Market Report Fortnight ending January 18, 2002 Report 02/02

Fiscal Sector Performance

The sector is currently experiencing severe imbalances in its budgetary operations. The deficit in November 2001 stood at K1.84 billion, after recording a historical high of K1.88 billion in the previous month. This outcome is to a large extent attributable to a reduction in revenues and a lower turn out of pledged foreign aid in an environment of high government expenditure. Revenues in November contracted to K2.72 billion from K3.25 billion during October, representing a monthly decline of 16.5 percent. On the other hand, expenditures at K4.56 billion had only declined by 11.0 percent when compared to K5.13 billion registered in October 2001. The bulk of government expenditure emanated from domestic debt service in form of maturing treasury bills.

Financial Markets and Interest Rates

Despite the intensification of the mop up exercise, the market is still awash with the Malawi Kwacha as evidenced by a rising demand for Malawi Government Treasury and the Reserve Bank of Malawi (RBM) bills. According to the auction results of 11 January 2002, subscribers bided for K327.3 million worth of treasury bills against K150.0 million the treasury needed to service its due debts. Of this amount, K264.6 million was issued. However, the yield rates for the 91 days and 273 days tenors increased to 46.18% and 46.39% from 45.75% and 46.03% registered during the preceding auction, respectively. On the other hand, the yield rate on the 182 days tenor dropped to 45.58% from 46.18%.

During the auction of 8 January 2002, Bids for the RBM bills amounted to K1.43 billion against issues totaling K1.1 billion. The excess demand for the paper saw yield rates decline, although marginally, to 46.18% from 46.36% for the 63 days tenor, and to 46.23% from 46.37% for the 91 days tenor.
Interest rates are expected to remain high following the monetary authorities’ continued tight monetary policy stance and the need for issue of treasury bills to pay government maturing domestic debt.

Global Economic Review
US Economy

Optimism over a rebound in the US economy has been on a steady increase over the past couple of weeks.  The labour market has started showing some indications of improvement after the 5.8% upturn in the jobless rate in last December and it is anticipated that conditions could recover further in the near term. There are however fears that shedding of jobs might accelerate again later in the first half of the year and this may again have the similar effect of dampening confidence. The consumer sector is said to be over-stretched and there will be a need for additional adjustment in the medium term with a higher rate of savings.

EURO

The Euro-zone economy has been showing signs of stability, since the Euro became the official currency, and a steady recovery over the next few months is expected.  Huge confidence in the economy is highly unlikely however and there will still be concern that the economy will under-perform the US in the longer term. This will tend to have the effect of leading long-term capital flows out of the economic grouping. The ECB has indicated that it has no intentions of cutting interest rates in the short-term even if a further decline in inflation is experienced

INTERNATIONAL CURRENCIES

The current account deficit and need for capital inflows to a lesser extent remain the US dollar's main sources of weakness. Falling interest rates have propped up the greenback, but there’s less chance that rates will be reduced much further this year. Rates are likely to remain static or increasing for the most part of the year, despite speculation over a near-term cut, making it difficult for the US to attract funds. This is a particular risk as the US stock market still appears overvalued on conventional terms and it will be difficult to secure strong and stable inflows.

The Euro is said to be functioning well as a currency after its successful launch at the start of the year.  It is anticipated that there will be gradual upturn in demand for the currency now that it exists in reality, particularly the global central banks, which are likely to consider an increase in Euro reserves. The People's Bank of China has already stated that it will consider a switch of reserves into Euros from United States Dollars.

The South African Rand has continued trading in the 11.25-11.75 range over the past couple of weeks. It appears to have discovered its base within this range but it remains vulnerable to developments in the region, particularly neighboring Zimbabwe, where further political upheaval is anticipated with the forthcoming in a presidential poll set for March 9-10.  The rand has rebounded strongly from a historic low of 13.85/dollar in December, cheered by comments from authorities and the government's interim decision to spin off a 20 percent stake in mobile phone group M-Cell to passive Dutch investor Ice Finance BV for $475 million. The 37% depreciation of the ZAR last year, prompted a 100 basis point hike in the South African Reserve Bank benchmark repo rate this week to curtail the ZAR’s devaluation induced inflationary pressure.