Market Analysis Report Fortnight ending April 12, 2002 Report 07/02

Tobacco Sales and Prospects

The improved quality and presentation of this season's tobacco crop at the auction floors indicates a short and medium term easing of pressure on the Malawi economy. Tobacco sales opened on 3rd and 4th April at the Lilongwe and Limbe Auction Floors, respectively, where for the first time in three years, Burley tobacco fetched an average of US$1.60 per kilogramme. The average price per kilogramme during 2001 was US$1.09.

According to the Tobacco Control Commission (TCC), tobacco sales at the country's auction floors are estimated at 146,000 metric tonnes this year, representing a growth of 17.53% when compared to 124,650 metric tonnes sold last year. This notwithstanding, Malawi will for the first time in six years not meet the demand from prospective buyers who were demanding 150,000 metric tonnes of burley and 20,000 metric tonnes of flue cured tobacco against an estimated supply of 130,000 and 11,000 metric tonnes, respectively.

In addition to this there is a growing demand for burley tobacco from Zambia, Mozambique and particularly Zimbabwe where commercial farmers are faced with low tobacco output.

The inevitable competition for the local tobacco will lead to a further improvement in the prices at the auction floors, providing the tobacco reaches the Malawi auction floors and is not sold in cross-border trade.

Tobacco has for decades taken a leading role in the provision of critical foreign exchange. The positive news from the Floors, if sustained, will boost the foreign exchange position, which has declined to unprecedented levels and has forced the MKW to depreciate against its trading partners.

Currently the MKW is trading at MKW76.30 to the USD after stabilising at MKW75.84 a fortnight ago.

Financial Markets and Interest Rates

There has been a slow down in the issue of both RBM and Treasury bills, which has nevertheless been accompanied by high yield rates. The auction results of 2nd April showed the yields for the 63 days RBM-Bill reduced to 46.31% from 46.43% while the 91 days RBM bill increased marginally to 46.19% from 46.14%.

The Treasury raised less than the announced required amount to service debt in the T-Bill auction results of 5th April. The low volume of bids amounted to only MKW212.6 million, well below the required MKW250 million. The yield rates on 182 days and 273 days tenors increased to 46.12% and 46.19% from respective rates of 45.97% and 46.13% registered during the auction of 28th March. On the other hand, the yield rate for the 91 days bill contracted marginally to 45.68% from 45.70%.

Inflation

The inflation rate for February 2002 dropped to 18.9% from 20.2% in January 2002. This has come as a surprise because all major fundamentals favoured a movement in the opposite direction. The economy has for the past quarter months been severely hit by a maize food shortage which has seen the price of maize leap by at least 200%. During the same period the MKW depreciated, fueled by severe shortage of foreign exchange.

WORLD ECONOMIC REVIEW

US Economy

Long-term confidence in the American economy remains intact with continuing optimism over strong productivity growth. Prospects for short-term improvement also look good, more so with the sharp consumer confidence rise for March that has kept hopes of a solid rebound in consumer spending alive. Speculations that an increase in interest rates maybe brought forward to the second quarter by the US Federal Reserve Bank were curtailed last week after the unemployment rate came out higher than expected.

Euro Zone Economy

The German economy has started showing signs of recovery. The German IFO index rose strongly last month to 91.8 from 88.5 the previous month, the highest level since April 2001. The overall economic evidence for the Euro Zone should remain favourable in the short term. As the Euro-zone recovers there will, however, be pressure for a tightening of fiscal policy to ease longer-term budget trends and this will tend to retain a bias towards a low interest rate policy from the European Central Bank.

International Currencies

In the last few days, the dollar has shown susceptibility to the continued Israeli / Palestinian crises and the subsequent oil price increases. The conflict is resulting in an upturn in global risk aversion, which may make it harder for the U.S. to fund its huge current account gap as capital inflows fade.

One of the Euro's fundamental problems remains the concern over longer-term productivity trends. Recent figures show that productivity levels in the Euro-zone remain static and it is expected that fears of a medium-term under-performance will continue. Capital account figures were also a let down with portfolio outflows of EUR 41.3 billion in January.

Regional Emerging Market News

Zambia's primary copper production decreased in February from the previous month, according to figures released by Bank of Zambia. Exports also experienced a reduction of 5.5 percent to 26,158 tonnes over the same period.

Fears over the future of the country's copper industry as Anglo American plc moves towards finalizing a sale, transfer of assets or closure of the mines it bought two years ago could see output fall even further over the next few months. Anglo's subsidiaries account for close to 67 percent of Zambia's total metals yield, which is the countries key foreign exchange earner.

Fears over Zimbabwe's increasing pressure for a revaluation of the ZWD to more representative levels vis-a-vis the parallel market remain strong, which would have significant effects on trading partners, particularly Malawi.

The MKW has also continued to lose grip of the ZWD despite economic downturns in Zimbabwe

when it is currently trading at an average of MKW1.4085 after maintaining an exchange rate of MKW1.3865 during the whole of March 2002. The performance of the MKW against the ZAR has been encouraging as well as it has now depreciated to a low of MKW7.00 from MKW6.66 barely a fortnight ago.