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Prepared by Manabu Nose (AFR).
Swaziland’s banking system is predominantly foreign-owned. Three commercial banks (which comprise 85 percent of total banking system asset) are subsidiaries of South African Banks and operate similar business models. The remaining 15 percent of asset is owned by a state-owned bank which plays a development banking role.
The deviations of international reserve, sovereign spread, and SACU payments are computed as the gap of actual gross official reserve, sovereign spread, and SACU disbursements from the trend component. The trend component is computed by applying the Hodrick-Prescott (HP) filter to the quarterly series with the smoothing parameter of 1,600.
In the absence of quarterly GDP data, quarterly electricity delivered and consumed by households and industries is the best available quarterly series in conducting the macro-financial analysis, which appears to track short-term fluctuations in growth well. See recent literature (Henderson, Storeygard, and Weil, 2012) for the application of night light (and electricity consumption if available) data as an alternative measure of growth in Sub-Saharan African countries where the quality of national account data is weaker than developed and emerging countries.
The VAR model is backward-looking, which estimates the macro-financial linkage based on the historical data and does not take into account future policy reactions to prospective SACU revenue fall. The analysis uses higher frequency data (quarterly) to increase the number of observations in the regression and employs a proxy measure of quarterly growth (electricity consumption) which is not a perfect measure for data availability. For these reasons, the calibrated series of growth and private sector credit based on the VAR model show larger volatilities than the annual projection in the staff report, though the overall trends are consistent between two frameworks.
Botswana is excluded from the sample as Botswana’s quarterly NPL data is not available from the FSI database.
In the panel regression, electricity consumption growth cannot be included as quarterly series are not available for Lesotho and Namibia.
The risk sharing agreement stipulates that the parent bank will recapitalize the subsidiary for losses exceeding 25 percent of the regulatory capital of the subsidiary. Given some uncertainty o the ability and willingness of the South African parent banks to honor this agreement, we cap the losses at 50 percent of a bank’s regulatory capital rather than 25 percent as agreed in the risk sharing document.