Financial Markets and Interest Rates

The market is experiencing a liquidity squeeze attributable to the tight monetary policy stance being pursued by the monetary authorities. This has seen a contraction on the demand for Treasury Bills and has consequently forced the Treasury to rely more heavily on overdrafts from the central bank for its perennial cash shortfalls. According to results of the T-Bills auctions during the first two weeks of June 2002, the demand for the paper declined from MWK548.0 million as per the auction of June 7 to a low of MWK186.7 million during the auction of June 13 with issues contracting to MWK300.9 million and MWK153.3 million, respectively.

The latest statistics from the government indicate that the budget deficit for April 2002 stood at MWK2,930.3 million of which MWK1,366.1 million was met through issue of T-Bills with overdrafts from the Reserve Bank of Malawi making up for much of the balance.

Although the decline in issue of T-Bills has seen a substantial drop in yield rates, the shift to advances from the central bank is a cause for concern since it will counter the tight monetary policy currently in place. Continued resorting to advances from the central bank in financing the budget deficit is may result in direct increases in the growth of money supply and is therefore inflationary pressure.

This could see inflation, which in April dropped to 17.5% from 18% in March, make a U-turn in the medium term. It may also be a catalyst for macro-economic imbalances which may result in interest rates rises and exchange rate depreciation for MWK.

According to the June 13 auction results, the yield rate for the 91 days bill dropped to a recent record low of 43.84% from 44.78% registered on June 7, while that for the 182 days bill dropped to 45.02% from 45.41%. This notwithstanding, the yield rate for the 273 days tenor increased marginally to 45.54% from 45.53% on June 7 and 45.45% on May 31.

The results of June 11 showed yields on RBM bills also declined when the 63 days tenor attracted a rate of 45.33% from 45.77% on June 4, while that for the 91 days bill contracted to 45.06% from 45.58%.

Current indications portray further declines in yield rates in the short term. However, the budgetary imbalances do not suggest a continued reduction in rates.

The Malawi Kwacha Exchange Rate

The official MWK exchange rate has remained relatively stable against the USD and the ZWD, but slightly appreciating against the ZAR. The mid rate of the MWK to the USD is MWK75.849 and MWK1.4085 to the ZWD. However, the slow down in the accumulation of foreign exchange reserves experienced this year is likely to impact negatively on the Kwacha. The situation on the ground shows that scarcity of foreign exchange is already being felt when some foreign exchange bureaux are selling US$1 at above MWK80. This could be attributable to speculators who are now accumulating dollars to hedge themselves against potential Kwacha depreciation.

The MWK appreciated against the ZAR with the official mid-rate suddenly decreasing to MWK7.3852 from MWK8.00 barely a fortnight ago. The movement in the MWK/ZAR exchange rate reflects movements in the international prices of gold and platinum on which the rand is premised.

WORLD ECONOMIC REVIEW

US Economy

There is now no doubt that longer-term confidence in the US economy has been has been punctured, brought about by concerns over durability of the turn-around and fears of another terrorist attack on American soil.  The current account figures released on Thursday June 20 showed a widening deficit, which further hurt the dollar.  The US Federal Reserve remains reluctant to raise interest rates, which to some extent is being taken neutrally to negative by markets overall as it signifies the central bank’s own doubts over the strength of the rebound of the economy.  

Euro Zone

The European Central Bank (ECB) has revised their inflation projections upwards for 2002/03 with the upper points of the forecasts above the 2% ceiling.  The ECB has forewarned of a potential inflation threat, thereby fuelling speculation of an increase in Euro-zone interest rates within the next few weeks. It has been said however that timing of a hike will be crucial, more so given that economic evidence is still mixed and also that European equity markets have fallen sharply over the past few weeks.  A hasty decision could be damaging to Euro growth prospects.

International Currencies

Confidence in the dollar has been seriously damaged with the widening current account gap and its unlikely that Wall Street will provide much support in the near future.  The US hit new 2002 lows against Euro 0.9706, the Japanese Yen 121.49, and the British Pound at 1.5017.

Most bankers are advising offshore investors to diversify out of the dollar, under pressure from capital flows out of the US and a doubtful economic outlook. The dollar has tumbled to two-year lows against the euro, while equity markets have been hit by worries about profitability, corporate chicanery and terror attacks.

Emerging Markets

The recent devaluation of the Nigerian Naira is anticipation of fuel inflation in the West African nation due to the higher cost of imported goods.  Across the board, upward price adjustments are expected after the Nigerian central bank’s 1.7 percent devaluation of the local unit on June 14 after foreign reserves declined drastically to 8.3 billion Naira down from 10.1 billion Naira in January 2002. The devaluation is not however expected to affect imports due to a huge dependency on them by Nigerian industries. Figures released by Nigeria's Federal Office of Statistics earlier this month put consumer price inflation at 18.8 percent in March, down 0.1 percent from the previous month, on a 12 month moving average basis.

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.