Anti-Bakili Muluzi / MALAWI POLITICS TODAY

Malawi’s default rate ranked high

by Frank Phiri, 27 April 2006 - 07:38:52

International credit rating agency Fitch has given Malawi a foreign and local currency Issuer Default Rating (IDR) of ‘CCC’ with positive outlook, an improvement from ‘CCC+’ that it gave the country in December. The rating, affirmed on April 20 this year, means that the country is slowly moving from the red to solid black in terms of its credit worthiness to foreign and domestic lenders. A ‘CCC’ rating is in the speculative category under Fitch’s ratings. It entails that default is a real possibility and that capacity for meeting financial commitments is solely dependent on sustained and favourable business or economic conditions. In a statement issued in Johannesburg, Fitch has attributed the improvement to a track record of sound fiscal discipline that followed satisfactory completion of a six-month Staff Monitored Programme (SMP) with the International Monetary Fund (IMF), leading to reinstatement of a lending programme—the Poverty Reduction and Growth Facility (PRGF)—last August. “Fiscal performance, the main source of macroeconomic instability in the past, has improved as a result of better expenditure management and the return of donor budgetary support,” said the ratings agency. It notes that Malawi has achieved the minimum six-month track record for adequate performance under the IMF’s PRGF which is a prerequisite for reaching completion point under the Heavily Indebted Poor Country (HIPC) initiative. “But [full completion] will require the maintenance of sound macro-economic management, including modifying the exchange rate system to be more flexible, and compliance with the few remaining completion point triggers, mostly in the social area,” said Fitch. Finance Minister Goodall Gondwe admitted in an interview on Tuesday that more work must be done for the country to improve on the credit ratings ladder. He said delays to enact the Anti-Money Laundering Bill and to clear domestic arrears were contributing to a poor credit rating for Malawi. “We’re still lacking in these few areas, but by next year our rating should improve. If we attain full HIPC completion point by June, which I am optimistic of, that should improve our image further,” he said. The minister said government was doing its “maximum” best to win debt cancellation, get the money laundering law in place and repay domestic arrears. Gondwe told Nation Business Review earlier this month that government would put aside a further K3.5 billion for domestic arrears under the 2006/07 budget, after paying about K2 billion under the current budget. The domestic arrears bill stood at K10 billion in 2004. Apart from the arrears, government owes the domestic market about K60 billion in Treasury Bills while its foreign debt stands at US$2.9 billion of which 80 percent is owed to multilateral financial institutions such as IMF, World Bank and the African Development Bank (ADB). Fitch notes in the statement that rating constraints are significant for Malawi due to high debt ratios in comparison to rated peers in the region, and that the economy remains vulnerable to external shocks. No comparisons could be made between Malawi and her neighbours since the findings are on individual countries, companies, banks, among others.