Download 2015 Quarter 1 MALAWIAN SNAPSHOT

MALAWIAN
SNAPSHOT
2015 Quarter 1
Inflation – According to the National Statistics Office (NSO) of Malawi, the consumer price index (CPI) increased by 19.7% y-o-y in February, following the
21.2% y-o-y increase recorded during the preceding month. The urban and rural rates for February were 22.5% y-o-y and 19% y-o-y, respectively, while
overall food inflation was recorded at 19% y-o-y.
Growth – The Reserve Bank of Malawi (RBM, the central bank) noted in its Monthly Economic Review for January 2015 that the country’s real GDP is
estimated to have expanded by 6.3% last year, and is projected to slow to 5.8% in 2015.
National development plan – The government of Malawi has an official development strategy, the Malawi Growth and Development Strategy (MGDS),
which aims to reduce poverty through economic growth and infrastructural development. The second MGDS, MGDS II, has been formally approved and
spans the 2011/12 to 2015/16 fiscal years.
OPPORTUNITIES
STRENGTHS
Seasonal foreign exchange inflows – the 2013 and 2014 tobacco seasons
generated inflows of foreign exchange amounting to $362.6m and $360.9m,
respectively.
Low, tending moderate political risk – stable security situation, with very low
risk of unrest or conflict.
Close working relationship with the International Monetary Fund (IMF) – the
Tourism potential – natural beauty combined with a friendly populace presents
Fund completed the fifth and sixth reviews of Malawi’s performance under its
significant potential in the tourism industry.
Extended Credit Facility (ECF) arrangement in March 2015.
Potential in communications industry – the mobile penetration rate is very low Healthy economic expansion rates are projected for the medium to long term,
(32.3% in 2013), hence the market holds potential for further development.
averaging 5.3% from 2015-17.
VULNERABILITIES
WHAT IS BEING DONE?
Corruption is rife – the ‘cash-gate’ corruption scandal has led to significant
political repercussions leading to the suspension of budgetary aid from
Malawi's major international donors.
The exchange rate devaluation and free-float have rendered imports much
more expensive than before; therefore, inputs into the production process are
much more expensive in local terms.
While the IMF’s decision in March to approve the release of funds to Malawi
is a step in the right direction, there have been little tangible results regarding
donor budgetary aid resumption.
While the weakened currency is painful at the moment, it will benefit the
country in the long-run, as the exchange rate approaches its market-determined
value.
Floods at the beginning of 2015 are expected to limit tobacco production,
thereby limiting foreign exchange revenues in the upcoming season.
International donor support remains withheld following the cash-gate
corruption scandal.
Susceptibility of agricultural sector to adverse weather conditions.
High dependence (up to 40% of government finances) on donor aid.
MEGA TRENDS
Population
17,377,468 (July 2014 est.); Age 15 - 64: 50.4%
Population growth rate (%)
3.33% (2014 est.)
Life expectancy at birth
Total population: 59.99 years; male: 58.04 years; female: 61.97 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 10.25%; People living with HIV/AIDS: 1 million (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 65.8%; male: 73.0%; female: 58.6% (2015 est.)
and write)
Urbanisation
Urban population: 15.9% of total population (2013); Urban population growth: 3.7% (2013)
Population below $1.25 (PPP) poverty line 72.2% (2010 est.)
Unemployment rate
15.8% (2011 est.)
Employment (% of total)
Agriculture: 86.4%; Industry & Services: 13.6% (2011 est.)
Labour participation rate (% of total
population ages 15+)
83.0% (2013)
Business languages
English, Chichewa
Telephone & Internet users
Main lines in use: 33,569; Mobile cellular: 5.29 million; Internet users: 938,383 (2013)
Sources: CIA World Factbook, World Bank, National Statistics Office Malawi, UNESCO, ITU, UNAIDS & NKC Research
1
Total
Malawi
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
Economic Freedom 2015 (1 most, 178 least free)
HDI Ranking 2013 (1 most, 187 least developed)
189
164
144
132
126
178
187
174
0
Source: NKC Research
175
110
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
N/R
N/R
N/R
Malawi is not rated by any of the three major rating agencies, namely Standard and Poor’s (S&P), Fitch Ratings and Moody’s Investors Service.
Infrastructure
Diversity of
the Economy
Banking
Sector
Continuity
of Economic
Policy
Poor
Dominated by
tobacco industry
Relatively
underdeveloped
Uncertain under
Relatively strong
new President
GDP Growth
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Twin deficits
Weak
Low
Low
Daily Trading
Volume
$15,020
(average daily turnover
in Feb 2015)
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Malawi Stock Exchange
13 domestic
Limited
$1.46bn (end of Feb 2015)
Source: Malawi Stock Exchange
Banking and food
production
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Limited
21-days to 273-days
(T-bills)
2-, 3- ,4- and 5-year
Treasury notes
N/a
Yes
Yes
Relatively underdeveloped
Macro-economic overview
A continuing vulnerability in Malawi is the economy’s heavy reliance on the agricultural sector, even more so after uranium production was suspended at the
Kayelekera mine in February 2014. That said, the possibility remains that uranium production might resume, with the Australian multi-national stating in
January 2015 that it is starting the process to conduct a feasibility study to recommence uranium production at the mine. An additional positive development
pertains to the unexpected appreciation of the Malawian kwacha over the past few months. After reaching an all-time low of MK482.2/$ on 28 November
2014, the kwacha appreciated by some 11.3% to MK427.60/$ by the end of March. The turnaround in the Malawian currency’s fortunes, which recorded a
26.2% depreciatory slide over the October to November 2014 period, follows the fall of global oil prices and the approval for the release of funds by the IMF.
The Fund completed the fifth and sixth reviews of Malawi’s performance under its Extended Credit Facility (ECF) arrangement in March 2015. According to
the press release, the IMF approved the disbursement of some $18.1m, thereby bringing the total disbursement under Malawi’s ECF arrangement to $90.3m so
far out of the total $144.4m approved in July 2012. Several waivers were granted to Malawi in order to approve the most recent reviews, including the “nonobservance of performance criteria related to the net domestic assets of the Reserve Bank of Malawi (RBM), net domestic borrowing by the government, the
ceiling on new non-concessional external debt maturing in more than one year, and the ceiling on non-accumulation of external payments arrears”.
Furthermore, the Fund approved Malawi’s request to delay the conclusion of the ECF arrangement by six months to 22 May 2016. The IMF noted in its press
release that the continued lack of donor fiscal aid has placed significant strain on Malawi’s macroeconomic outlook, leading to “increased recourse to central
bank financing, accumulation of domestic arrears, exchange rate depreciation, and high inflation”. While the government has attempted to appease the
international community via implementation of the so-called ‘Action Plan’, these efforts have yet to yield tangible results with regard to the resumption of
budgetary aid. Nevertheless, the approval of the latest round of reviews by the IMF is a step in the right direction.
2
Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
31.5%
Service/GDP
46.7%
Industry/GDP
21.8%
Malawi’s economic structure is dominated by agricultural activities that are susceptible to weather conditions, although the services sector contributes more to
economic output and is expanding at a brisk pace. The economy remains heavily dependent on foreign exchange inflows stemming from the tobacco sector.
Other important agricultural products include sugar and tea. The industrial sector arguably has the most viable potential in the Malawian economy, with
specifically the uranium sector boasting substantial proven reserves. However, production at Malawi's sole uranium mine, Kayelekera, was suspended in
February last year on the back of low global prices of the yellow cake. The services sector is the largest contributor to GDP, with an estimated contribution of
46.7% in 2014. The most important sub-sectors within the services industry are government services, telecommunications and the banking industry.
Real GDP Growth & Net FDI/GDP
2.5
10.0
Source: NKC Research
8.0
2.0
6.0
1.5
4.0
1.0
2.0
0.5
0.0
0.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
Although it is yet unclear as to what extent the economic consequences will be from the recent floods, it is evident that there will be some lasting negative
effects, particularly with regard to agriculture. Severe damage is estimated to have occurred in the agricultural sector, with the tobacco industry of particular
concern. The floods have led the government to admit that economic growth will be further negatively affected this year, while continued budgetary aid
suspension (stemming from the cash-gate scandal in late 2013) places further strain on the economy’s growth prospects. As such, we have lowered our
projection substantially for the coming year, with real GDP forecast to grow by 4.6% in 2015. The economy is expected to recover the following year,
expanding by 5.5% in 2016. Although the Malawian government offers several incentives to promote investment into the country, foreign investment inflows
remain subdued, partly due to the relatively diminutive size of the economy, and partly due to a lack of investment opportunities compared to other countries
in the region. Nevertheless, foreign direct investment (FDI) inflows (in US dollar terms) are expected to increase in coming years due to a projected
improvement in the overall economy, but only slowly, as it will continue to be constrained by the difficulties of operating in the Malawian economic
landscape.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
2016F
Fertilisers
Mineral fuels, oils & distillation products
Machinery & boilers
Pharmaceutical products
Tobacco & manufactured tobacco
substitutes
Other
Sugars & sugar confectionery
Coffee, tea & spices
Source: NKC Research
0.0
0.2
0.4
0.6
0.8
1.0
Main Imports: % share of total
2014E
2015F
2016F
Fertilisers
13.28
15.09
15.99
Mineral fuels, oils & distillation
products
12.02
6.41
6.89
Machinery & boilers
10.94
11.98
12.40
Pharmaceutical products
6.53
7.56
8.18
Main Exports: % share of total
2014E
2015F
2016F
Tobacco & manufactured tobacco
substitutes
55.52
53.11
52.01
Other
30.53
32.43
33.25
Sugars & sugar confectionery
8.42
8.90
9.32
Coffee, tea & spices
5.52
5.56
5.42
Malawi’s most significant imports include petroleum, pharmaceutical products, fertilisers, and industrial machinery. The country is currently benefiting greatly
from the lower global oil prices, considering that mineral fuels are traditionally on of Malawi’s primary import categories. Malawi imported mineral fuels
amounting to some $186.3m during the first half of 2014, accounting for almost 14% the country’s total imports during the period. As a result of Brent crude
oil currently trading at prices over 50% lower than a year ago, we have considerably lowered our estimate for Malawi’s oil imports last year, as well as our
projection for 2015. On the exports side, it is still unclear as to what extent tobacco exports will suffer this year as a result of the recent flood-damage to the
agricultural sector. While we deem it likely that lower production levels will be mitigated by higher prices, given Malawi’s international status as a prime
supplier of burley tobacco, our projections for tobacco exports in the coming year are subject to adjustments once more concrete estimates are available.
3
Current Account & Budget Balance
(% of GDP)
0.0
4.0
-10.0
2.0
-20.0
0.0
-30.0
-2.0
-4.0
-40.0
Source: NKC Research
-50.0
-6.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
Despite a lower forecast deficit on Malawi’s trade balance due to lower oil imports, the country’s overall projected current account deficit is still much larger
than would be considered prudent, particularly given the continued lack of budget support from the international community. Although our most recent
econometric model projects Malawi’s current account deficit balance to narrow in percentage of GDP terms in coming years, the deficit is still forecast to be
equivalent to an average of 22.1% of GDP over the 2014-16 period.
On the fiscal side, the Malawian minister of finance, Goodall Gondwe, admitted in his budget speech last year that he does not expect Malawi to receive
budgetary support from the country’s major international donors in the 2014/15 fiscal year (FY, July 1 to June 30), given that the necessary reforms in public
financial management will not be completed within the FY. However, under the assumption that budgetary aid is restored in the next FY, Malawi’s fiscal
deficit is projected to narrow from the estimated 3% of GDP in the 2014/15 FY to 0.9% of GDP in the 2015/16 FY, before widening to 1.1% of GDP in the
2016/17 FY.
Average CPI (% change, y-o-y)
30.0
Source: NKC Research
25.0
20.0
15.0
10.0
5.0
0.0
2009
2010
2011
2012
2013 2014E 2015F 2016F
Although Malawi’s struggle with rising prices is far from over, the outlook for 2015 is somewhat better than in the last two years. After staying above 20% yo-y for 31 consecutive months, CPI inflation finally fell below the psychological level to 19.7% y-o-y in February. The central bank’s Monetary Policy
Committee (MPC) noted in its February meeting that it projects CPI inflation will decrease to around 15% y-o-y by mid-2015, due to an appreciation of the
Malawian kwacha and decreases in fuel prices. That said, the recent floods significantly damaged the agricultural sector, with the tobacco sector of particular
concern. Malawi traditionally generates the majority of its foreign exchange inflows during the tobacco marketing season, which stretches from March to
August. Food imports are also likely to increase, given the damage to the agricultural sector, which will place additional pressure on the current account.
Nevertheless, CPI inflation is expected to decrease considerably from the average of 23.8% recorded last year to an average of 11.3% in 2015, before
decreasing further to an average of 7.9% next year.
CONTACT DETAILS
KPMG
NKC
NKC Independent Economists CC
Lamion Gama – designation is Partner
Tel +265 01 820 744
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon
such information or opinions.
© 2015 KPMG, a Malawian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss
entity. All rights reserved.
KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International
provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such
authority to obligate or bind any member firm. All rights reserved.
4