Anti-Bakili Muluzi / MALAWI POLITICS TODAY

Malawi good for investment as it improves on credit worthness

by Taonga Sabola, 11 March 2007 - 09:19:38

There is more positive news on the economic front with a global economic think-tank rating Malawi more favourably in terms of investor confidence and reliability in its latest report. The development means there is reduced risk for companies and institutions dealing with Malawi’s entrepreneurs. Both industry and the financial sector have hailed the latest ratings which are used by foreign banks and investors in deciding whether to do business with the country and to what extent. In the report the body, Fitch Ratings, has upgraded Malawi’s long-term foreign currency Issuer Default Rating (IDR) — which reflects the ability of an entity to meet financial commitments on a timely basis — from CCC to B- (B minus) with a Stable Outlook. A B rating means the financial situation in the country varies noticeably while the former rating of CCC meant the country was considered vulnerable and dependent on favourable economic conditions to meet its commitments The rating firm, which is dual-headquartered in New York and London, said in a statement posted on Reuters on Tuesday Malawi’s long-term local currency IDR was similarly upgraded to B- (B minus), with a Stable Outlook, from CCC and the short-term IDR to B from C. A C rating is given to entities that are considered highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations. Malawi’s country ceiling has been raised to ‘B-’ (B minus) from CCC. Fitch Ratings is a leading global rating agency committed to providing the world’s credit markets with independent, timely and prospective credit opinions. It was one of the three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the US Securities and Exchange Commission in 1975. Malawi Confederation of Chambers of Commerce and Industry (MCCCI) described the development as very positive, arguing that the new ratings have a huge bearing on how other people view the country. MCCCI Chief Executive Officer Chancellor Kaferapanjira told the Economic Report on Wednesday that going up the ladder on the Fitch report may yield positive results for the country. “That’s a very significant development because these ratings are used by many people outside the country when they want to do some business with you. It also has an impact in terms of investment as it gives some confidence to investors when they want to go into a particular country,” said Kaferapanjira. Bankers Association of Malawi (Bam) president George Partridge agreed, adding that getting a good grade on the Fitch ratings is “of utmost importance” for a country like Malawi. “Basically it determines outsiders’ perspective on whether they can lend you money or deal with you in general. It gives the outsiders a chance to assess a country’s ability to pay back credit. “Such ratings are also important for the banking sector when we want to establish Letters of Credit. The outsiders look at the country risk which usually determines the price at which one may borrow. The higher the risk the lower the cost,” said Partridge. Malawi’s creditworthiness has improved markedly since 2004. And in recognition of the policy measures that underpin this improvement, in August 2006 Malawi reached completion point under the Heavily Indebted Poor Countries (“HIPC”) initiative organised by multilateral and bilateral creditors, and received a write-down of bilateral debt. Consequently Malawi qualified for the Multilateral Debt Relief Initiative (MDRI), which cancelled all pre-2004 debt to the World Bank and African Development Bank, and pre-2003 debt to the IMF. The development left Malawi’s external debt at 23 percent of GDP at the end of 2006, compared with 142 percent at the end of 2005. External debt service will be less than one percent of current account receipts in 2007-08. “Debt relief has not been the only positive development. The fiscal deficit has been reduced, and controls on public spending tightened,” says Charles Seville, Associate Director of Fitch’s Africa and Middle East sovereign team. Debt relief and improved fiscal discipline since 2004 has allowed the government to reduce domestic borrowing, which now accounts for half of total government debt of 42 percent of GDP. This in turn has allowed the Reserve Bank of Malawi to ease monetary policy. Lower interest rates will help the government reduce interest costs and lengthen the maturity profile of its debt. It will also encourage credit growth, investment and economic activity. The government is supporting the private sector by targeted infrastructure spending and measures to improve the business climate. But the report also notes that Malawi still suffers from various structural weaknesses, including vulnerability to economic shocks, and dependence on agriculture. Growth reached 8.5 percent in 2006 on a strong harvest, but Malawi’s recent growth performance has been somewhat weaker than rating peers such as Cameroon (‘B’ Stable), Mozambique (‘B’ Stable) and Rwanda (‘B-’ Positive), which have also received debt relief from HIPC and the MDRI. Its domestic debt is also higher and more costly than that of its peers. In light of social spending and investment needs, the budget will continue to be highly dependent on aid. Relations with donors — led by the UK government — are good, and Malawi can count on firm aid inflows provided standards of governance are maintained. A reversal of recent progress in this area is one of the main risks to the rating. Fitch says it expects new borrowing to push up the debt burden, although debt service will rise more slowly. “Loans will be exclusively on concessional terms from multilateral lenders, as a condition of the Poverty Reduction and Growth Facility (“PRGF”) with the IMF that expires in mid-2008. The government will also build up its capacity to manage external borrowing to avoid a rapid accumulation,” says Fitch. Measures of external liquidity such as reserves are weak, but are set to rise. Current account and fiscal receipts will receive a further boost from the Kayelekera uranium mine, which is scheduled to open in September 2008, Fitch noted. “It remains to be seen whether Malawi can build a track record of improved fiscal performance without the incentive of debt relief. It must also negotiate the path towards the legislative and presidential elections scheduled for 2009, which are likely to be closely contested. “However, there is scope for Malawi to progress in time to a higher rating within the ‘B’ category provided recent improvements in governance, the policy framework and economic performance continue,” reads the statement.