AUTHOR: Wasili Mfungwe
CONTENTS
Executive summary
Outlook for 2014………………………………………….
Highlights…………………………………………………..
Country risk rating and analysis……………………………
Market Developments………………………………………..
Fixed Income Market…………………………………….
Activity in the Equity Market ……………………………
Foreign Exchange Market………………………………..
Developments in the External Sector…………………..
Trends in the Measure of Inflation……………………….
Policy Trends………………………………………………….
Macroeconomic Overview………………………………..
Political Developments…………………………………….
Election Watch………………………………………………..
Strategic Developments……………………………………
Key Economic Indicators………………………………….
Executive Summary
Outlook for 2014
Economic growth to touch 6%
Policy uncertainty due to elections
Increased fiscal deficit out of delayed donor support and politically driven fiscal slippages
Inflation to be slightly contained
Current account deficit to dwindle slightly
Highlights
Stock market continues upward trend though at a slower pace than last year
Inflation easing
Liquidity risk slackened
Treasury bill yields tumbled
Inter-bank rate easing
Budgetary support still in limbo
Country Rating and Analysis
Malawi is currently not rated by credit rating agency; as such we use a Risk Assessment Matrix which covers risks most relevant at the time of publication.
Overall likelihood of the risks to materialize is generally medium in the short term and medium in the medium term. However, the impact of the risks is generally high in the short term and medium in the medium term.
Market Developments
Fixed Income Market
Interbank Market
Following the recovery trend exhibited within last quarter of 2013, the banking system liquidity markedly increased to an average of MK13.5 billion in excess from MK4.1 billion daily- a 222% leap. Major drivers of the trend are significant inflows from tobacco sales and also expenditures by political parties within the campaign period. Moreover, analyst portend that the MK13 billion alleged to have been stolen by government authorities was pumped into the system. As such inter-bank activity halved within the quarter to an average of MK1.8 billion daily from MK4 billion and no institution utilized the discount window throughout the quarter. The interbank rate softened a massive 1700 basis points to 8% from 25% previously.
We anticipate the market to
remain a wash in the coming months but the Government is facing liquidity hurdles hence increased risk of domestic borrowing given that donors are withholding support until after the elections.
Treasury Bills Market
Monetary authorities offered securities to the tune of MK56 billion, 4% above MK53.9 last quarter. Investors supplied funds to the tune of MK129.5 billion indicating 131% over-subscription generally driven by the improvement in the liquidity position of investors. The central bank was not wooed by the abundance of funds but stuck to the requirement to allot MK54.9 rejecting MK74.6 billion in the process. It is worth noting that the government borrowed MK23.7 billion fresh debt within the quarter under review above short term debt rollover target of MK31.5 billion. Going forward, domestic borrowing through treasury bills and ways and means is anticipated to intensify as Government’s resource envelope has been negatively affected by donor support being withheld.
Treasury bill yields were subdued by the burgeoning demand and consequent over-subscriptions. As such the 182-day paper emerged the biggest loser to close the quarter at 13%, 695 basis points down. The 364-day tenor followed to weaken 449 basis points to trade at 18%. The 91-day paper traded at 12% as at the end of the quarter having shed 321 basis points. Investors seem to have confidence in the macroeconomic developments in the country as the longest paper is receiving the highest demand at 40% for the quarter. This is also evidenced by the positive yield curve.
Activity in the Equities Market
In 2013 the equities market recorded a year of bull dominance as generally all stocks rallied with large capitalised stocks taking a lead to record significant gains. This resulted in positive changes in market performance indicators. Continued share price appreciation triggered by impressive interim results released by some blue-chip companies and attractive dividend payout kept market sentiments on the positive.
The Malawi Stock Exchange has a challenge to replicate the unprecedented spectacular results posted last year. Within the first quarter of 2014, the Malawi All Share Index, the MASI maintained the positive trajectory but with albeit slower pace than last year. The MASI added 251.94 index points or 2.01% to a new high of 12531.04 slower than 5.54% achieved by this time last year. The price gains registered by 8 counters, ILLOVO (+1.74%), NBM (+2.33%), NICO (+3.43%), NITL (+1.69%), PCL (+7.02%), REAL (+15%), SUNBIRD (+1.43%) and TNM (+12.15%) were the major drivers in the upward movement of the index, arising from an increase in the Domestic Share Index (2.4%). The Foreign Share Index was steady at 1709.34 points. It is worth noting that one of the star performers for 2013, STANDARD BANK 1.25% within the quarter despite impressive results generally due to dividend non-payment as the Bank recapitalizes for Basel II and other capital intensive projects.
Year –on-year analysis indicates that trading turnover has declined as a total of From 49,026,736 shares were transacted at a total consideration of MK920,496,961.68 (US$2,173,602.17) in 339 trades. In comparison, in the corresponding period in 2013, the market transacted a total of 2,101,338,035 shares at a total consideration of MK2, 952,651,806.76 (US$7,448,395.05) in 179 trades. This reflects a 97.67% decrease in terms of share volume and a 68.82% (70.82% in US Dollar terms) decrease in share value.
Foreign Exchange Market
At the foreign exchange market in quarter 1, the Malawi Kwacha gained some ground against major International currencies. The local unit was at MK411.046 per US dollar as at the close of the quarter after opening at MK435.2288/US$ – a 6% appreciation. The Malawi Kwacha also strengthened 5% and 6% vis-à-vis the Pound Sterling and the Euro to trade at MK682.7885 and MK564.7772. A notable appreciation was recorded as regards the South African Rand at 7% generally due to the Rand’s weakness against the dollar as investors are going for financial assets on the US with the cut of the Quantitative Easing which will see US rates surging. Generally, the Malawi Kwacha has been appreciating on account of tobacco inflows. Going forward, we anticipate the Kwacha to remain buoyant up until the close of the tobacco selling season although derailed by minimal donor support and the structural imbalances the country has.
Developments in the External Sector
Gross Official Reserves
Overall external reserves were almost stable for the quarter under review with a slight decline of US$2 million to US$759 million in the first quarter. The foreign currency stock is enough to cover 2.55 months below the recommended 3 months import cover. With the tobacco inflows we anticipate that the reserves will continue rising but will be hampered by minimal donor inflows. As such the Malawi Kwacha is likely to appreciate but at a low magnitude as compared to last year. The official reserves held by the government of Malawi increased US$77 million to touch US$477 million to constitute 62.8% of all the reserves. The central bank was busy buying foreign currency from the market to the tune of US$3.9 million in their quest to influence the exchange rate. The reserves held by the private sector however declined to US$282 million 21.9% down from last quarter.
Overall Balance of Payments
Exports are forecast to rise in 2014 as tobacco production continues to increase with TAMA forecasting demand for tobacco at 210 million kgs, a 25% increase from 2013 and prices remain buoyant. However the shutdown of Kayelekera mine might increase the cur-rent account deficit if it is closed for a long time as uranium ac-counts for 10% of total exports but tobacco export growth will pre-vent a worsening shortfall. Export growth will be robust in 2015-17, underpinned by favorable tobacco prices and government efforts to promote production of cotton and other agricultural commodities. Imports are expected to moderate in 2014, as investment growth slows, global commodity prices fall and currency depreciation dampens domestic demand. In 2016-18 import growth will increase on the back of increased economic activity and growing public investment spending.
International Relations
The International Monetary Fund (IMF) has indicated that the disbursement of MK 8.4 billion part of the Extended Credit Facility to Malawi awaits the results of the forthcoming tripartite elections in May. The IMF mission has been in the country for three weeks and held discussion with key stakeholders, including Ministry of Finance and the Reserve Bank of Malawi (RBM). The IMF disbursed US$ 20 million in January but that did not result in resumption of budgetary support from donors. Malawi was set to receive 40% of the 2013-2014 budget from donors but the support was subsequently withheld following revelation of the public funds mismanagement by the current administration.
Malawi is expected to remain in good terms with major donors; the US, the UK and the EU. However they have concerns on the corruption and theft scandals in the public sector. As a result only the IMF has disbursed funds to the government while CABS members have decided not to give the funds directly to government.
Relations between Malawi and Tanzania will remain strained by the dispute over the countries’ border in Lake Malawi. China’s economic presence in Malawi is expected to grow, albeit from a low base.
Trends in the Measure of Inflation
Consumer price inflation opened the quarter on a high note inching up to 25.9% in January having closed the last quarter at 23.5%. The general increase in the price started to trend downwards within the quarter to close at 24% still higher than last quarter. Given the availability of food since the country is in the harvest season and minimal appreciation of the Malawi Kwacha, we anticipate the inflation rate to maintain a downward trajectory. The trend is likely to be underpinned by the contractionary monetary policy that the monetary authorities are currently implementing.
However, the removal of fuel and electricity subsidies together with the election related spending means that inflationary pressures will still persist in the short term. The recent increase in electricity tariffs will add further inflationary pressures as the general prices of goods and services rise creating cost push inflation. However, the inflationary pressures may be eased by the maize prices which are expected to go down as the harvest season has began and maize becomes readily available. Inflation in 2013 had failed to reach the single digits as targeted in the Economic Recovery Plan and it is unlikely to do so in 2014.
Policy Trends
Monetary Policy
Based on economic and monetary outcomes and forecasts, the Monetary Policy Committee decided to keep the Policy rate unchanged at 25%. Major considerations were made on Global economic activity is expected to improve further in 2014 on account of recovery in advanced economies. Global growth is now projected at 3.7% in 2014 against 3.9 % in 2015. Oil prices are projected to drop slightly in 2014, averaging US$103.1 per barrel, from US$109 per barrel.
On the domestic front, inflation accelerated to 23.5% in December from 22.2% in October. This brought average inflation for 2013 to 28.6 percent, from 21.3 percent in 2012. The relatively higher average inflation in 2013 was largely due to rising food prices coupled with the rapid depreciation of the Kwacha in the aftermath of cashgate and suspension of donor flows. It should also be noted that the high rates of inflation during the first half of 2013 reflected the low base in 2012.
Broad money supply (M2) grew at 35.1% in December 2013 from 31.8% in October. This monetary expansion reflected both accumulation of reserves and increased credit to private sector which rose annually by 15.7% in December 2013 from 15.2% in October.
Notwithstanding seasonal factors and withdrawal of donor budget support, the build-up of gross official reserves continued and stood at US$402.4 million (2.1 months of import) in December 2013, the highest end-December outcome since 2005. This outcome was on account of generally consistent monetary policies since the May 2012 economic reforms.
The sharp depreciation of the Kwacha which started in September, 2013, stabilized somewhat in December as demand for foreign exchange was contained by tight monetary conditions. Indeed, the Kwacha started appreciating especially in February, much earlier than anticipated.
The MPC welcomed developments in the exchange rate, noting that the appreciation of the Kwacha will dampen inflationary pressures especially if fiscal discipline is sustained over the next few months. Members further noted the decline in Treasury bill yields as a result of improved liquidity conditions in the interbank market. However, they recognized that intensified fiscal discipline is necessary to keep Treasury Bill yields down, thereby strengthening the effectiveness of the Policy rate.
Looking ahead, inflation is expected to peak at in the very short term largely due to rising food prices and lagged impact of the Kwacha depreciation. Thereafter, inflation is expected to begin a deceleration in March as a result of the expected seasonal appreciation of the Kwacha and improvements in the food supply situation.
However, members noted risks to inflation emanating from fiscal pressures during the election period. In light of the foregoing, and the need to allow more time for the recent monetary policy measures to work through the economy, the MPC resolved to keep its monetary policy stance unchanged.
In a desperate attempt to control money supply and rein in inflation, the Reserve Bank of Malawi (RBM) has been issuing securities tradable instruments with a turnover MK 72.5 billion, a move condemned by an economist as counterproductive. The interest rates that the RBM is paying to sell the securities are as high as 40% way above the Bank rate. The interest cost the the Bank will pay is exorbitant currently estimated at MK billion.
Commercial banks have started reducing the lending rate following the fall in the cost of deposits in the market, the fall in the cost of deposits has been driven by the continuous slump of treasury bills yield rates which has gone done from 35% at the start of the year to average yield rate of 17%. NBM MW the biggest bank by assets and market capitalisation has reduced the lending rate from 40% to 36% while Standard MW has reduced to 35%. The other commercial banks are expected to reduce their lending rates. NBM MW has indicated that it will start offering MasterCard products and services this year, currently there is no MasterCard services offered by the commercial banks in the country. All the Commercial banks are expected to follow the market leader as it has always been the case.
Fiscal Policy
There was an over expenditure in the first quarter of the 2013/14 fiscal year due to substantial payments on interest on domestic debt. Expenditure in the first quarter was MK172.9 billion against revenues of MK124.4 billion, MK101.6 from domestic revenues and MK22.8 billion from grants. Total expenditure for the 2013/14 Fiscal Year was set at MK638 billion comprising MK463.1 billion recurrent expenditure and K175.0 billion development expenditure (Source: Budget statement). The fiscal deficit may increase as public spending, although declining, may be higher than revenues in the run up to elections but the government is expected to have received lower than expected revenues from grants as some donor countries withheld aid the second quarter of the fiscal year 2013/2014. The IMF has urged the government to maintain a tight fiscal policy and they disbursed US$20 million at the completion of the third and fourth IMF reviews in favor of Malawi. The fiscal deficit may widen even further if donor aid is not disbursed as members from CABS have not confirmed how much they will disburse to government. The amount and means has been left to the members to decide on their own accord. According to the World Bank, the overall fiscal deficit was expected to widen to about 19% of GDP in 2013 after rising to 16.6% of GDP in 2012.
Meanwhile, the Malawi government is planning to draw a zero deficit budget for the 2014-2014 under the assumption that the country receives no budget support from donors. The development follows the suspension of budgetary support by the Common Approach to Budget support (CABS). The donors under CABS met this week and failed to reach a conclusion to resume the budget support for the 2013-2014 budget.
The present value of public debt is projected to decline steadily from 42.5%t of GDP in 2013 to 23.6% of GDP in 2018. The main risks to debt sustainability are deterioration in the terms of trade and adverse weather conditions. Stress tests indicate vulnerability to export-related shocks. Fiscal consolidation and measures to arrest declines in the quality of institutions are needed to ensure capacity to manage a growing debt load.
Macroeconomic Overview
Economic Growth is expected to remain around the levels of 6.1% in 2014 following a pickup in growth in 2013. Growth may be supported by recovery in aid, although the actual timing of the resumption of budgetary support is uncertain and an increase in tobacco exports. The shutdown of the Kayelekera mine may drag growth as the ex-ports contribute towards GDP growth. Economic growth is forecast to average 5.4% in the period 2015-2017 despite the declining potential for raising maize output through fertilizer usage. Risks to economic growth in 2014 are the high inflation rates and high lending interest rates which slow down economic growth as they reduce private sector activity as well as delays in donor funding. Another risk to economic growth is the alleged corruption in the public sec-tor and donor funding withdrawal. Growth in 2014 will be hinged on the recovery in aid, the expansion of agricultural subsidies and improved investor sentiment as well as innovations in the mining sector.
Political Developments
The forensic audit report has faulted the Reserve Bank of Malawi (RBM) on the massive looting of public funds. The report which was released on Monday this week indicated that the bank has a Memorandum of Understanding with the Malawi government which empowered the Central bank to check government bank balances before clearing any government cheque. The audit report indicates that the total funds which the government lost between April to September 2013 amounts to MK 13.6 billion , however the report did not mention the names of the people involved in the syndicate. The report was presented to the Public Accounts Committee of Parliament which has referred the report to the Auditor General to include names of people and companies which were involved. The forensic audit report will negatively affect the country’s credit rating.
In other developments, The UK audit firm, Baker Tilly International has rejected the request by the Public Accounts Committee of the Malawi parliament to release to the public names of suspects in the forensic audit report. The company has stated that its policy prohibits release of audit findings to the public. The government of Malawi has also indicted that it was summoned by the British government not to release the names of suspects in the public financial mismanagement scandal.
Election Watch
Malawi Communications Regulatory Authority (Macra) has warned broadcasters in the country against airing hate speeches ahead of the May 20 tripartite elections. The performance of the broadcasters is described as very bad in terms of political coverage. Some of the broadcasters are promoting hate speeches through their phone- in programmes. The regulatory body will be more vigilant and strict with broadcasters during the polling day, and the day the official results will be announced.
In other developments, Opposition parties have expressed displeasure over the manner in which Malawi Broadcasting Corporation (MBC) is covering their campaign events in the run up to the May 20 elections. The parties have described MBC coverage as ‘cosmetic’ despite promising a change. The parties’ remarks follow the public broadcaster’s promises to Malawi Electoral Commission (Mec). MBC, among others, promised that it will not rebroadcast presidential rallies where the President Joyce Banda was campaigning besides giving equal airtime for political parties to campaign.
The parties, United Democratic Front (UDF), Malawi Congress Party (MCP) and Democratic Progressive Party (DPP) in separate interviews on Monday accused two MBC radios and a television station of plundering taxpayers’ money by only covering the PP. MBC’s coverage of MCP is very cosmetic and minimal.
The May 2014 presidential race remains very tight with four main contenders leading the ruling PP, the MCP, the UDF and the DPP in a cut throat competition. Although we anticipate free and fair elections, we should note that there will be some tension after the results. Members of the ruling PP and the DPP have hard their emotions charged culminating to political violence.
Other Strategic Developments
Tobacco Market Update
The 2014 tobacco market commenced on 24 March 2014, two weeks later than the last season. In the first week of 2014 tobacco sales, a total 5.14 million Kilograms of tobacco was sold at an average price of US$1.14 per Kilogram with a total value of US$5.88 million compared to the first week of 2013 tobacco sales of 2.4 million Kilograms sold at US$1.25 per Kilogram with a total value of US$3.06 million. Prices ranged between US$0.85 and US$2.20 per Kilogram in 2014.
The Tobacco Control Commission has revised the tobacco production estimate for this year’s season down by 10%. This follows adverse weather conditions in some parts of the country, particularly in the central and northern regions of Malawi. The commission estimates that the country will produce 180mt of tobacco down from 200mt previously estimated. The new estimate is higher by 7.1% from the preceding season output. The commission has indicated that the tobacco market is likely to have new buyers this year. The chief executive officer for the commission has since edged farmers to bring high grade tobacco to the market.
Malawi Mining Watch
Global Metals and Mining Limited, an Australian listed company has completed the bulk sampling campaign at Kanyika Niobium mine in Mzimba District. The company has extracted 40t of Niobium samples which have been sent to China for metallurgical pilot plant programme at the Guangzhou
Research Institute for Non-Ferrous metals in February.
Malawi Underperforms on Economic Freedom Index
The Malawi economy has been rated poorly in the economic freedom index published by the Wall Street Journal and the Heritage foundation. Malawi’s economic score is at 55.4% making it 124th in the world. The economic freedom is defined as the fundamental right of every human to control his or her own labour and property. The score has not changed from last year. The country is ranked 22 out of the 46 counties in the sub-Saharan region.
Illovo Sugar Malawi Profit Slumps 4.7%
Illovo Sugar Malawi has registered a MK 1 billion drop in its profitability for the year 2013 during which it made a profit of MK 20 billion compared to MK 21 billion realised in 2012. A financial statement released by Illovo Malawi’s South Africa based parent company, Illovo Sugar Group, also shows that sugar production at the Malawi subsidiary declined to 215,000 tonnes in 2013 from 237,000 tonnes in 2012. A development that has partly been attributed for the slump in the profit. Illovo Sugar Malawi is also mentioned to have failed to secure export orders for sugar from the United States market in the year. However, the company’s exports into the European market were almost constant, maintaining at 33% of the company’s total sugar production volume. The company remains the most profitable entity listed on the local bourse with the runner up, the conglomerate PCL trailing at MK17 billion earnings.
The Commodities Exchange Trades hit US$1.9 billon
The commodities exchange under Auction Holdings Limited registered US$ 1.9 billion in trade enquiries in 2013. The exchange indicated that it attracted the attention of international importers during the year. The head of operations for the commodity market further indicated that the exchange has partnered with other foreign commodity exchanges to share competencies and market information. The commodity exchange is expected to boost the agricultural commodities market in Malawi and will encourage commercial farming in the country.
The Newly Incorporated Airliner considering Listing
The newly incorporated and the only airliner in the country, the Malawian Airliner has indicated that the government intends to sell 31% of its shares in the business to private investors. The Airliner has indicated that the decision to sell the shares to private investors was agreed by both the shareholders and will be effected after a minimum period of twelve months of operations. The government injected US$ 12 billion as its capital for the 51% stake in the venture and the 49% is held by the Ethiopian airlines. The airliner started local flights last week and is expected to launch regional flights in the coming weeks. This might be an opportunity for private investors; however there is an expectation that the government might consider offering the shares to the public through listing on the local bourse. There has been no new listing of a company on the Malawi Stock Exchange since 2009.
The Newly Incorporated Airliner considering Listing
Paladin Energy Limited has suspended its operations at the Kayelekera Uranium mine in the country; the company has suspended the operations due to fall in the prices of uranium on the global market. The company will place the plant at care and maintenance position until the prices of Uranium recovers. The government has since expressed concern over the decision as the plant remained Malawi’s largest mining operation.
Minimum Wage Rate up 73.8%
The Malawi government has revised the minimum wage from MK 317(US$ 0.7) to MK 551(US$ 1.3) pay day. The minimum wage applies with no exception to all sectors of the economy. The development will reduce industrial strikes by labourers which have been rising following the adoption of floating foreign exchange regime by the government and the subsequent depreciation of the local unit in 2012. The local unit has been depreciating since the adoption of the floating exchange regime with subsequent marginal appreciation in 2013.
Key Economic Indicators
2012 2013 2014 2015 2016
Real GDP (%) 1.9 5.5 6.1 6.5 5.5
CPI Inflation annual average % 21.3 26.0 15.1 6.9
Revenue as % of GDP 26.5 39.0 37.3 35.6
Overall Balance as % of GDP -6.9 -1.3 -4.4 -3.6
Foreign Reserves US$ millions 215.4 403.0 453.1 557.3
Import Cover 1.1 1.9 2.0 2.4
Current Account Balance -4.4 -3.5 -4.0 -3.2 -1.9
National Savings as % of GDP 12.5 16.9 18.6 20.3 22.7
Exports (goods and Services) US$ millions 1,359.3 1,499.2 1,631.1 1,768.9 1,913.4
Imports (goods and services) US$ millions 2,259.1 2,356.0 2,520.7 2,659.1 2,840.0
External Debt as a % of GDP 37.4 41.5 38.9 37.7 36.4
**Source IMF
