractionary monetary policy has moderated the inflation levels in the review period, contributing to reduced risks associated with the domestic economy. The CBE, pursuing its statutory mandate of promoting financial stability, will continue to monitor and appropriately implement or adjust policy measures to foster financial system stability, in line with the evolution of macroeconomic and financial conditions. It is worth noting that the FSR seeks to enhance an understanding of financial system vulnerabilities among policymakers, financial market participants and the public.
Stimulate
By making the FSR available to the public, the Governor seeks to stimulate debates on policies necessary to manage and mitigate risks to the financial system. An improved public awareness of financial system vulnerabilities may encourage financial institutions to address activities that might exacerbate systemic risks and promote policy reforms to strengthen the financial sector’s resilience. Financial stability is an essential prerequisite for sustainable economic growth. The governor defines financial stability as the condition in which the financial system, comprising of financial intermediaries, markets and market infrastructures, can withstand internal and external shocks such that participants have confidence in the system.
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