Fitch Ratings has today affirmed Malawi's foreign and local currency Issuer Default Ratings (IDRs) at 'CCC' with Positive Outlook and Short-term rating at 'C'. On 21 December 2005, Fitch revised Malawi's rating from 'CCC+' after assigning IDRs. The modifiers '+' (plus) and '-' (minus) are no longer in use for issuer ratings at 'CCC' level and below.
Fitch notes that Malawi's track record for sound economic management, in particular fiscal discipline, is lengthening. The country satisfactorily completed a six-month staff-monitored programme ("SMP") and its first review of a three-year poverty reduction and growth facility ("PRGF") programme, which started in August 2005. It has also achieved the minimum six-month track record for adequate performance on a PRGF needed to reach the Heavily Indebted Poor Countries ("HIPC") completion point. Full completion is expected in the course of 2006. But this will require the maintenance of sound macroeconomic management, including modifying the exchange rate system to be more flexible, and compliance with the few remaining completion point triggers, mostly in the social services area. This would make the country eligible for the multilateral debt relief initiative ("MDRI"), leading to a substantial reduction in outstanding debt: multilateral debt accounts for around 80% of its public external debt.
"HIPC and MDRI relief will substantially lower the overall debt and debt service burden, strengthening Malawi's creditworthiness by improving its ability to adjust to external shocks and releasing domestic fiscal resources to address pressing social and developmental issues," says Veronica Kalema, Director in Fitch's Sovereign team.
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. Structural reforms to the wage bill and pensions are being implemented and Malawi Telecom has been privatised. Some of the proceeds of this sale will go towards lowering domestic debt. Coupled with lower fiscal deficits, net domestic debt is projected to drop to 18% in 2006 and around 13% by 2008 from around 22% of GDP over the past four years. This will reduce domestic debt-servicing costs, which have also been crowding out private investment.
Nevertheless, rating constraints remain significant. Malawi's debt ratios are high relative to rated peers and the economy remains vulnerable to external shocks - drought as well as commodity prices (tobacco, tea and sugar are exported). Growth is expected to rebound to 8% in 2006 from 2% last year because of normal weather. The country is poor even by regional standards and Malawi has the lowest income per capita of all Fitch-rated sovereigns.