Market Report Fortnight ending 2nd August 2002 Report
15/02
The RBM Interest Rate Adjustment
The Reserve Bank of Malawi with effect from July 29
reduced its Bank Rate from 46.8% to 43%. This should
be seen as a deliberate move to influence downward adjustments
in interest rates in the economy and is in line with
the objectives of the recently passed 2002/3 fiscal
budget.
The adjustment, although marginal, should induce financial
institutions to take action if the economy is to recover
from the recession during the 2001/2 fiscal year. Preliminary
indications show that real GDP during 2001 contracted
by 1.5% in sharp contrast to an expected expansion of
2.3%. This was largely attributable to a contraction
in agricultural output and poor industrial performance
due to uncompetitive costs of production.
The economy is expected to grow by 1.4% in 2002. The
move by monetary authorities is therefore commendable
and calls for collective action from all the stakeholders
if further adjustments in the bank rate are to be expected.
This will sustain the recent gains made in achieving
macroeconomic stability.
According to latest numbers, the domestic inflation
continued its downward trend with the official inflation
rate of 16.7% in June, a four year low. The situation
is expected to improve further in the short and medium
term as a result of the tight monetary policy being
pursued.
In addition, yield rates on the financial market have
of late been on the decline and indications are that
the trend might continue in the short and medium term
if government remains committed to reducing its domestic
debt accumulation.
The Malawi Kwacha Exchange Rates
After stabilizing against the USD and the ZWD for over
two months, the MWK temporarily registered some depreciation
attributable to speculative position taking, but has
of late shown signs of firming up as a result of an
improvement in the foreign exchange situation. As at
end June 2002, the official foreign exchange position
stood at US$ 191.6 million, representing 3.21 months
of import cover. Currently, the mid exchange rate is
at MKW75.7500 against the USD and MWK1.40 against the
ZWD after temporarily depreciating to respective mid
rates of MKW76.7402 and MKW1.4251 three weeks ago.
The performance of the MWK against the ZAR continues
to be erratic. It is now trading at an average of MKW7.5337
after depreciating to MKW7.8220 barely a week ago.
Financial Markets and Interest Rates
The market continued to register declines in yield
rates due to a slow down in government borrowing. According
to the T-bill auction results of July 26, yield rates
for the 91 and 182 days tenors declined to 40.48% and
43.03% from 41.06% and 43.10% registered on July 19,
respectively. T-bills for the 273 days bill also decreased
to 44.01% from 44.45%.
According to the RBM bills auction results of July 23,
the yield rates for the 63 days bill decreased to 42.56%
from 43.32% registered on July 16, while that for the
91days bill also dropped, although marginally, to 42.49%
from 42.63%.
Although the monetary authorities have indicated to
intensify mop up exercises, the rising demand for the
RBM-bills will likely see a further decline in yield
rates. According to the auction of July 23, the demand
increased to MWK1,204.32 million, of which only MWK553.94
million was issued.
WORLD ECONOMIC REVIEW
US Economy
Outlook for the US economy continues to be bleak more
so after GDP data on Wednesday, August 31 showed U.S.
growth slowed to an annual rate of 1.1 percent, significantly
below consensus estimates. Investors are also watching
to see how far the recent battering of U.S. shares has
hurt the real economy. There are, however, indications
that global economic concerns are growing, a scenario
which is expected to improve the relative merits of
the US economy as an investment destination.
On the other hand, there are rumours of an impending
emergency cut in US interest rates to stabilise markets
and a co-ordinated move to cut rates in the G7 area.
This however seems very unlikely in the very near term.
Euro Zone
The Euro-zone figures have again by and large been
disappointing despite signs of growth in France. The
German IFO index was particularly disappointing and
this will renew fears of a fresh downturn in Germany
and the Euro-zone. European Central Bank (ECB) in a
widely anticipated move left key interest rates on hold
August 1, at 3.25% for the ninth consecutive month in
light of growing evidence of the fragile state of the
economy.
International Equity Markets
Wall Street closed 2.63% lower after a stunning turnaround
of above 5% in the Dow Jones earlier in the week, which
was largely attributed to some extent to a slight of
easing corporate concerns. European markets have also
not been spared. More drastic declines however have
been experienced in Asian equity markets, which are
fostering regional economic growth concerns in particular
in Japan. The Nikkei index has fallen below the 10,000
mark and this will revive fears over the financial sector.
International Currencies
The currency markets will no doubt continue to take
cognisance of developments in equity markets. The dollar
is expected to remain under pressure but capital repatriation
to the US as global economic concerns increase could
aid the greenback in the short-term. The US current
account deficit problems will however persist in the
long - run, which will leave the currency susceptible.
Emerging Market News
The South African government announced on August 1,
that it would stick to its policy of gradually relaxing
exchange controls after an official inquiry into the
ZAR’s slide in 2001 found no clear reason for
the rapid decline. President Thabo Mbeki launched the
inquiry in January after a business leader alleged that
"dubious" deals had helped to fuel the Rand's
37% depreciation against the dollar in 2001, which triggered
domestic inflation and forced authorities to raise interest
rates. South African financial markets were little moved
by the reports, with the Rand stuck in a weaker range
of 10.20-10.35 against the US dollar on general emerging
market concerns.
|
