Market Report Fortnight ending February 15, 2002 Report 04/02

Macro-Economic Developments

The difficulty for the economy to develop built-in mechanisms and the cost of its failure to cushion itself against adverse exogenous forces manifested when the MKW finally succumbed to the pressure on the foreign exchange market. The MKW surprised policy makers and the business community alike when its average official exchange rate suddenly plummeted to MKW72.28 to the USD, MKW1.34 to the ZWD and MKW6.58 to the ZAR from MKW68.00, MKW1.26 and MKW6.14 registered barely a fortnight ago. To compound this situation, the fundamental reality paints a gloomy picture for the immediate term as the severe shortage of foreign exchange has seen forex bureaux pegging one USD to as high as MKW80. This sudden depreciation of the MKW reflects the cronic characteristic weaknesses of the Malawi economy which has for decades failed to generate its own foreign exchange reserves sufficient to comfortably carry it through this seasonal lean period.

Contrary to the prevailing opinion attributing this recent development to the withholding of some aid by the donor community, the move by the donors, which although unfortunate, is merely a catalyst in an already volatile situation.

The level of official foreign exchange reserves has currently dwindled to as low as 3.2 months of import cover. This notwithstanding, the downward trend in reserves started to manifest in September 2001 when the country’s forex revenue and reserves are at a peak. The donors’ retention of already pledged inflows has, in addition to the evident loss in forex inflows, has inevitably created some panic and speculation among the business community creating a surge in the demand for the USD in a desperate move to hedge themselves against future depreciation of the MKW.

The shortage of forex is a concerning development given the fact that premise of resumption of aid is dependent on the outcome of the forthcoming economic management review between the IMF and Malawi Government. With official reserves at 3.2 months of import cover against an IMF target of at least 3.5 months, the authorities have not under-performed.

The viable remedy to tame the current predicament is therefore for the authorities to expeditiously intervene through seeking exceptional financing from other lenders with a view to stabilise the MKW, while waiting for the tobacco marketing season.

MKW500 Bank Note Release

February 12, 2002 finally saw the release of the new MKW500 bank note by the RBM into the economy, compelled by the long-term effects of the country’s high inflation environment, several years after the release of the MKW200 note. Some quarters in the market have expressed fears that the new banknote will further fuel inflation. However, these fears are unjustified given RBM’s commitment to a tight monetary policy.

The impact of the new MKW500 note on prices will therefore be very remote. However the timing of the launch is unfortunate with the current scenario of MKW depreciation against its major trading partners. The depreciation will inevitably lead to rising inflation and if the exchange rate problem persists for an extended duration, the new higher value banknote could to some extent draw domestic prices towards it, which could negate the positive gains on the perennial fight against inflation, in which the authorities have of late been demonstrating varying degrees of success.

Financial Markets and Interest Rates

The yield rates on the on Treasury Bills suddenly fell during the auction of February 8. At 44.63%, the yield rate for the 273 days tenor dropped by almost one hundred and fifty basis points from 46.01% at the previous auction. The rate on the 182 days tenor declined to 44.52% from 45.69% while the 91 days bill reduced marginally to 46.16% from 46.23%. This downward trend in the rates can be seen as a deliberate move to bring interest rates down as opposed to an excess demand for the paper. During the last auction bids, at MKW182.3 million, clearly fell short of the required amount of K250 million and only MKW158.2 million was allotted. Possible implications for higher yield rates during future auctions with a view to make up for the registered shortfall.

On the other hand, yield rates on the RBM Bills remained generally stable. The auction results of February 12 show the yield rate for the 63 days paper slightly decreasing to 46.42% from 46.47% previously. The 91days tenor barely moved from 46.51% to 46.37%. The ‘Applied for’ and ‘Allotted’ factors were both up by 13.5% and 6.7% respectively indicating a continuing appetite amongst investors for this instrument.

World Economic Review

US Economy

The economic indicators for the US have remained encouraging reinforcing further optimism for an economic turnaround in the near future, particularly with signs of rising productivity growth. It has been observed however that the excesses built up during the long expansionary phase of the previous several years have not been eased, with evidence of imbalances having widened further. Consumer debt, for instance, is still rising sharply signifying increasing deficit financing of consumption during hard times.

Euro-Zone

Confidence in the Euro-zone remains subdued, but more optimistic news in recent days has improved prospects considerably, particularly so from Germany, where signs of economic revival are evident. The German economy, whose industrial sector is of critical significance to the wider Euro-zone economy, as a whole has floundered badly over the past few months.

International Currencies

The US dollar will remain the currency of choice, at least in the short term, although it still has to contend with potential difficulties arising from the current account deficit.

Continuing uncertainty in the corporate sector over accounting practices, stemming from Enron’s collapse, the world’s biggest ever bankruptcy, is still making the US an unattractive destination for foreign funds, further worsening this situation. This flow of international funds into the US corporate sector has been critical in the financing of the current account deficit.

On the Euro, the long-term capital account of the Euro-zone, which has persistently undermined the unit over the past two years remains a major source of concern. Fears of a repeat of this pattern during the next 12 months are rife. The US’s current predicament is however likely to arrest capital outflows from this economic group in the short term at least.

Regional Emerging Markets

The Naira, the Nigerian currency, devalued over the past week on other hand following a slide of 2.5 percent on the black market on Friday, 8th 2002. This also came after calls by the lower-chamber of the House of Representatives for a drastic devaluation of the unit to reduce the premium between official and black market rates. The calls by lawmakers have created some level of uncertainty in the market, which has led to attempts to hedge against an eventual depreciation of the Naira, in accordance with the lower house’s recommendation, by buying up the available foreign exchange in the market. In the face of falling oil income and cuts in production of crude oil to meet OPEC quotas, it is proving difficult for Nigerian authorities to hold the value of the Naira firm

Trade in ZAR has been quiet during the past few days ahead of the budget presentation on February 20. No major upheavals are expected until after the budget.