Foreign Exchange Reserves

The performance of the external sector has been comparatively sluggish against a corresponding period in 2001. The official Foreign Exchange position is currently at around US$165.0 million, representing 2.7 months of import cover in sharp contrast to an equivalent of 5.6 months of imports recorded in May 2001. This position is a concern because the economy always experiences a peak in its foreign exchange levels during this time of the year, due to tobacco sales.

This year’s development, to some extent reflects unstable circumstances pervading tobacco crop marketing, which has been characterized by cross-border smuggling and erratic prices at the auction floors. The low level of foreign exchange reserves has also been perpetuated by the delayed and suspended disbursement of foreign assistance.

This outturn will in the medium term impact negatively on the MKW exchange rate, which has of late been stable against the USD and the ZWD but has continued to fair badly against the ZAR. Currently the mid-rate for the kwacha has since the start of April 2002 remained at MKW75.85 against the USD and at MKW1.40 to the ZWD. On the other hand, the kwacha has continued to depreciate against the ZAR when the mid-rate is currently at slightly above MKW7.70 from MKW7.40 registered a fortnight ago.

Financial Markets and Interest Rates

The issue of Treasury bills increased during the auction of 10^th and 17^th May 2002 when issues amounted to K830.2 million and K500.9 million, respectively. The increase reflected the pressure on government budgetary operations, more especially on domestic debt services. However, the rise in demand for the paper has seen yield rates on all the tenors slightly decreasing. According to the 17th May 2002 auction results, the yield rate for the 273 days bill decreased to 46.06% from 46.42% while that for the 182 and 91days bills decreased to 45.94%. This notwithstanding, low government revenue collection being experienced will see an increasing need for more issues which will translate into high yield rates in the short and medium term.

And according to the 14^th May auction results for RBM bills, out of the K495.75 million worth of bills bidders were willing to buy, K382.64 million was issued. This was a decline when compared to K668.39 million issued during the preceding auction of 7^th May. This saw yield rates decline when the 63 days bill attracted a rate of 45.54% from 46.15% during the previous auction. The rate for the 91 days tenor also decreased to 45.77% from 46.25%.

WORLD ECONOMIC REVIEW

US Economy

The markets continue to be wary of the US economy’s pace of recovery after a series of disappointing economic figures.  The significantly higher fiscal deficit anticipated to be in the US$100-125 billion range this year, much larger than the government expected months ago will further worsen economic outlook for the US. The increased spending over tax revenue as a result of a higher fiscal deficit will have to be financed by Treasury bonds, which will no doubt put upward pressure on bond market yields. Moreover, the fiscal deficit will illuminate the emergence of a growing twin deficit with the already existing huge current account gap.

Euro Zone

In news that has brightened Euro Zone’s inflation outlook, consumer price data from the German State of Saxony decreased shows that inflation went down lower than expected in May, making the third state in the regional grouping largest economy to record a similar outturn.  Two other German States also registered annual inflation rate downturns that were larger than projected on Thursday, 23^rd May 2002. Figures from 6 State will be used to come up with preliminary figure for the whole of Germany, which now is anticipated to come in lower than the 0.2% monthly rise initially projected.

This has overall been viewed as a good sign for Euro inflation outlook, despite the fact that the strongest price pressures have emanated from other countries in recent months. In the past couple of months, inflation for the grouping has come in well above the European Central Bank’s 2.0% ceiling fuelling speculation of an early rate hike.  The ECB’s prime goal is to combat inflation and has recently emphasized that it is keeping an eye on wages and other factors affecting inflation outlook with vigilance.  This is normally taken as central banker code for an impending rate hike.

International Currencies

Euro sentiment earlier in the week was significantly boosted by the successful resolution of Germany's IG Metall strikes. There’re however fears that the European Central Bank could raise interest rates as soon as June, before the US Federal Reserve Bank, which could be interpreted in the market as hindering growth, a minus for the single currency.

In the meantime, concerns about the US economy and recent warnings of an imminent terrorist attack on American soil continue to weigh negatively on dollar sentiment. The dollar is also being hampered by the fears of US corporate profits (i.e. P/E ratios) as well as fears about growing twin deficits.  The growing current account gap continues to worry traders who are fearful of foreign investors putting much needed capital elsewhere and starving the US of the US$1.5 billion a day requirement to finance the trade gap.

These apprehensions have made countries with cyclically recovering economies and higher interest rates very attractive to investors. Currencies like the Australian Dollar and New Zealand Kiwi have all done extremely well in recent months.

Regional Emerging Markets

According to official data released on Tuesday this week, South Africa's targeted CPIX inflation rate, which eliminates the impact of changes in home loan rates, rose by 8.8 percent in the year to April compared to 8.0 percent in the year to March.  This is the sixth consecutive month that the index has risen outside the official target range of 3% – 6%.

This has cemented expectations that a third rate hike this year is in the offing.  The Reserve Bank has hiked its benchmark Repo rate by a total of 200 basis points so far this year in a bid to curtail the inflationary impact of the Rand's 37 percent plunge against the dollar, mostly at the end of last year.   The Rand has however regained more than 15 percent of its value this year and as such, the anticipated June rate hike maybe the last.

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.