EFFECTS OF WORLD ECONOMIC DOWNTURN ON SWAZILAND'S INSULATED

UNCLAS MBABANE 000085


INFO SOUTHERN AFRICA DEVELOPMENT COMMUNITY

DEPT FOR AF/S (MHARRIS); AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
USTR FOR COLEMAN, WJACKSON

E.O. 12958: N/A
TAGS: ETRD ECON EFIN WZ
SUBJECT: EFFECTS OF WORLD ECONOMIC DOWNTURN ON SWAZILAND'S INSULATED
FINANCIAL MARKETS, EXPOSED EXPORT MARKET

REF: (a) 08 Mbabane 345, (b) Mbabane 60


1. SUMMARY. Swaziland's financial market, fairly insulated from the
global banking crisis, has kept banks that operate in Swaziland
safe. Swaziland's small domestic market makes it heavily dependent
on sugar exports and exports to the South African market. This
vulnerability to commodities pricing has not severely affected Swazi
businesses so far. The textile industry, already volatile and
dependent on AGOA access, favorable exchange rates, and U.S. export
orders, has laid off over 2000 workers. END OF SUMMARY.

MANUFACTURING


2. The textile industry has lost 2100 jobs since the beginning of
the year. In February, a local newspaper reported that one garment
company alone planned to lay off 800 workers. The industry employs
approximately 17,000 Swazis, with an average wage of 95 USD
(E950.00) per month.


3. Swazican, a major exporter, reports net export volumes remain in
line with expectations. Swazican's parent company, Rhodes Food
Group, has seen basic commodity foods such as canned vegetables,
jams and canned fruits pick up in demand with the onset of the
global recession, as consumers "trade down" from other "luxury" food
items.


4. Sugar products, Swaziland's main export, have slightly increased.
Swaziland Sugar Association (SSA) believes rand/dollar depreciation;
Swaziland's ability to fill quota shortfalls of other African,
Caribbean, Pacific sugar producers; and sugar product
diversification have led to the increase in sales. Another factor
keeping the industry buoyant is structural adjustments made in 2006
to address the declining EU preferential sugar prices.


5. The Swaziland Federation of Trade Unions reports that 120
employees of Maloma, the only mine operating in Swaziland, lost
their jobs since the beginning of the year. The Federation of
Swaziland Employers and Chambers of Commerce (FSE&CC) reports only
one of their members closed in 2008.

THE SOUTH AFRICA EFFECT


6. According to the Central Bank, Swaziland sends over 50 percent of
its exports to South Africa, but conventional thought has the number
at 80 percent. The most current trade data available is for 2007,
but anecdotal evidence indicates Swaziland exports to South Africa
are stable at this time. A decline in South African imports is
Swaziland's most serious economic challenge; projections are that a
decline is inevitable, due to worldwide economic pressures, but
projections regarding the degree of decline are speculative. South
African imports account for most of South African Customs Union
(SACU) revenue (some experts claim as much as 80 percent),and SACU
revenue represents 66 percent of total GOKS revenue. As noted in
reftel (b),the anticipated decline in SACU revenue has resulted in
a 2009-10 projected budget deficit for the Government of the Kingdom
of Swaziland.


7. Remittances by Swazis in South Africa represent 4.2 percent of
GDP (43.2 million USD),with the average annual remittance totaling
480 USD. A 2008 UN study shows 62 percent of Swazi migrant workers
work in the South Africa mining industry, totaling approximately
7000 Swazis. Therefore, lay-offs in South African mines produce
relatively minor residual effects in Swaziland. An Employment Bureau
of Africa recruitment agent says no Swazi miners have been laid off,
but he is expecting some retrenchment in the next month or so. The
last recruitment for mine workers was in June 2008.

INFLATION


8. Inflation, currently 11.8 percent, down from an average of 12.6
in 2008, is on track to fulfill analysts' expectations for a lower
inflation rate than 2008.


9. The FSE&CC reports that most exporting companies are witnessing a
decline in global orders, and anticipate increased pressure in the
form of wage negotiations. In the short term, they believe price
volatilities, unemployment, and wage bill pressures will be
significant factors for local businesses, as most companies are
expecting rigorous wage negotiations by mid-year.

TRANSPORTATION


10. Swaziland Railways' freight revenues are fluctuating, with
decreasing revenues in July and an increase in November, only to
decline in December. Swaziland Railways attributes the drop in
revenues to a number of factors: delay in signing the European
Partnership Agreement delayed the shipping of sugar; forest fires
delayed and decreased the shipping of timber; and a decline in
garment exports. February revenues have shown signs of improvement.

AGOA


11. Swazi exports to the U.S. have declined by 64 million USD since

2005. Garments exports, Swaziland's biggest export to the U.S.,
increased slightly between 2007 and 2008, but overall exports
declined by eight percent in the same time period. It is estimated
that export trade to the U.S. accounts for approximately two percent
of Swazi exports.

SURVIVING THE CRUNCH


12. Unless there are major political changes, Swaziland's location,
size, and underdeveloped private sector will continue to be the
dominant factors in determining Swaziland's economic future. The
global financial crunch has yet to fully exacerbate this weakness.
Simultaneous long-term stagnation in South Africa, resulting in a
decreased market for Swazi exports and decreased Southern Africa
Customs Union receipts, and large declines in European Union export
orders will be flashpoints for a severe Swazi economic downturn.

PARKER