Fiscal Sector Performance

Parliament has this week started deliberating on the 2002/3 fiscal budget against a backdrop of severe fiscal budget imbalances. According to latest statistics the pressure on budgetary operations intensified during the month of March 2002 when the deficit increased to MWK2,759 million, representing a monthly growth of almost 40% when compared to a deficit of MWK1,957.1 million recorded in February 2002.

This reflects a significant increase in expenditures in the current environment of decreasing revenues. Expenditures, at MWK4,790.0 million, increased by almost 25% from MWK3,843 million in February 2002, while revenues, at MWK2,030.6 million, increased by only 7.7%.

According to the minutes from the latest Monetary Policy Committee meeting, this shortfall was financed largely by proceeds from Treasury Bill auctions and overdrafts from the Reserve Bank of Malawi. This mode of financing can exert an upward pressure on the growth of money supply and force the monetary authorities to intensify mop-up exercises through increased issues of RBM bills. The short and medium term effects of this could culminate into rising interest rates, which could unfortunately reverse the downward trend in yield rates noticed during the most recent auction of RBM and Treasury bills.

Financial Markets and Interest Rates

In efforts to reduce domestic debt the government further reduced the amount of T-bills required during each auction to MWK300mm from MWK500mm. This move has seen some downward trends in yield rates. According to the auction results of May 31^st the yield rates for the 91 and 182 days bills decreased to 45.50% from 45.86% and 45.52% from 45.92% registered during the preceding auction of May 24^th. The rates for the 273 days bill also decreased significantly to 45.45% from a high of 46.21%. Government promises to check slippages in expenditures in the new fiscal budget could sustain the downward trend in yield rates in the short and medium term.

With its resolution to maintain the tight monetary policy stance, the monetary authorities intensified the issue of RBM bills. According to the results of May 21^st and 28^th auctions, issues amounted to MWK849.58 million and MWK565.17 million, respectively. This saw yield rates somewhat stable when the 63 days bill yield rate remained at 45.87% while that for the 91 days bill increased marginally to 45.98% from 45.95% during the previous auction.

The Malawi Kwacha Exchange Rate

The Malawi Kwacha has since April 2002 been stable against the USD and the ZWD. Currently the mid-rate is at MWK75.85 and MWK1.40, respectively. Satisfactory performance of South Africa’s gold exports, with global commodity market prices rising, has seen the ZAR maintain its edge against the Kwacha when the official exchange rate increased to an average of MWK8.00 from MWK7.00 in April 2002.

WORLD ECONOMIC REVIEW US Economy

The fragility of sentiment towards the US economy continues, although economic indicators released recently are slightly stronger than anticipated, the effect of which has been an easing of immediate concerns over a double-dip recession.  It is widely believed that there will need to be a sustained period of strong data to yield improvement in sentiment towards the world’s largest economy.  Asset returns remain by and large disheartening, particularly on Wall Street. This situation has been exacerbated by waning confidence in corporate America.

Euro Zone

In a widely anticipated decision, the European Central Bank (ECB) left their benchmark-refinancing rate unchanged at 3.25% with the regional grouping’s central bank expecting recent Euro strength to help counter inflationary pressure. Fears over the Euro-zone economy's underlying growth trend however persist, which to some extent is moderating recovery consumerism. 

In the meantime, Germany saw a surprise upturn in manufacturing orders for the month of April. Data showed a rise in domestic orders further raising hopes that the euro zone's largest economy might have finally turned the corner.

International Currencies

The markets persistent unease over the ability to finance the current account deficit continues to hurt the US dollar.  These imbalances in the US economy have not been rectified and this remains a serious threat to the dollar over the medium term.  Further weakness in the green back on a trade-weighted basis can therefore be anticipated over the next few months.  However, if the US can secure stronger productivity growth then the trend may eventually swing back in the dollar's favour, more so given current evidence on longer-term Euro-zone productivity, which is not encouraging. 

Performance on Wall Street and persistent terrorist threats remain significant factors affecting dollar sentiment.

Regional Emerging Market News

Zambia’s President, Levy Mwanawasa, this week disclosed that Anglo-American Plc (AAC) had offered the Zambian government $30million to offset its withdrawal from troubled Konkola Copper Mines (KCM). Zambia had initially asked for $200 million, which was apparently turned down by AAC. The mining house’s initial agreement with the Zambian government did not include exit payments. An agreement is currently being hammered out on the modalities of the Anglo’s exit and details will be disclosed upon signing. The copper mines are the mainstay of the Zambian economy and KCM accounts for 67 percent of Zambia's total metals production.

The World Bank announced last month that it would give Zambia a concessional loan to keep the mines alive after Anglo withdraws, but was quick to add that only private sector participation would resolve the crisis.  Anglo announced in January 2002, that it would pull out of KCM, majority owned by its subsidiary Zambia Copper Investments, citing low global metal prices.

Senior Manager - Charles Carey ccarey@loita.malawi.net
Fx. Money Market - Aubrey Chalera achalera@loita.malawi.net
Loita House, Cnr. Victoria Ave. Henderson Str.
Private Bag 389, Chichiri, Blantyre 3, Malawi
Telephone: (265) 622 681/808/099, 620 437 Facsimile: (265) 622 683, 620 583

This report is issued by Loita Investment Bank Limited ("LIB") exclusively for its customers. LIB has made reasonable efforts to ensure the accuracy and completeness of the information contained in this document. However LIB does not accept responsibility in respect thereof nor in respect of any recommendations, implied or implicit, contained in this document. Unless otherwise stated, all views expressed herein (including estimates and forecasts) are solely those developed by our Economic Analysts and are subject to change without notice.