Events unfolding in Middle East greatly affecting CMA

EZULWINI – The tragic events unfolding at present in the Middle East, less than two years after the start of the conflict in Ukraine, which shows no sign of an immediate resolution, highlight the importance of geo-political risks.

The Deputy Governor of the South Africa Reserve Bank (SARB) Fundi Tshazibana says these can negatively affect the global economy in trade, commodity prices – especially oil – and higher asset price volatility.

Tshazibana said beyond geo-political issues, climate change, and the potential it has to generate greater volatility in agricultural commodities and changes in resource allocation, presents another risk to global inflation.

The deputy governor said, in fact, as Christine Lagarde, President of the European Central Bank, recently remarked, the world may have entered a period where supply shocks would become durably larger, and more frequent than in the past.

Tshazibana said these non-financial factors could have a direct impact on financial markets and capital flows, as investors may require a higher risk premium for holding riskier assets. She said factors could also have indirect impacts, as more frequent and larger supply shocks have a larger probability of de-anchoring inflation expectations, forcing central banks to be more cautious and resulting in tighter policy over the economic cycle.

INFLUENCED

She added that the expectations that the era of low and stable interest rates would last influenced both the funding and investment models of many financial institutions, leading them to increase their exposure to interest risk. She said if higher yields for longer become the norm, many investment positions may be liquidated simultaneously, adding to asset price volatility.

The deputy SARB governor added that the negative spillovers from the global environment to the CMA regional economies were not limited to financial flows. “Merchandise trade flows also pose a risk to emerging market and developing country growth,” she said.

She also mentioned that global trade in merchandise goods – after the post-COVID-19 rebound – appeared to be in a recession phase. She highlighted that China’s shift away from infrastructure and property investment, towards more household consumption and poses a challenge for commodity exporters.

“As a result, African exports have been contracting since the second quarter of 2023,” said Tshazibana.

“Beyond the current weakness in global export and import flows, the international trade system could suffer from geo-economic fragmentation in the medium term if geo-political rivalries unravel the multilateral, rules-based system,” she said.

Meanwhile, The Central Bank of Eswatini Governor Dr Phil Mnisi mentioned that the CMA Governors have made it a tradition that in each of their meetings they would take time to deliberate on topical issues that affect the region. He highlighted that over the years, the CMA has played a pivotal role in promoting regional economic integration facilitating trade, and fostering price and financial stability.

Dr Mnisi said the collective efforts of the central banks in the CMA have undoubtedly delivered a stable financial system and contributed to the growth and resilience of the members’ economies. He said it was therefore imperative to continue building on that, hence the need to collectively deliberate on issues impacting the region to ensure agility and efficiency in policy making.

OVEREMPHASISED

“The need for sharing experiences in the region cannot be overemphasised,” said Dr Mnisi.

Dr Mnisi said Eswatini had not been spared from global and regional spillover effects. He said such spillovers could have both negative and positive impacts on the economy. He said some of the recent global spillover effects to Eswatini included the COVID 19 pandemic, global warming effects and geopolitical tensions, especially the war in Ukraine.

He said these have impacted the economy in diversified ways ranging from supply chain disruptions: volatility in oil prices and lower food production, all culminating in inflationary pressures. He highlighted that the Kingdom of Eswatini saw the economy contracting by 1.6 per cent in 2020 before rebounding to 10.7 per cent in 2021.

“Overall inflation also began an upward trajectory as food and fuel prices rose sharply during this period Inflation is forecasted to reach 49 per cent in 2023 from 3.73 per cent (in 2021) and 4.8 per cent (in 2022), Asset quality as indicated through NPLs also rose to over 7 per cent over the period,” said the governor.