Foreign Exchange Reserves

The fortnight under review witnessed a marginal draw down on official foreign exchange reserves when the position dropped to US$207.067 million (or 3.47 months of import cover) from this year’s highest level of US$209.521 million (or 3.51 months of import cover). This reflects a rise in demand for foreign exchange in an environment of dwindling supply, which has coincided with the closure of the tobacco-marketing season. So far, the Limbe Auction Floor has already closed with Lilongwe and Mzuzu Floors pending to close around 6th September 2002.

This development has kindled pressure on the kwacha exchange rate. Currently, the kwacha is trading at mid rates of MWK76.2451 to the USD and MWK 1.4159 to the ZWD after appreciating to MWK 75.75 and MWK1.4067 barely a fortnight ago. On the other hand, the kwacha has for at least a month been gradually appreciating against the ZAR. The kwacha is currently trading at MWK 7.0456 after depreciating to MWK7.4284 at the close of July.

Short-term prospects for the kwacha portray a gloomy picture; more especially with the uncertainty surrounding the resumption of the IMF pledged balance of payments inflows.

This notwithstanding, the kwacha exchange rate is expected to stabilize against its major trading partners in the medium and long term following some positive response from donors. The EU last week granted MWK 25 billion (Euro 345 million) to be disbursed in the next five years beginning this year. And this week, the US and Malawi governments have signed another aid package to a tune of MWK 2.3 billion (US$ 28.7 million) to be disbursed between now and 2005.

Financial Markets and Interest Rates

Treasury bills auction results dated 23rd August 2002 indicated that government is really determined to slow down borrowing from the domestic market when the treasury reduced the required amount of TBs to MWK150 million from MWK300 million required during the previous auction. During this auction, MWK246.9 million worth of TBs was issued against a demand of MWK247.1 million.

This saw yield rates on the 182 and 273 days bills declining further to 41.14% and 41.97% from respective rates of 41.54% and 42.32%. However, a marginal increase in the yield rate on the 91 days when it increased to 38.53% from 38.44%.

There has been mixed outcomes on the yield rates for the RBM bills. The rate for the 63 days bill during the auction of 20thAugust 2002 stood at 40.36% down from 40.51% during the previous auction. On the other hand the yield rate on the 91 days bill continued its upward trend. After recording a low of 39.94% on 8thAugust, the rate is now at 40.20%.

U.S. Economy

This past week was yet another disheartening one for the US economy after total new claims for U.S. jobless benefits rose for the third straight week, climbing above the psychological 400,000 mark for the first time since early July. Earlier in the week, the consumer index, which is compiled by the US Conference Board, a business-backed research group experienced a sharp fall to 93.5 in August from 97.4 in July. Analysts had expected the index to come in at 97.0. The impact of the fall of the index on sentiment was huge as consumer spending is propping the World’s largest economy despite sluggish capital expenditures

Euro Zone

Euro zone August consumer prices increased to 2.1% from a year earlier, rising above the European Central Bank's 2% target. EU Commission officials however insist that consumer prices are in line with earlier forecasts and the region's inflation prospects are good.

Earlier in the week, the IFO economic institute's headline West German business climate index decreased to 88.8 in August from 89.9 in July, a slightly bigger fall than analysts had forecasted and a signal that Europe's largest economy was not likely to gain momentum soon.

International Currencies

The strong correlation between the US Dollar and U.S. share prices has persisted in recent weeks. After the drastic fall in the consumer index earlier in the week, the Dow Jones industrial average fell more than one percent and failed to close above the 9,000 levels. This saw dollar decline to a near one-week low at 117.97 against the Japanese Yen in U.S. trade on Tuesday.

The rising concerns over an imminent US attack on Iraq are also dogging the Greenback. The market is worrying over the cost of such a military offensive and its impact on an already growing fiscal deficit.

Emerging Markets News

South Africa’s all-commodities Producer Price Index (PPI) increased by an annual rate of 15.2% from 14.4% in June exceeding market forecasts of 14.3%. This was its fastest increase since September 1989. This has fueled fears that the central bank would hike interest rates again for the fourth time this year. The Reserve Bank has raised its key Repo rate by 300 basis points to 12.50% this year in a bid to curtail inflation ignited by the Rand's unprecedented 37% decline in 2001. The Reserve Bank’s Monetary Policy Committee meets on September 11-12.

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.