Fitch Ratings-London-06 March 2007: Fitch Ratings today upgraded the long-term foreign currency Issuer Default rating ("IDR") of Malawi to 'B-' (B minus) with a Stable Outlook, from 'CCC'. The 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'. Malawi's country ceiling has been raised to 'B-' (B minus) from 'CCC'.
Creditworthiness has improved markedly under the new government which came into power in May 2004. And in recognition of the policy measures that underpin this improvement, in August 2006 the country 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. At the same time it 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.
Following these cancellations, the external debt of the Malawian government stands at 23% of GDP at the end of 2006, compared with 142% at the end of 2005. External debt service will be less than 1% of current account receipts (CXR) 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% 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.
A low-income country, Malawi still suffers from various structural weaknesses, including vulnerability to economic shocks, and dependence on agriculture. Growth reached 8.5% 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.
New borrowing will 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.
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.
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.