Malawi

Country Summary

Economic performance and outlook: Flooding in 2014/15 and drought in 2015/16 hurt agriculture, the economy’s dominant sector. Erratic rains affected the country’s hydro-dependent electricity generation, leading to widespread blackouts and water shortages. The power shortages severely affected small- and medium-size enterprises dependent on distributed power. Larger businesses generally have power backup systems to maintain production, but using these adds to the cost of doing business. In 2016/17, adequate rainfall improved agricultural production, increasing the maize, groundnuts, and beans harvests. The economy is expected to double its 2016 GDP growth rate of 2.3% to 4.5% in 2017. The medium-term outlook (5%–5.5% in 2018–19) is more positive as the economy stabilizes, but the country remains vulnerable to external shocks and fiscal slippages. 

Macroeconomic evolution: Macroeconomic stability showed signs of improvement during the past 12 months. Year-on-year inflation dropped considerably, from 218% in 2016 to 12.3% in 2017. Declining food price inflation has been the main driver in reducing overall inflation. Since early 2016, the Malawi kwacha further stabilized against the U.S. dollar, reducing exchange rate volatility while stabilizing nonfood prices and helping lower inflation. The Reserve Bank of Malawi started to ease monetary policy by reducing the policy rate by 600 basis points to 18% in July 2017. Although government revenues remained largely flat during the past two fiscal years, spending rose in 2014–16 as the government increased its maize purchases and repayments of arrears. Fiscal year 2016/17 showed signs of fiscal tightening as maize importation was curtailed. The government is expected to continue to reduce the budget deficit in the medium term. At moderate risk of debt distress, public debt stands at 54% of GDP and is projected to slowly decline in the medium term. 

Tailwinds: Higher rainfall in 2016/17 was a key contributor to the overall macroeconomic situation in Malawi. First, domestic production of maize increased 36%, which eliminated the fiscal pressures of maize importation. The government is implementing fiscal reforms and improving accountability and transparency systems, which are starting to bring back development partners that withdrew budget support following the Cash Gate Scandal. Earlier in 2017, the government received $80 million in general budget support to strengthen policy and institutional reforms in agriculture and to enhance public financial management systems. 

Headwinds Economic performance depends largely on weather conditions, which are expected to be more variable due to climate change. The country’s economic outlook is greatly influenced by agricultural performance, government economic management programs, global commodity prices, and donor support. Although the electricity supply improved during the rainy season, the flows in the Shire River—the source of 95% of Malawi’s electricity production —are insufficient for generation at full capacity. Water levels in Lake Malawi, which feeds the Shire River, have been about 1 meter under historic averages; the below–full capacity supply is expected to continue. Elections in 2019 are expected to increase pressure on fiscal spending as the current administration strengthens efforts to win re-election. Maintaining financial sector stability is a key priority. Efforts are under way to strengthen capitalization of banks, but the sector remains exposed to high concentration risk due to the limited number of large creditworthy borrowers.

Source: African Economic Outlook 2018

Fixed Income

Summary

  • The government securities yield curve extended to 5 years with three real benchmark points along the curve (2-3 and 5 years). 
  • The issuance strategy is to restructure government debt and build the benchmark yield curve for market development. 
  • Malawi  is 28th in the ABMDI 2017 Ranking Report. 

Issuance strategy 

The strategy is to issue more longer-dated government paper in order to restructure government debt, which is largely short term at the moment, and to develop an active benchmark yield curve for market development.   

Benchmark issues 

Malawi aims to develop a market-based longer-dated benchmark government bond yield curve. The government aims to create benchmarks for 2-3-5-7-10-15 and 20 years. The government of Malawi uses the auction method and some issues are reopened until they are fully subscribed and allotted. 

Yield curve

Yield curve calculation models 

Despite the fact that Malawi has no benchmark yield curve, the Reserve Bank of Malawi currently prepares a indicative yield curve on a weekly basis. The actual yields are used where available and indicative yields based on market consensus where there are no active trades. 

Interpolation methods 

The linear interpolation method is used where there are no benchmark yields from actual trades or survey. 

Yield curve managed by 

Despite the fact that Malawi has no benchmark yield curve, the Reserve Bank of Malawi currently prepares a yield curve on a weekly basis. However, this will be transferred to the Financial Market Dealers Association (FIMDA) 

Display platform 

The Daily Reports with the yield curve are posted on the Reserve Bank of Malawi website.   

Challenges in building an efficient yield curve 

Illiquid bonds and limited secondary market: there is usually no secondary market trading of bonds, despite their listing on the Malawi Stock Exchange (MSE). 

Guide to Buying Bonds

Procedures for market participation

Investors can present their bids directly to one of the branches of the Central Bank. Prospectus and application forms for government securities are obtained from the Reserve Bank of Malawi (RBM).

Settlement cycle

Treasury bonds are settled on a T+7 basis.

Taxation

Interest income in excess of K10,000 is taxable at the appropriate rate according to the Income Tax Act. However, the First Schedule of the Taxation Act exempts holders of government securities to be taxed.

Capital gains on the other hand are taxed at the ordinary income tax rate up to 100% of the gain but there are provisions for inflation adjustment. Capital gains can also be subdivided depending on whether capital allowances were available on the assets. 

Market restrictions

Openness to international investors

Malawi Stock Exchange (MSE) regulations limit participation of an individual foreign portfolio investor to a 10% maximum of any class of security and limit total foreign investment in any portfolio to a maximum of 49%.

Capital controls

Capital accounts were liberalized in the 1990s. This was followed by the FX and the exchange rate liberalization.

Restrictions on foreign exchange and profit repatriation

The foreign exchange market is fully liberalized.

2011, the RBM had to exert greater foreign exchange controls in an attempt to slow depletion of foreign exchange reserves.

There are no restrictions on repatriation of dividends, lease repayments and interest. Capital and loans can be freely remitted as long as they are obtained from foreign sources and registered with the RBM.

Credit rating

Malawi was last rated in 2009 by Fitch. The credit rating agency assigned a rating of B- to the local currency issuer default. S&P and Moody’s have not yet rated Malawi.

List of Primary Dealers 

The Malawi market comprises five primary dealers:

National Bank of Malawi

Standard Bank Malawi

NBS Bank

First Merchant Bank

Trust Securities

The Malawi Stockbrokers Ltd. is the institution authorized by the government to handle the secondary market trading.

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