MID-YEAR ECONOMIC REPORT 2017 JUNE 2017

Transcription

1 MID-YEAR ECONOMIC REPORT 2017 JUNE 2017

2 LIST OF ACRONYMS AfDB: BHL: CPI: DSI: ECB: ECF: EIU: ESCOM: EUR: FEWS NET: FISP: FMB: FSI: GBP: GDP: IMF: MASI: MASL: MK: MPC: MPICO: MSE: MT: MRA: NBM: NBS: NICO: NITL: NSO: OMO: OPEC: PCL: RBM: Rmb: SDF: Sunbird: TB: TCC: TNM: African Development Bank Blantyre Hotels Plc Consumer Price Index Domestic Share Index European Central Bank Extended Credit Facility Economist Intelligence Unit Electricity Supply Corporation of Malawi Euro Famine Early Warning Systems Network Farm Input Subsidy Program First Merchant Bank Plc Foreign Share Index British Pound Gross Domestic Product International Monetary Fund Malawi All Share Index Meters Above Sea Level Malawi Kwacha Monetary Policy Committee Malawi Property Investment Company Plc Malawi Stock Exchange Metric Tonnes Malawi Revenue Authority National Bank of Malawi Plc NBS Bank Plc NICO Holdings Plc National Investment Trust Plc National Statistical Office Open Market Operations Organization of the Petroleum Exporting Countries Press Corporation Plc Reserve Bank of Malawi Chinese Renminbi Southern Dark Fired Tobacco Sunbird Tourism Plc Treasury Bills Tobacco Control Commission Telekom Networks Malawi Plc

3 TABLE OF CONTENTS Executive Summary Economic Overview Other Market Developments Regional Developments Global Developments Outlook for June and Beyond Malawi Economic Risks Appendices: Selected Economic Indicators (Malawi) Selected Economic Indicators (Tanzania, Uganda, Zambia, Mozambique) Proposed Budget Framework 4. Budgetary operations Malawi Selected Economic Indicators GDP Projections KPIs for ESCOM Seasonal Calendar 39

4 EXECUTIVE SUMMARY Economic Outlook Malawi The Kwacha is expected to appreciate during the tobacco marketing season. In the medium to long term, the currency will depreciate on account of the significant current account deficit, weak investment inflows and low forex reserves. Inflation is expected to remain subdued in the short term due to the continued slowdown in food prices and dwindling global oil prices. The EIU expects inflation to average 13.8% in 2017 and 9.9% in Interest rates on the interbank market are dependent on volatility of liquidity and are unlikely to be stable. Treasury bill yields and commercial bank lending rates are expected to decline as a result of the reduction in the Monetary Policy Rate. The Monetary Policy Rate has been revised downwards to 18% from 22% and it is expected to be maintained in the short term. Execution of the 2017/18 fiscal budget is expected to be better than the previous financial year due to the resumption of budgetary support by the World Bank, disbursement by the IMF and improved domestic revenues as a result of new proposed tax measures. The fiscal deficit is expected to decline to 3.9% of GDP from a likely outturn of 4.1% of GDP in the 2016/17 financial year. However, financial constraints may still prevail due to lower disbursement in project grants. Real GDP growth for 2017 has been forecasted upwards to 4.4% by the World Bank and 4.5% by the IMF. Growth is expected to rebound in 2017 as agricultural production improves and the country begins to diversify its export base. The government of Malawi has stated that the economy is recovering and may grow by at least 6.1% due to the fairly stable currency depreciation, favourable weather patterns and a downward trend in inflation. However there are significant downside risks as indicated below: Key Economic Risks Malawi Insufficient power supply will lead to lower productivity and dampen economic growth. High government debt levels create a future obligation for government to repay the debt plus interest. Global oil price increases will lead to high import costs which may widen the country s trade deficit. Persistently weak export base affects the Kwacha s stability against the major currencies as import values exceed export values. P A G E 4

5 M I D - Y E A R E C O N O M I C R E P O R T EXECUTIVE SUMMARY (Continued...) Key Economic Highlights For The First Half of 2017 Malawi In May 2017, headline inflation decreased to 12.30% from 20.00% in December Inflation averaged 15.4% in the five months to May 2017 from 22.30% during the first half of 2016 (Source: NSO). Treasury bill yields decreased on all the tenors during the first half of The All-type Treasury bill yield decreased to 22.10% in June 2017 from 25.10% in December (Source: RBM). During the first half of 2017, the Malawi Kwacha marginally appreciated against the U.S Dollar but depreciated against the British Pound, the Euro and South African Rand. The Kwacha closed the period at K against the US Dollar, a marginal appreciation of 0.01% from K in December 2016 (Source: RBM). Total forex reserves increased to US$1.04 billion (4.96 months worth of import cover) as at 30 June 2017 from US$ million (4.51 months worth of import cover) in December 2016 as compared to US$ million (4.76 months worth of import cover) in June 2016 (Source: RBM). The stock market was bullish during the period under review, with the MASI increasing by 18.41% to settle at 15, points from 13, points in December The market gainers were BHL, FMB, ILLOVO, MPICO, NBM, NBS Bank, NITL, PCL, Sunbird, Standard Bank, TNM and Old Mutual. The market loser was NICO (Source: MSE). Liquidity levels decreased in June 2017 averaging K4.26 billion per day from K5.75 billion per day in December Access on the Lombard Facility (discount window borrowing) averaged K4.09 billion per day in June 2017 decreasing from K13.64 billion per day in December 2016 (Source: RBM). In January 2017, Malawi became the third Southern African country to report an outbreak of armyworms, estimated to have destroyed 2,000 hectares of crops in Malawi (Source: Ministry of Agriculture). The Monetary Policy Committee (MPC) of the Reserve Bank of Malawi met on 23 and 24 March 2017, and after taking into account the disinflation process, the Policy Rate was revised downwards by 2 percentage points to 22%. The MPC also met on 4 and 5 July 2017 and revised the Policy rate downwards by 4 percentage points to 18% (Source: RBM). The tobacco marketing season was opened on 11 April As at the thirteenth week of the season, a total of million kilograms (2016: million kilograms) were sold at an average price of US$1.96 (2016: US$1.54), resulting in a total value of US$ million (2016: US$ million) (Source: TCC). On 21 April 2017, the Government of Malawi announced the appointment of new Reserve Bank of Malawi governor Dalitso Kabambe, replacing Charles Chuka whose contract had expired (Source: RBM). On 19 May 2017, the national budget was presented at Parliament by the Minister of Finance and total expenditures have been approved at K1.30 trillion (Source: Ministry of Finance). The World Bank approved a US$95 million (K69 billion) credit to Malawi to boost the quantity and quality of various agricultural products for domestic and export markets (Source: World Bank). On 21 June 2017, the Executive Board of the IMF completed the ninth review of Malawi s economic performance under the ECF arrangement and approved the disbursement of US$26.9 million (Source: IMF). P A G E 5

6 1. ECONOMIC OVERVIEW Inflation Headline inflation for the 5 months ended 31 May 2017 averaged 15.4%, a decline from 21.3% recorded during the last half year of This is due to the decrease in both food and non-food inflation. Food inflation declined to an average of 16.30% from 26.90% during the first half of 2016 while non-food inflation decreased to an average of 14.40% from 17.90% during the first half of 2016 (Source: NSO). Government Securities Treasury bill yields decreased on all the tenors during the first half of The all type Treasury bill yield decreased to 22.10% in June 2017 from 25.10% in December 2016 (June 2016: 28.99%). Total Treasury bill applications for the month of June 2017 stood at K27.29 billion and the entire amount was allotted. In December 2016, total Treasury bill applications stood at K20.42 billion and K16.01 billion was allotted, representing a 17.19% rejection rate. The 364 days paper accounted for the highest subscription rate in June 2017 at 85.54%, followed by the 91 days paper at 8.82% and the 182 days paper at 5.64% (December 2016: 364 days at 44.33%, followed by 91 days at 8.82% and 182 days at 5.64%). There were Open Market Operations (OMO) conducted in June 2017 and a total of K76.42 billion (December 2016: K53.70 billion) was allotted in OMO securities against maturities of K billion (December 2016: K billion) (Source: RBM). P A G E 6

7 1. ECONOMIC OVERVIEW (Continued...) Foreign Currency Market During the first half of 2017, the Malawi Kwacha marginally appreciated against the U.S Dollar but depreciated against the British Pound, the Euro and the South African Rand. The Kwacha closed the period at K against the US Dollar from K in December 2016, a marginal appreciation of 0.01% (Source: RBM). Total forex reserves increased to US$1.04 billion (4.96 months worth of import cover) as at 30 June 2017 from US$ million (4.51 months worth of import cover) in December 2016 and US$ million (4.76 months of import cover) in June Of the total reserves, US$ million (3.25 months of import cover) were gross official reserves and US$ million (1.71 months of import cover) were private sector reserves (Source: RBM). P A G E 7

8 1. ECONOMIC OVERVIEW (Continued...) Interbank Markets and Interest Rates Liquidity levels have decreased to an average of K4.26 billion per day in June 2017 from K5.75 billion per day in December Access on the Lombard Facility (discount window borrowing) averaged K4.09 billion per day, decreasing from K13.64 billion per day in December 2016 at an average rate of 24.00% from 26.00% in December Overnight borrowing between banks decreased to an average of K5.49 billion per day in June 2017 from K5.90 billion per day in December Interbank interest rates averaged 21.42% in June 2017 decreasing from 24.89% in December During the first half of 2017, the Monetary Policy Rate was reduced in March 2017 to 22% from 24% in December It has been revised to 18% from 22% on 5 July Commercial bank base lending rates averaged 31% in June 2017 (June 2016: 36%) and are likely to decline in the short term (Source: RBM). Stock Market The stock market was bullish during the first half of 2017, with the Malawi All Share Index (MASI) increasing by 18.41% to settle at 15, points from 13, points in December The market gainers were TNM (54.21% increase), ILLOVO (35.09% increase), Old Mutual (14.76% increase), Standard Bank (14.00% increase), NBM (10.49% increase), Sunbird (9.40% increase), FMB (8.88% increase), NITL (7.35% increase), PCL (5.56% increase), MPI- CO (2.17% increase) and BHL (0.75% increase). The market loser was NICO (28.94% decrease). During the period, the Domestic Share Index (DSI) increased by 18.46% to 12, points from 10, points while the Foreign Share Index (FSI) increased by 14.76% to 2, points from 2, points. The year-to-date return for the MASI increased to 18.41% as at June 2017, compared to -8.53% in December 2016 (June 2016: %). A total of million shares were transacted in the first half of 2017 at a total consideration of K3.92 billion in 515 deals. In the first half of 2016, a total of million shares were transacted at a total consideration of K1.29 billion in 459 deals. This reflects a 43% increase in share volume and a 204% increase in transaction value. Market capitalization increased in both Kwacha and U.S Dollar terms from K billion (US$ million) in December 2016 to K billion (US$ million) in June P A G E 8

9 2. OTHER MARKET DEVELOPMENTS Food Security Update (Source: FEWS Net) Following the good cropping season, an average national staple was achieved during the first half of This has led to improved market supplies and brought food stocks back to normal levels. Food security has improved, however acute food shortages are anticipated in a few areas that experienced localized shocks. Early crop estimates indicated that an average production was expected during the season, however damage caused by armyworms posed a serious threat. Average maize prices have declined by about 11% since December The decrease was atypical as past trends have shown that maize prices usually increase by about 30% between December and February. This was mainly driven by the presence of humanitarian assistance up to March 2017 which reached almost half the rural population and early access to green maize consumption. Incomes have also been improving for households in the southern and central regions who are involved in harvesting activities and crop sales. However, the government is maintaining the maize export ban imposed last season and has put in place strict control measures. This could lead to lower income for farmers and maize traders who will be forced to only rely on the domestic market. Agriculture Production Estimates Survey Results (Source: Ministry of Agriculture, Irrigation and Water Development) The Ministry of Agriculture released the Agriculture Production Estimates Survey in February 2017 which showed that the country s maize production was expected to increase by 35.9% in the 2016/17 season. The first round 2016/17 Agriculture Production Estimates Survey projected that maize production would increase to 3,220,712 metric tonnes, higher than the 2015/16 final round estimate of 2,349,493 metric tonnes. The projected increase in maize production was an improvement after the worst food shortage in nearly a decade when the country recorded a 30% drop in maize production during the 2015/16 season. This left about 6.7 million people on the verge of food insecurity. Cotton production was expected to go up by 7.6% while tobacco production was expected to drop by 36.6%.. P A G E 9

10 2. OTHER MARKET DEVELOPMENTS (Continued ) Prospects for the 2016/2017 Rainfall Season In Malawi (Source: Department of Climate Change and Meteorological Services) In February 2017, the Department of Climate Change and Meteorological Services stated that the weak La Nina weather phenomenon which was influencing the country s weather conditions during the 2016/17 rainfall season had ended. Climatic analyses of the weak La Nina phenomenon showed that the country experienced normal cumulative rainfall amounts. A greater part of the southern half of the country experienced above normal rainfall amounts while some parts of the northern half of the country experienced below normal rainfall amounts. Hence there is neither La Nina or El Nino and meteorological models have indicated that neutral weather conditions (often referred to as La Nada) will persist in La Nada is a condition whereby sea surface temperatures are neither warm nor cold across the central equatorial Pacific Ocean. Statement of the 1 st and 2nd Monetary Policy Committee Meeting for 2017 (Source: RBM) The Monetary Policy Committee (MPC) of the Reserve Bank of Malawi met on 23 and 24 March 2017 to review the global and domestic economic developments. After taking into account the disinflation process and inflation outlook, the MPC decided to reduce the Policy Rate by 2 percentage points to 22% and maintain the Liquidity Reserve Requirement (LRR) at 7.5%. Real economic growth was projected to rebound to between 4% and 5% in 2017 from 2.7% in 2016 on the back of favorable weather conditions, and stable macroeconomic environment. The MPC also met on 4 and 5 July 2017 to review the recent economic developments and decide on the monetary policy stance in order to consolidate gains made in stabilizing the economy. After taking into account the disinflation process and the inflation outlook, the MPC decided to reduce the Policy Rate by a further 4 percentage points and maintain the LRR at 7.5%. Real GDP growth was projected to rebound to 4.5% in 2017 on the back of favorable weather conditions and stable macroeconomic environment. IMF Completes Review Mission to Malawi (Source: IMF) In March 2017, a team from the IMF led by Oral Williams conducted discussions on the ninth and final review under the Extended Credit Facility (ECF) arrangement. The mission observed that Malawi s economy was hit hard by the negative impacts of droughts but the economic outlook is improving, with better prospects of agricultural output. Real GDP is expected to pick up to a range of 4.5% in 2017, driven by a rebound in agriculture, wholesale and retail and telecommunication sectors. Annual inflation is also expected to decline, reflecting prudent monetary and fiscal policies as well as the stabilization of food prices on account of humanitarian response. In June 2017, The Executive Board of the IMF completed the ninth and final review of Malawi s economic performance under the ECF Arrangement. The Board approved the disbursement of US$26.9 million. The Executive Board stated that real GDP growth is expected to pick up in 2017 due to better prospects for agricultural output. Annual inflation is also expected to be on a downward trend. However the macroeconomic outlook remains challenging, reflecting uncertainties related to adverse weather conditions and policy slippages. P A G E 10

11 2. OTHER MARKET DEVELOPMENTS (Continued ) Financial Statements for Listed Companies (Sources: Respective Companies) In March and April 2017, most of the companies listed on the Malawi Sock Exchange released their financial results regards to the 2016 financial year. The table below presents the performance of the listed companies during the year under review. Trading Statements of Listed Companies (Source: Respective Companies) Some companies have released their trading statements regarding their performance during the first half of the 2017 financial year. The table below shows a summary of these statements: COUNTER TNM FMB MPICO NICO NITL DESCRIPTION Profit for half year ended June 2017 to be more than 50% higher Profit for half year ended June 2017 to be more than 60% higher Profit for half year ended June 2017 to be more than 20% higher Profit for half year ended June 2017 to be more than 20% higher Profit for half year ended June 2017 to be more than 150% higher P A G E 11

12 2. OTHER MARKET DEVELOPMENTS (Continued ) 2017 Tobacco Marketing Season Update (Source: TCC) The tobacco marketing season was opened on 11 April 2017 at Kanengo Auction Floors in Lilongwe by the President of Malawi, Arthur Peter Mutharika. The season is expected to be better than the previous year due to improved weather conditions and the reduction in tobacco production. As at the end of the thirteenth week of the tobacco marketing season, a total of million kilograms (2016: million kilograms) were sold at an average price of US$1.96 (2016: US$1.54), resulting in a total value of US$ million (2016: US$ million). Water Level and Power Generation Update (Source: EGENCO) Electricity Generation Company Malawi Limited (EGENCO) released a water level and power generation update, stating that water levels in Lake Malawi have been rising due to the rainfall that the country experienced. As at 3 rd April 2017, lake levels rose by 0.77 metres above sea level (masl) to masl. In view of the rise in water levels, EGENCO increased the opening of the flows from 126 cumecs to 160 cumecs to allow more water for optimum power generation at its power stations. Due to this action, power generation improved. EGENCO is still controlling the flow of water from Lake Malawi to ensure that there is adequate water harvested in Lake Malawi. Government Appoints New Reserve Bank of Malawi Governor (Source: RBM) On 21 April 2017, the Government of Malawi announced the appointment of new Reserve Bank of Malawi (RBM) Governor Dalitso Kabambe, replacing Charles Chuka whose contract expired. Before this appointment, Dalisto Kabambe was the Principal Secretary in the Ministry of Foreign Affairs and has also held various positions in the Ministry of Finance including Director of Economic Planning. P A G E 12

13 2. OTHER MARKET DEVELOPMENTS (Continued ) World Bank Resumes Budgetary Support To Malawi (Source: World Bank) The World Bank Board of Executive Directors approved an US$80 million credit to the Malawi Government for general budget support on 4 May This is the first budget support in 4 years since the public finance mismanagement scandal which led to withdrawal of donor support. This budget support operation, referred to as the Agricultural Support and Fiscal Management Development Policy Operation (DPO), is the first of a proposed series of two operations. It aims at improving incentives for private sector participation in agricultural markets and strengthening fiscal management. 2017/18 State of the Nation Address: Harnessing Economic Gains for Sustainable Socio-Economic Development (Source: Malawi Government) The President of Malawi delivered the State of the Nation Address on 5 May 2017 during the opening of the 6th Meeting in the 46th Session of Parliament and the 2017/18 budget meeting. He made the following key points: 1. Macroeconomic Environment The economy is showing signs of recovery and an estimated real GDP growth rate between 5% and 6% is expected in This will be as a result of strong agricultural season due to favourable rains in most parts of the country and good performance in the manufacturing, wholesale and retail sectors. Annual inflation rate has been declining and this trend is expected to continue due to the favourable agriculture season and an expected decline in international prices for petroleum products. The government managed to control expenditures in the fist half of the 2016/17 mid year and domestic revenue mobilization performed well although the country's debts have increased over time. Government will continue to strengthen its debt management strategies through adherence to public debt policies and medium term debt strategies. 2. Sustainable Economic Growth Malawi will have enough food largely due to good rains in most of the country. The preliminary crop estimates suggest maize production will increase by 37.5% from 2.4 million metric tons in 2015/16 season to 3.3 million metric tonnes in the 2016/17 season. The 2016 tobacco season registered sales of 195 million metric tonnes generating an estimated revenue of US$276 million, 18% lower than 2015 sales. Government will continue to encourage managed production through contract farming and enhance agricultural extension services to produce quality tobacco leaf. The mining sector has potential to significantly contribute to the country's sustainable economic growth and development. The establishment of modern geo-management platform will provide investors with access to geo scientific information essential for making well informed investment decisions. 3. Social Development The government will continue improving the health and well being of Malawians through construction of the first cancer treatment centers, increasing HIV treatment sites and reducing maternal and child mortality rates. The government will also continue to construct classrooms, train more teachers and expand infrastructure in public universities to ensure high quality education across the country. Reliable transportation and access to services is a prerequisite for socioeconomic growth and development P A G E 13

14 2. OTHER MARKET DEVELOPMENTS (Continued ) 2017/18 National Budget Statement Summary (Source: Ministry of Finance, Economic Planning and Development) On 19 May 2017, the national budget for the 2017/18 financial year was presented to the Malawi Parliament by the Minister of Finance, Goodall Gondwe. The national budget has been formulated within the backdrop of a rebounding economy projected to grow to 6.1% in 2017 from 2.7% in The key points are as follows: Total revenue and grants were proposed to increase by 13.3% from a likely outturn of K977.8 billion (23.0% of GDP) in 2016/17 to K1.11 trillion (22.3% of GDP) for the 2017/18 financial year. Domestic revenue was budgeted to increase by 16.9% to K980.3 billion (19.7% of GDP) while grants were projected to decline by 8.3% to K127.7 billion (2.6% of GDP). In order to increase domestic revenue, several new taxation measures were proposed such as an introduction of a 10% excise tax on television subscription fees, a removal of duty free imports of minibuses and buses. Income tax measures proposed are: increasing the tax free income bracket from K20,000 per month to K per month and an introduction of a PAYE bracket of 35% for salaried income above K3 million per month. Total expenditure was projected at K1.29 trillion (26.1% of GDP). This comprises of recurrent expenditure of K946.6 billion (19.1% of GDP) and development expenditure of K348.8 billion (7.0% of GDP). Recurrent expenditure comprises of K303.6 billion in wages and salaries, K185.8 billion in interest payments, K197.3 billion in subsidies and transfers, and K256.0 billion in purchases of goods and services. Domestically funded development expenditure was estimated at K132.6 billion (2.7% of GDP) while foreign financed development expenditure is projected at K216.1 billion (4.4% of GDP). The major projects being implemented under the 2017/18 fiscal year include: the Shire Valley Irrigation Project, construction of community hospitals and teachers training colleges, rehabilitation of the railway system and the commencement of the coal-fired power generation project which will add 300 megawatts to the national power grid. The projected deficit including grants in 2017/18 is billion (3.9% of GDP), this is a decline (in terms of GDP) at 4.1% of GDP but an increase from K billion during the previous fiscal year. Although it was hoped during the mid-term review to reduce the deficit to 3.1% at GDP, the likely deficit for the 2016/17 budget is slightly higher. However, this will be an improvement from the deficit in 2013/14 fiscal year at 6.1% of GDP. The projected deficit is lower than other Sub-Saharan countries such as Kenya (7% of GDP), Mozambique (11% of GDP), Zambia (7% of GDP) but higher than South Africa (3.1% of GDP) and Tanzania (3.8% of GDP). Net domestic borrowing is expected to be reduced from K63.6 billion (1.5% of GDP) to K27.5 billion (0.6% of GDP). In light of this development, the budgetary support will be used to repay domestic borrowing and huge arrears that were accumulated by June The 2017/18 budget is based on the assumption of the return in budgetary support from the European Union, the World Bank and disbursement from the IMF. Reserve Bank of Malawi Financial and Economic Review (Source: RBM) The Reserve Bank of Malawi released the financial and economic review for the fourth quarter of Total public debt stock dropped from K2.0 trillion at the end of the third quarter of 2016 to K1.8 trillion in the quarter under review. Of the total debt, US$1.5 billion (K1.1 trillion) was external debt at 28.9% of GDP and domestic debt at K721 billion which is 19% of GDP. The report also showed that real GDP growth in 2016 is estimated at 2.7%. The sluggish growth was mainly due to the continued effects of weather-related shocks which adversely affected the agricultural sector. The positive growth in 2016 emanates from a few sectors that still made strides despite the economic challenges. These sectors include the financial and insurance sector, information and communication sectors, construction and the manufacturing sector. In 2017, real GDP growth is projected to reach 4.5% mainly due to improved weather conditions and macroeconomic stability. P A G E 14

15 2. OTHER MARKET DEVELOPMENTS (Continued ) Farmers Union of Malawi Statement on Maize Export Ban (Source: Farmers Union of Malawi) Farmers Union of Malawi released a press statement whereby they observed with great concern the practice by government of imposing an export ban on maize. The ban was implemented to ensure that the country is self sufficient, however it has brought economic injury and suffering to farmers. According to Farmers Union of Malawi, the maize export ban has dampened maize farm gate prices with prices as low as K50/kg. While government invests billions in agriculture through the subsidy program in order to benefit smallholder farmers, the export ban reduces expected benefits to Farm Input Subsidy Program targeted farmers which is a clear policy contradiction. Hence with these low farm gate prices, farmers will not be able to recover their costs and make a good profit margin. Agriculture remains a key sector in eradicating poverty among the rural populace most of whom are farmers employed in the sector, thereby any elements of mismanagement has a negative repercussion on people s lifeline. As a way forward, the Farmers Union of Malawi strongly recommended to government to open an export window for maize. Farmers Union of Malawi has information of maize prices in Eastern Africa ranging from US Dollars per metric tonne which are competitive and could make good profit margins. This may ease pressure on the domestic market and allow demand for maize to pick up, which may push up maize prices to the benefit of producers. Malawi Economic Monitor (Source: World Bank) The World Bank published the Malawi Economic Monitor for May Real GDP growth is expected to increase to 4.4% in 2017, driven by improved conditions in the agricultural sector. In 2017, the average inflation rate is projected to decelerate to 15.2% following improved agricultural production and reduced pressure on food prices. With the projected recovery in agriculture and improved domestic revenue mobilization, the fiscal deficit is expected to narrow over the medium term. Projections for the fiscal outlook indicate a modest fiscal consolidation will likely continue. It is expected that most of the financing will be through concessional foreign borrowing helped by a resumption of budget support by multilateral development partners, together with significant domestic borrowing. Malawi s current debt remains manageable, although the rapid increase in domestic debt is beginning to create stresses. As determined by the most recent World Bank and IMF Debt Sustainability Analysis (DSA), at the end of 2016 Malawi s total public and publicly guaranteed (PPG) external debt stood at US$1.79 billion (33.1% of GDP) while gross domestic debt stood at K865 billion (21.1% of GDP). The pace of external debt has been rather moderate, reflecting the highly concessional nature of the bulk of Malawi s external debt. However domestic borrowing has increased rapidly, mainly as a result of external financing shortfalls arising from the cash-gate scandal and consequent decline in budget financing. First Merchant Bank Plans To Acquire Opportunity Bank (Source: FMB) In June 2017, First Merchant Bank (FMB) announced that it plans to take over Opportunity International Bank of Malawi (OIBM). However the move is still subject to approval from the Reserve Bank of Malawi, the regulator of financial services institutions. If approved, this will be the second major acquisition by FMB in 2017 after acquiring a majority stake in Barclays Bank of Zimbabwe just a month earlier. FMB s Chairman Hitesh Anadkat stated that the deal will give the bank leverage to increase market penetration by tapping into OIBM s largely rural and social agent banking platform. OIBM will also be able to tap into FMB s infrastructure and services. P A G E 15

16 2. OTHER MARKET DEVELOPMENTS (Continued ) Agricultural Commodity Price Update (Source: ACE) Reports by the Agricultural Commodity Exchange for Africa (ACE) have shown an decrease in commodity prices in June Maize prices have decreased by 18.64% to an average of K per kg in June 2017 from K in January Soya has also decreased by 29.03% to K per kg in June 2017 from K in January Prices of other commodities such as groundnuts, cowpeas and pigeon peas have also decreased as shown in the table below: Paladin To Proceed With Potential Sale of Langer Heinrich (Source: Paladin ) Paladin Energy is proceeding with the potential sale of Langer Heinrich, one of its mines which is located in Namibia. The potential sale refers to the company s restructuring proposal which could entitle CNNC Overseas Uranium Holding to acquire Paladin s interest in its Langer Heinrich Mine. CNNC will acquire 75% interest of Langer Heinrich which will help the company to reduce its debt obligations. Paladin and CNNC have agreed terms with an independent investment bank and a valuation is expected to be provided as soon as possible. Paladin Energy is a uranium production company with mines in Australia and Africa. The Langer Heinrich mine in Nambia is Paladin s flagship project while Kayelekera Mine in Malawi provides a follow up to Langer Heinrich. However, the extended downturn to uranium prices has resulted in Kayelekera Mine being placed on care and maintenance. Paladin has been suffering major debt challenges leading to the potential sale of Langer Heinrich. Annual Economic Report 2016 (Source: Ministry of Finance, Economic Planning and Development) In June 2017, the Ministry of Finance released its Annual Economic Report which shows that in 2016, Malawi s GDP is estimated at 2.7% on account of weather shocks and unstable macroeconomic conditions. Overall, agricultural activity contracted by 0.2%. However, growth was registered in the other sectors such as transportation and storage, accommodation and food services, information and communication, financial and insurance services. In 2017, the economy is expected to recover following the favorable weather conditions. GDP growth is projected at 6.1% on account of the good performance of agriculture and fishing which is estimated to grow by 6.8%, and growth in other sectors such as manufacturing, construction, wholesale and retail trade, financial and insurance services. Inflation is projected to decline in 2017, following the favorable weather conditions which resulted in increased food production. In 2017, end period inflation is projected at 13.8% and annual average inflation rate at 14.5%. Malawi posted a current account deficit of US$756.8 million in 2016 and is projected to increase by 12.1% to US$848.5 million in The projected increase in 2017 is as a result of increased economic activities, due to good weather conditions which is expected to increase the demand for goods and services. Some of this demand will be met by imports. At the same time, decline in tobacco production will reduce export earnings P A G E 16

17 3. REGIONAL MARKET DEVELOPMENTS Sub-Saharan Africa The IMF released its Regional Economic Outlook report for Sub-Saharan Africa, stating that the economic outlook remains clouded in the region. Growth slowed sharply in 2016 averaging 1.4%, the largest decline in two decades. About two-thirds of the countries in the region slowed down, although some countries still continued to expand strongly. A modest rebound in growth to 2.6% is expected in 2017, but this will be driven by some crucial factors in the three largest economies such as a recovery in oil production in Nigeria, higher public spending in Angola ahead of elections and the fading of drought effects in South Africa. Growth for the region will continue to fall short of past trends as a result of its deteriorated outlook due to delayed and limited policy adjustments, increases in public debt, declining international reserves and depressed private sector activity. Even the increases in commodity prices are not expected to provide much relief and oil prices still remain low. Therefore, there is an urgent need for fiscal consolidation and additional policy actions in order to ensure macroeconomic stability (Source: IMF). Zambia Zambia s economy is expected to grow by 4.1% in 2017, however the World Bank has warned that stricter spending controls are needed to ease the country s large debt burden. Zambia s external debt stood at US$7.2 billion as at the end of May 2017, rising from US$6.9 billion in December The cost of servicing debt now amounts to 20% of domestic revenue in 2017 from 8% in This leaves less resources for development priorities and poverty reduction (Source: World Bank). Zambia has limited its 10% tax on maize exports in order to encourage production of the nation s main food crop. The 10% export tax will only apply when maize production does not exceed 2 million tonnes. This threshold is expected to encourage maize production. Zambia s National Farmers Union (ZNFU) has stated that the move will enhance maize exports at economically acceptable prices. (Source: Reuters). Zambia s central bank has cut its benchmark lending rate by 150 basis points to 12.5%. This is due to lower inflation and subdued economic growth. This move is likely to boost small medium enterprises and also cushion the impact of the electricity tariff hike (Lusaka Times). Zambia's year-on-year inflation has decreased to 6.8% in June 2017 from 7.5% in December This is attributed to the decrease in both food and non-food prices (Source: Central Statistics Office of Zambia). The Zambian Kwacha appreciated against the major currencies. The Zambian Kwacha appreciated against the US Dollar to ZMK9.14:US$1 in June 2017 from ZMK9.90:US$1 in December 2016 (Source: Bank of Zambia). Zimbabwe Zimbabwe s economy is expected to grow 4 times faster in 2017, largely due to a bumper maize harvest although fiscal imbalances continue to fuel the financial crisis. Economic growth is expected to rebound to 2.7% in 2017 from 0.7% in While the good harvest is projected to boost GDP in 2017, sustaining robust long term growth will require addressing underlying fiscal and financial sector imbalances (Source: World Bank). A report by Zimbabwe s Treasury has shown that Zimbabwe s domestic debt as at March 2017 stood at US$4 billion, a 40% increase from the previous year. The country is facing serious shortages of cash and foreign exchange. These shortages led to the introduction of bond notes, however these bond notes have done little to ease the financial crisis in the country and queues outside banks are regular as people wait to get cash (Source: The Herald). P A G E 17

18 3. REGIONAL MARKET DEVELOPMENTS Tanzania Tanzania plans to import 400 megawatts of electricity from Ethiopia to power its local industries. Despite having 57 trillion cubic feet of natural gas reserves, Tanzania faces chronic power shortages due to its reliance on hydropower dams in drought-prone regions. Tanzania s government stated that Ethiopia has agreed to supply the country with 400 megawatts which will be increased later on (Source: Reuters). The World Bank approved a US$345 million loan for the expansion of a port in Tanzania s commercial capital, Dar es Salaam. Tanzania plans to lift the port s capacity from 13.8 million tonnes in 2016 to 28 million tonnes by Tanzania has been trying to make Dar es Salaam a trade hub for landlocked countries but the port has been facing challenges due to congestion and inefficiency (Source: World Bank). Tanzania s inflation has increased to 6.1% in May 2017 from 5.0% in December 2016 This was mainly due to a the increase in the cost of food, transport and housing (Source: Tanzania Bureau of Statistics). The Tanzanian Shilling has depreciated against the major currencies during the month under review. The Tanzanian Shilling depreciated against the US Dollar to TSH2,230.14:US$1 in June 2017 from TSH2,172.62:US$1 in December 2016 (Source: Bank of Tanzania). Uganda Earlier this year, an armyworm invasion raised major concerns in the country which is already devastated by droughts. The pests appeared in almost 20 districts and attacked 40% of maize in some areas. The Ministry of Agriculture stated that the armyworm outbreak could potentially wipe out 11% of the country s maize output and sugarcane fields have also suffered damaged (Source: Reuters). Uganda s central bank cut its key lending rate to 10% from 11% on 19 June 2017, this is the third cut this year mainly due to the stable shilling and reduced inflationary pressures. Bank of Uganda s officials have stated that the supply shocks that caused inflation to rise the past 6 months are expected to decline in the third quarter of 2017 (Source: Reuters). Uganda s inflation has increased to 6.4% in June 2017 from 5.7% in December This is due to the increase in both food and non-food prices. The Ugandan Shilling has appreciated against the US Dollar but depreciated against the British Pound and the Euro. The Ugandan Shilling appreciated against the US Dollar to UGX 3,590.90:US$1 in June 2017 from UGX 3,610.50:US$1 in December 2016 (Source: Bank of Uganda). Mozambique In January 2017, Mozambique failed to repay the monthly installment of its US$727 million external debt and was been warned of the legal consequences of the default. The Ministry of Finance confirmed that it was unable to pay its monthly installment of US$59.7 million but did not specify the reasons for the default (Source: CNBC Africa). The IMF will visit Mozambique from 10 to 19 July 2017 to discuss issues around the management of public finances following a recent audit report into the government s US$2 billion loans which were not disclosed publicly. Kroll Inc has published an audit report which shows that at least US$500 million still remains unaudited and unexplained. The IMF has stated that the publication of these reports constitute an important step towards transparency regarding these loans (Source: IMF). Mozambique s year-on-year inflation has decreased to 20.45% in May 2017 from 23.67% in December This was mainly due to the decrease in the prices of food and non-alcoholic beverages. The Metical has appreciated against all the major currencies. The Metical depreciated against the US Dollar to M60.45:US$1 in June 2017 from M71.34US$1 in December 2016 (Source: Bank of Mozambique). P A G E 18

19 3. REGIONAL MARKET DEVELOPMENTS South Africa South Africa s economy contracted by 0.7% in the first quarter 2017, leading to its first recession since the financial crisis of The poor growth was unanticipated as the economy was expected to rebound after it shrank by 0.3% in the last quarter of The recession is mainly due to weak performance in agriculture and manufacturing sectors (Source: CNN Money). Ratings agency Moody s downgraded South Africa s credit rating in May 2017, citing a recent abrupt cabinet reshuffle and reduced prospects for an economy mired in recession. Moody s stated that recent events such as abrupt cabinet reshuffles and reduced growth prospects have led to the downgrade to Baa3 from Baa2, which is the bottom of the investment grade table (Source: Reuters). South Africa is expecting to harvest its biggest maize crop in 4 decades, a year after droughts devastated output of the country s staple food. Farmers in South Africa are set to produce over 15 million tonnes in 2017 and a surplus of 50% as a result of the good rains in January and February The extra produce is expected to help push food prices down (Source: BBC) Other Countries Botswana s real economic growth may nearly double in 2017 as diamond exports pick up from the slump in global commodity prices and electricity shortages. The Minister of Finance stated in a budget speech to parliament in January 2017 that the economy would grow by an estimated 4.2% in 2017 compared with 2.9% growth in The Minister added that the budget deficit would widen to 1.43% of GDP from 0.7% the previous year due to severe drought and electricity shortages (Source: Reuters). Ghana s central bank reduced its benchmark interest rate by 2 percentage points to 23.5% in March 2017 and further to 22.5% in May 2017, the biggest reductions since December This was done as a result of the downward trend in inflation, in order to boost business activity. Ghana was one of Africa s fastest-growing economies but growth slumped in 2014 due to falling commodity prices, high inflation and high debts (Source: Reuters). Nigeria is targeting real economic growth of at least 7% a year by 2020 according to the Ministry of Budget and National Planning as the country goes through its first recession in 25 years. Nigeria s economy is heavily dependent on exports of crude oil and has been hit by low global oil prices which has reduced government revenues and availability of foreign currency. The 7% target for gross domestic product growth is part of a medium-term economic recovery plan that seeks to address the country s problems (Source: Reuters). Germany has offered Egypt US$500 million to support its economic programme and the country s mediumsized and small businesses. It has been agreed that Germany will provide US$250 million to support its economic programme and another US$250 million to support several other sectors including micro-enterprises, small and medium-sized enterprises. The support will come in the form of grants and concessional funds (Source: Bloomberg). * Refer to Appendix 2 for more details on historical inflation and currencies for selected countries P A G E 19

20 M I D - Y E A R E C O N O M I C R E P O R T GLOBAL DEVELOPMENTS Economic Growth Projections Economic growth Global economic growth is expected to pick up pace from 3.1% in 2016 to 3.5% in 2017 and 3.6% in This is due to the expected stronger economic activity with a long awaited cyclical recovery in investment, manufacturing, trade and expectations of more robust global demand which may help push up commodity prices. Growth is expected to pick up in advanced economies especially the United States. The US economy is projected to expand at a faster pace with growth forecast of 2.3% in 2017 and 2.5% in 2018, driven by the cyclical recovery in inventory accumulation, solid consumption growth, and the assumption of looser fiscal policy. The Euro Area is also expected to have a modest recovery due to a mildly expansionary fiscal stance, accommodative financial conditions, a weaker Euro and political uncertainty. Growth in the United Kingdom is projected at 2.0% in 2017 from 1.8% in 2016 and a decline to 1.5% in 2018 due to anticipated negative effects of Brexit. China s economic growth is projected at 6.6% in 2017, and slowing to 6.2% in 2018 due to anticipation of continued policy support in the form of strong credit growth and the reliance on public investment to achieve growth targets (Source: IMF). Source: World Bank Oil prices Global oil prices have been stubborn during the first half of The Brent Crude has tumbled by 14% during the first half of 2017, closing the period at US$46.04 per barrel as the oil market continues to remain oversupplied. This is the largest drop since Brent and US Crude prices fell by 19% during the first half of Oil prices generally increase during the first half of the year. The OPEC production cut deal continues to be offset by the surging oil production in the US combined with weak fuel demand and persistently robust OPEC exports. This has left global oil stockpiles at a record high. Investors are also nervous about rising output from Nigeria and Libya which are exempt from cutting oil production. Oil prices may also continue to be volatile as result of the tensions in Middle East. The Brent Crude is expected to average US$54.0 per barrel in 2017 from an estimated US$44 per barrel in 2016 (Source: EIU). Monetary policy The Bank of England left its policy rate unchanged in the first half 2017 at 0.25%. The policy rate was last reduced to 0.25% from 0.50% in August 2016 in order to meet its 2% inflation target. The Bank of Japan also left the country s policy rate unchanged at negative 0.1% despite the country s struggling economy. The US Federal Reserve raised its policy rate twice in the first half of The Federal Reserve raised its policy rate by 25 basis points to a target range of 0.75% to 1% in March 2017 and then by another 25 basis points to a target range of 1% to 1.25% in June This reflects the Bank s confidence in the strengthening of the US economy and signs of higher inflation (Source: EIU). P A G E 2 0

21 4. GLOBAL DEVELOPMENTS (Continued...) Currency movements Currency Movements: US$ vs Euro ( ) The U.S Dollar did perform well in the first half of 2017, despite the interest rate increases and the proposed tax cuts and infrastructure spending. The U.S Dollar underperformed by about 6%, closing the period at US$0.88: 1. The US Dollar s strength against a host of other currencies has declined to its lowest since November Despite the effects of Britain s potential departure from the European Union, the British Pound gained strengthen against the US Dollar during the first half of the year. The British Pound has strengthen by 5.4% against the US Dollar, closing the period trading at an average of 1.30:US$1. Among the large currencies, the Euro s surge against the US Dollar during the first half of the year has been the most impressive. The Euro s good performance was built on a combination of rising growth and inflation, diminishing geopolitical concerns and the victory of Emmanuel Macron after the French election. The Euro appreciated by 8% during the first half of the year, closing the period trading at an average of 1.14:US$1. Source: Bloomberg The Japanese Yen modestly gained strength during the first half of the year, mainly due to the volatility of the US Dollar. The Yen closed the period at 112:US$1 (Source: EIU). Global trade The World Trade Organization forecasted that global trade will expand by 2.4% in 2017 from 1.3% in 2016, but only if the global economy recovers as expected and governments pursue the right policy mix. Global economic growth has been unbalanced since the financial crisis but may experience an upturn in 2017 due to expected investment spending in China and the USA. However there are still many prevailing risks such as the unpredictable direction of the global economy in the near term and the lack of clarity about government action on monetary, fiscal and trade policies which continues to raise concern that trade activity will be stifled. The spike in inflation may lead to higher interest rates, tighter fiscal policies and imposition of measures to curtail trade could undermine high trade growth over the next two years (Source: WTO). P A G E 2 1

22 4. GLOBAL DEVELOPMENTS (Continued...) Interest Rate Movements The U.S libor (the cost of banks to borrow funds in US Dollars) rose during the first half of the year. The rise was mainly due to the two interest rate hikes by the Federal Reserve. The US libor for 3 months increased to 1.30% in June 2017 from 0.94% in December The 6 months libor also increased to 1.46% in June 2017 from 1.29% in December Forecast: 3 Months Libor However, the benchmark US Treasury yield dropped to 2.31% in June 2017 from 2.45% in December 2016, mainly due to lower investor confidence as a result of political uncertainty. Forecast: 6 Months Libor On the other hand, the Bank of England Rate and European Central Bank have remained unchanged The US Federal Reserve have been raised twice since December 2016 (Source: CNN Money). P A G E 2 2

23 Exchange Rates The Kwacha is expected to appreciate during the tobacco marketing season as foreign currency is more readily available. The Kwacha has been relatively stable, supported by low Kwacha liquidity levels and a lower demand for foreign exchange. In the medium to long term, the Kwacha is expected to depreciate due to the significant current account deficit, weak foreign direct investment inflows and low forex reserves. This overall trend towards a depreciation in the value of the Kwacha reflects uncertainties regarding Malawi s macroeconomic outlook and has also been driven by the general strengthening in the value of the US Dollar. 5. OUTLOOK FOR JULY 2017 AND BEYOND - MALAWI Inflation Inflation decreased to 12.30% in May 2017 from 14.60% in April This was mainly due to the decrease in both food inflation and nonfood inflation. Malawi s maize production is expected to increase in 2017 which could help reduce food shortages and lower inflationary pressures. However, the previous delays in FISP implementation and the armyworms outbreak earlier in the year could lead to lower than expected maize yields. Inflation is expected to remain subdued in the short term due to the continued slowdown in food prices. Food inflationary pressures are expected to remain low during the green maize harvest season. The increase in agricultural production is expected to increase food availability in the country which may lead to lower food inflationary pressures. Non-food inflationary pressures may also remain temporarily restrained as a result of the dwindling global oil prices. The EIU forecasts inflation to average 13.80% in 2017 from a previous forecast of 17.90%. Inflationary pressures are expected to ease gradually from 2018 onwards to single digits after a normalization of food production (Source: EIU). POSSIBLE IMPACT: An appreciating exchange rate may reduce the cost of imports in the short term. However the Kwacha is expected to depreciate in the medium to long term as a result of the strengthening of the US Dollar and insufficient currency inflows, leading to the worsening of the trade balance. POSSIBLE IMPACT: Lower inflation rates will lead to reduced interest rates. Lower inflation rates increase disposable income for expenditure and the real return for investments improve. P A G E 2 3

24 5. OUTLOOK FOR JULY 2017 AND BEYOND - MALAWI (Continued ) Interest Rates Interest rates on the interbank market are dependent on the volatility of liquidity and are unlikely to be stable. Treasury bill yields are expected to decline in the short term as a result of the reduction in the Monetary Policy Rate. The Monetary Policy Rate was revised to 18% from 22% after the MPC meetings held from 4 to 5 July 2017, and it is expected to be maintained in the short term. Commercial bank base lending rates are also expected to decline as a result of the revision of the Monetary Policy Rate. Foreign Trade Although tobacco prices have improved as a result of the normalization of harvesting patterns, tobacco export values may decline, owing to weak global demand as a result of increased health campaigns. Medium-term export growth will be driven by the gradual expansion of soya beans, tea, sugar and other cash crops, although growth will continue to be held back by infrastructure challenges, a lack of finance for farmers and poor agricultural technologies. POSSIBLE IMPACT: Lower lending rates reduce the cost of borrowing high which may help boost private sector activity, resulting to improved economic growth. It may also lead to higher property values as demand is increased by reduced mortgage rates. POSSIBLE IMPACT: Higher export values will increase the inflow of forex which would help to reduce the trade balance if inflows are sustainable. The promotion of agricultural resilience by connecting farmers to markets and strengthening farmer capacity in risk management practices may help to improve exports. Tobacco will still remain the main export commodity, although its growth potential is limited amid weak global prices due to lower demand as a result of the anti-tobacco smoking lobby. Import growth is expected to remain high in 2017/18 driven by the rising domestic demand for foreign goods, despite the government s efforts to implement a tight fiscal policy. It is critical for the country to diversify its export base in order to be competitive and reduce risks in economic growth due to overdependence of tobacco. The trade balance will remain in deficit, owing to high cost of transporting goods into and out of a landlocked country. Overall, the current account deficit is forecast to contract gradually from 18.8% of GDP in 2016 to 15.9% of GDP by 2021 as a rebound in export earnings may improve the trade balance (Source: EIU). P A G E 2 4

25 5. OUTLOOK FOR JULY 2017 AND BEYOND MALAWI (Continued...) International Relations Although corruption scandals and the slow pace of the public financial management reforms strained relationships with donors, the resumption of budgetary support by the World Bank and disbursement by the IMF is expected to help encourage other donors and investors. Nevertheless, donors will remain engaged through project-based grants and off-budget support to non-governmental agencies. The government will continue to seek external support from nontraditional partners including China and India, and their economic presence in Malawi is expected to grow. Relations with Tanzania will remain strained by dispute over the countries border in Lake Malawi although expected to be resolved diplomatically (Source: EIU). Fiscal Policy Execution of the 2017/18 budget is expected to be better than the previous fiscal year as a result of the resumption of budgetary support by the World Bank, disbursement from the IMF and higher domestic revenue following the new proposed tax measures. The fiscal deficit is also expected to decline (in terms of GDP) during the 2017/18 financial year to 3.9% of GDP from a likely outturn of 4.1% of GDP in 2016/17. POSSIBLE IMPACT: The return in budgetary support is expected to help increase government revenue which could help government execute its national budget. The return of budgetary support may also increase the availability of forex, leading to the stability in Kwacha. The return of budgetary support may result in reduced government borrowing. POSSIBLE IMPACT: An increase in development expenditure will result in improved livelihoods as the vulnerable are cushioned from the negative effects of the policy reforms. A lower fiscal deficit may lead to lower government domestic borrowing which could reduce interest rates. The new proposed tax measures and improvement in revenue collection by the Malawi Revenue Authority is expected to lead to higher domestic revenues during the 2017/18 financial year. Net domestic borrowing is also expected to be reduced from K63.6 billion to K27.5 billion which could help reduce government s future debt obligations. Fiscal policy is expected to focus towards preserving debt sustainability and reducing the budget deficit as maize production normalizes. Currently, the fiscal deficit is projected at 3.9% of GDP in the 2017/18 financial year which shows an improvement in fiscal management. However, there are much needed reforms in the public sector and this may take time due to political uncertainty and financing constraints. Nevertheless, fiscal discipline is expected to improve and continued support of the IMF may help in the gradual return of external budgetary support (Source: EIU). P A G E 2 5

26 5. OUTLOOK FOR JULY 2017 AND BEYOND MALAWI (Continued...) Economic Growth Real economic growth is projected at 4.40% by the World Bank and POSSIBLE IMPACT: Growth of the economy will boost donor and investor confidence hence increasing private sector activity and improving 4.5% by the IMF. This will be led by improved agricultural production from a contraction in the sector caused by drought in Malawi s the stock market performance. Increased private sector activity will boost economic growth. economy will continue being dominated by agriculture. Plans to expand cash crops beyond tobacco should register some success in 2017, supported by firmer global prices for soya beans, tea and sug- GDP Projections ar. Although tobacco prices are is expected to be better than the previous season, weak global demand may lead to lower tobacco values, which indicates that the tobacco industry may be in a phase of a long-term structural decline. Outside of the agricultural sector, growth is likely to be lackluster. Malawi s mining sector will continue to struggle to compete with mines in neighboring countries mainly due to the fall in mineral prices and the high-cost operating environment. Risks to economic growth in 2017 are high government debt levels which may increase the budget deficit, lower global commodity prices and uncompetitive exports. The insufficient power supply may also hamper productivity in the country. Growth in 2017 will hinge on the expansion of agricultural production and improved investor sentiment as Malawi s key macroeconomic indicators stabilize (Source: EIU). P A G E 2 6

27 6. ECONOMIC RISKS ECONOMIC RISKS IMPACT ON ECONOMY MITIGATION MEASURES Insufficient power supply 1. Commercial productivity remains small scale as large scale enterprises are difficult to implement with limited power supply 2. Low industrial productivity in the manufacturing sector resulting in low economic productivity and dampening economic growth. 3. Decline in tourism levels as it dampens tourists appetite to visit the country which results in lower income and growth in the industry. 4. Deferment of development by investors. 1. Encourage use of energy saver bulbs. 2. Rehabilitate and develop new power plants. 3. Public-Private Partnerships to enhance energy production through alternative power sources. 4. The entrance of Independence Power Producers (IPPs) may help boost power generation High inflation rates 1. Rising prices of goods and services. 2. Lowers the disposable income of households which would otherwise be used for savings and investment. 1. Tight monetary policy to reduce demand. 2. Decrease in government recurrent expenditure. Increase in government debt 3. Lowers the real returns on savings and investments. 4. Reduces the likelihood of foreign investors coming into the country as real returns are eroded by the high inflation rate. 1. Creates a future obligation for government which may keep the budget deficit large. 2. Crowds out the private sector hence reducing the expansion of the private sector as funds are not available. 1. Reduce government expenditure by tightening fiscal policy. 2. Increase government revenue base to finance debt. High Interest Rates 1. High lending rates will lead to slower private sector growth and a decrease in capital investments. 1. Reduction of the Monetary Policy Rate. 2. High interest rates will also lead to higher loan impairments for banks which will reduce funds that may be used to borrow other private investors. It also puts customer deposits at risk if the bank were to fail. P A G E 2 7

28 M I D - Y E A R E C O N O M I C R E P O R T ECONOMIC RISKS (Continued...) ECONOMIC RISKS IMPACT ON ECONOMY MITIGATION MEASURES Persistently weak export base Slow down in private sector growth due to high interest rates Donor budgetary support may not return 1. To affect Kwacha s stability against major trading currencies resulting in a depreciating currency. 2. Curtail growth in imports leading to higher prices of imported products. 3. To affect the sustainability of the fertilizer subsidy program which may increase the budget deficit as prices of imports increase. 4. Lead to drug shortages that could affect labor productivity. 5. Lead to fuel shortages that could affect production efficiency. 1. Dwindling private sector growth and reduced capital investments. 2. Increasing unemployment due to retrenchments and freezing of recruitment and/or winding down of companies. 3. Reduced savings by individuals directly or indirectly affected by unemployment. 4. Relocation of companies to other countries with better prospects. 1. Increased domestic borrowing by government thereby increasing the fiscal deficit. 2. Low forex availability resulting in fuel scarcity and reduced import of fertilizer for the subsidy program. 3. Depreciation of the Kwacha. Leading to higher prices of goods and services 1. Diversify into other forex generating sectors such as mining, tourism e.t.c. 2. Explore local production of goods currently imported. 3. Move more into local fertilizer manufacturing to reduce import costs. 4. Increased promotion of tobacco alternatives e.g. cotton, coffee, peas etc. 5. Control imports of products with local substitutes e.g. cooking oils, wheat, toilet tissues etc. 1. Provide incentives to the private sector e.g. tax incentives. 2. Declining inflation. 1. Diversify into other forex generating sectors e.g. increase in exports. P A G E 2 8

29 6. ECONOMIC RISKS (Continued...) ECONOMIC RISKS IMPACT ON ECONOMY MITIGATION MEASURES Global tobacco lobby (anti-smoking) Incidents of alleged theft and corruption within the public sector Uncertainty in the external environment Dispute with Tanzania resulting in cancellation of oil explorations activities 1. Decline in demand for Malawi tobacco and services from supporting industries resulting in lower commodity prices. 2. Reduction in export earnings (tobacco accounts for 60% of Malawi s export earnings). 3. Reduced employment opportunities in the tobacco and supporting industry. 4. Lower income for farmers- small holder and commercial. 1. It will lead to a misuse of resources as areas of great need do not receive the right resources and thereby hampering growth. 2. Loss of aid funding as donors become unwilling to send aid, which could affect government spending and forex availability. 3. Negatively affect the ability for external borrowing even for the private sector due to the negative image of the country. 4. Negatively impacts the country s sovereign credit risk ratings. 1. Dampening export demand for major export commodities i.e. tobacco, tea, cotton and sugar. 2. Declining investor interest in Malawi resulting in fewer investments and less foreign currency coming into the country. 3. Declining remittances from abroad, hence contributing to lower forex levels. 4. Reduced access to foreign capital, hence financing not available or difficulties in accessing letters of credit. 5. Impaired growth and Balance of Payments (BOP) due to declining exports and low foreign investments. 6. Decline in tourism levels leading to lower forex revenues. 1. Loss in possible source of revenue for government. 2. Loss in possible source of forex for Malawi. 3. Loss in possible employment opportunities for Malawians. 1. Diversify into other sectors such as mining and cotton e.t.c. 2. Engage in aggressive tourism marketing. 1.Tighter controls and measures with better implementation of the policies. 2. More transparency in the public sector and government. 1. Diversification of export base of products. P A G E 2 9

30 7. APPENDIX Appendix 1: SELECTED ECONOMIC INDICATORS FOR MALAWI Key Economic Risks-Malawi *Appendix 2 : SELECTED ECONOMIC INDICATORS FOR TANZANIA, UGANDA, ZAMBIA AND MOZAMBIQUE P A G E 3 0

31 Appendix 3: Proposed Budget Framework (Source: Ministry of Finance) 2015/ / / / /18 K Billion (Approved) (Approved) (Revised) (Proposed) (Approved) Total Revenues ,108 1,108 Domestic revenue Grants Budgetary support Earmarked grants 90 Total Expenditures 930 1,149 1,129 1,299 1,300 Recurrent expenditure Wage & salaries Interest on debt Investment Expenditure Deficit/Surplus (166) (174) (130) (191) (192) Deficit as a % of Revenue -22% -17% -13% -17% -17% P A G E 3 1

32 Appendix 4: Central Government Budgetary Operations in billions of Kwacha (Source: Reserve Bank of Malawi) APPENDIX 5: Trend of Public Debt in Malawi (Source: Ministry of Finance) P A G E 3 2

33 Appendix 6: MALAWI SELECTED ECONOMIC INDICATORS (source: RBM) P A G E 3 3

34 Appendix 7: GDP MALAWI (source: EIU) P A G E 3 4

35 Appendix 8: CONTRIBUTION TO GDP BY SECTOR Appendix 9: MALAWI ECONOMIC GROWTH (Source: EIU) P A G E 3 5

36 Appendix 10: MALAWI PROJECTIONS PER SECTOR (SOURCE: Ministry of Finance) GLOBAL PROJECTIONS (Source: EIU) P A G E 3 6

37 Appendix 11: PROJECTIONS GLOBAL PROJECTIONS (Source: World Bank) P A G E 3 7

38 Appendix 12: Key Performance Indicators (KPI) to be achieved by ESCOM (source: MERA) P A G E 3 8

39 Appendix 13: SEASONAL CALENDAR FOR A TYPICAL YEAR APPENDIX 14: MALAWI S MAIN EXPORT COMMODITIES IN US DOLLAR MILLIONS (Source: Ministry of Finance) Disclaimer This report has been prepared for indicative purposes only. Whilst every effort has been made to ensure the accuracy of information contained herein no responsibility or liability whatsoever resulting from the use of information contained in this report is accepted by NICO Asset Managers Limited. Recipients of this report shall be solely responsible for making their own independent appraisal and investigation into all matters contemplated in this report. P A G E 3 9

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