Malawi

Country Summary

Macroeconomic performance

Real GDP growth was an estimated 3.7% in 2018, down from 5.1% in 2016/17, which was a recovery from 2.7% in 2015/16. In 2016/17, growth was boosted by agricultural growth of 6.3%, up from a contraction of 0.1% in 2015/16, driven by better weather.

The fiscal deficit widened to an estimated 4.8% of GDP in 2018 from 3.7% in 2016/17. In 2017/18, the debt-to-GDP ratio was declined marginally to an estimated 58% of GDP from 59% in 2016/17, up from 30% in 2012/13. Malawi is now classified as being at a moderate risk of debt distress.

Inflation declined to an estimated 10.4% in 2017/18 from 11.5% in 2016/17, due partly to improved food supply. The Reserve Bank of Malawi gradually reduced its policy rate from 24% in November 2016 to 16% in December 2017, where it remained in 2018. In response, lending rates fell to 26.9% in July 2018, down from 33.6% in July 2017. The nominal exchange rate remained stable, fluctuating around 722 Malawian kwacha to the dollar in 2016 and 2017. Foreign exchange reserves continued to grow from 2.9% of GDP in 2013 to about 12% in 2017, in parallel with an equivalent increase in import cover from 2.1 months in 2013 to 3.6 months in July 2018.

The current account deficit was 9.8% of GDP in 2016/17, down from 13.0% in 2015/16. The improvement was due largely to a reduced import bill following the 2017 bumper harvest. However, the current account deficit worsened to an estimated 11.3% of GDP in 2017/18 but is projected to narrow slightly to 10.9% in 2018/19.

Poverty remains widespread at 51.5% nationwide in 2017, up from 50.4% in 2010, particularly in rural areas (56.6%). Extreme poverty is high, largely because of food insecurity. Incomes are very low, with GNI per capita of $360 in 2016. Inequalities are acute and rooted, with a Gini coefficient of .46 in 2010 and .44 in 2014.

Tailwinds and headwinds

GDP is projected to grow by 4.6% in 2018/19 and 5.6% in 2019/20. Agricultural improvements, stable macroeconomic fundamentals, the recovery in global commodity prices, and continued foreign direct investment inflows are projected to drive growth.

Due to high dependence on rain-fed agriculture, weather-related shocks are key risks to export commodities such as tea, tobacco, and other products, as experienced in 2017. The long dry spell in the first half of 2018 and fall 2018’s armyworm infestation reduced the maize output, contributing substantially to GDP deceleration in 2018.

A number of government initiatives aim at more resilient growth. To strengthen the industrial base, constrained by inadequate energy and water supplies, a feasibility study was completed in 2017 for the Kholombidzo Hydropower Generation Project, which will increase the country’s electricity generation capacity. Recognizing that agricultural performance continues to be hampered by adverse weather shocks, the government launched the National Agricultural Policy 2016 to increase production and the National Irrigation Policy 2016 to support irrigation, agricultural diversification, and value addition. In 2016, parliament enacted new land laws, including the Land Act, the Physical Planning Act, the Customary Land Act, and the Land Acquisition (Amendment) Act, to accelerate land registration for improved food production and infrastructure development.

Source: African Economic Outlook 2019

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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