Fitch Affirms Malawi at 'B-'; Outlook Stable
March 28, 2008
Fitch Ratings-London-27 March 2008: Fitch Ratings has today affirmed The Republic of Malawi's Long-term foreign and local currency Issuer Default ratings (IDR) at 'B-' (B minus) with a stable Outlook. Fitch also affirmed Malawi's Country Ceiling at 'B-' (B minus) and the Short-term foreign currency IDR at 'B'.
"Malawi enters its third consecutive year of strong growth, and continues to reduce domestic debt and reform public finances," says Charles Seville, Associate Director in Fitch's Sovereign group.
The economy recorded strong growth in 2006 and 2007, helped by the impact on maize production of benign weather and the government's large-scale fertiliser subsidy. The economy is expected to grow by 7% in 2008. Confidence is improving outside the agricultural sector and growth is set to outperform its recent average.
The start of uranium mining at Kayelekera in 2009 will add another pillar to the economy, which relies on tobacco for around half of total export earnings. The mine - the largest-ever investment in Malawi - will export an annual average of 3.3 million lbs of uranium oxide over seven years (worth over USD200m, or 6% of 2007 GDP).
Net domestic debt is falling - the most tangible indicator of progress in fiscal policy. Domestic borrowing exceeded the end-2007 targets agreed with the IMF, but net domestic debt fell to 12.6% of GDP, close to the Finance Ministry's 10% of GDP target. Since late 2006, domestic debt has accounted for well over 90% of government debt service. Measures of external liquidity are improving as the Reserve Bank of Malawi builds up foreign exchange reserves. But external liquidity remains a weakness compared with other B-rated sovereigns and seasonal fluctuations in hard currency inflows can lead to periodic shortages of foreign exchange.
Malawi's structural weaknesses are reliance on agriculture, vulnerability to climatic shocks and poverty. However, the government has a medium-term strategy to tackle these issues. Progress in terms of governance and social indicators was recognised by the US Millennium Challenge Commission (MCC) when it decided to award Malawi compact status in December 2007. The MCC will award Malawi a substantial, although as yet unspecified, grant over the next five years to invest in areas such as irrigation and infrastructure. This grant will be added to already substantial donor support, which makes up around 40% of Malawi's government revenue.
As the delay to the budget for the fiscal year to end-June 2008 (FY08) demonstrated in 2007, the economy is not immune from the unpredictable political scene. The president has not convened parliament since September, amid an opposition challenge to the legal status of the ruling party's MPs. This has held up a number of bills relating to the economy, and could delay the FY09 budget, which should be passed by the end of June 2008. Some project lending will be delayed by the political impasse, but Fitch would expect donors to maintain budget support, as in 2007, provided the government maintains a responsible fiscal stance.
The result of presidential and legislative elections to be held in May 2009 is uncertain. A minority government with a weak mandate might find it more difficult to maintain fiscal discipline. Consensus over economic policy and the better controls over the management of resources offer some reassurance that recent progress will not be undone. The government is drawing up goals that will form the basis of a new three-year Poverty Reduction and Growth Facility (PRGF) with the IMF, to replace the one which expires in August. This in turn should allow continued donor support.
Company — Malawi
Full nameThe Republic of Malawi