Happy New Year, I say as I frantically try to get this out before January is over (still writing from Honduras, where I am working until Saturday)! It certainly seems set to be a happier New Year in Malawi than in most other places in the World – at least as far as economic growth is concerned. Hopefully 2009 will also see Malawi follow in the steps of Ghana’s exemplary elections.
Three weeks ago The Economist ranked Malawi’s expected economic growth for 2009 as the second fastest in the World.
The IMF approved and disbursed in December a $77m External Shock Facility – a very welcome vote of confidence on Malawi’s progress and at the same time a much needed forex injection. The report is now available and at 6.7% has a more moderate growth forecast for 2009 than The Economist.
1. Commodity prices
Malawi’s best economist, Dr. Khwima Nthara, worried about the impact of the financial crisis on Malawi on the World Bank's Africa Can (End Poverty) blog - wondering whether we might expect some bad news as a result of second round impacts through lower commodity prices. I feel the picture on commodities for 2009 in Malawi is far from clear, with a lot of potential upside.
(1.1) Tobacco. As I commented in my latest economic update sales at the auction floors for the 2008 season hit a historical record of $465 million. This was an increase of $280 million on 2007 and reflected both record historical prices (at an average of $2.43 per kg) and record volumes (at 190 million kg).
The very positive results of the 2008 season should provide greater incentives to grow tobacco this season. Therefore, greater hectarage can be expected, although yields might decline as a result of lower fertilizer application due to the increase in fertilizer prices (more on this below). On balance I suspect the buyers and the Tobacco Control Commission will be expecting a (substantially?) larger crop.
The question is then whether last season’s prices will be maintained. It is worth pointing out that despite the general collapse in commodity prices since their peak in July 2008, there are some agricultural commodities such as sugar and cocoa that have bucked the general decline (with cocoa prices rising over 50% in the last six months). So price declines in the coming auction season are not necessarily a given.
(1.2) Uranium. Paladin state that they are still on track to ramp up uranium production from Kayelekera from March. Prices of uranium have fallen dramatically from their peak 18 months ago of $120 per lb. Nevertheless, at current prices of $48 per lb, Malawi can still expect uranium exports of over to $150 million per annum, representing a step-increase in GDP of over 3%. Exports in 2009 are likely to be around $75 million, as the mine takes about six months to reach its target production of 3.3 million pounds of uranium per annum.
(1.3) Sugar. In November Illovo, the country’s only producer of processed sugar, announced the results for its operations in the six months to end September. The Malawi operation has always been the star performer of this regional group, contributing 17% of its total revenue and 41% of operating profit in the last full year.
Malawi’s performance in the first half of the current year was even more impressive: operating profit in the first six months was equivalent to approximately $53 million, compared to $61 million for the last full year. In other words, Illovo is on track for an increase in full year earnings this year of over 50%.
Although the financial statement does not provide the details, it is likely that this increase is largely driven by increased domestic consumption, a signal of increased disposable income among Malawi’s population.
(1.4) Fertilizer. We all know how dependent Malawi is on imported fertilizer, with or without a humongous Government fertilizer subsidy. The IMF’s latest estimates of the Terms of Trade impact of the 2008 fertilizer price increases was that Malawi required an additional $123 million for the year. In my view this is an underestimate: imports for the 2008 subsidy amount to 200,000 tons at an average price that is $670 per ton higher than the 2007 price. So the impact on the subsidy programme alone is already greater than the IMF estimate. If we add commercial imports my sense is that in 2008 Malawi required an additional $200 million (5% of GDP) to pay for its fertilizer imports.
The great news is that the gains in fertilizer prices of 2008 have been totally reversed, and are now back at their early 2007 levels, and shipping prices (the Baltic Exchange Dry Index) has fallen to the lowest level in over a decade. These two factors should result in a positive Terms of Trade shock of well in excess of $200 million in 2009 (again much higher than the IMF’s latest estimate of $102 million).
(1.5) Oil. On oil I have neither the inclination nor time to challenge the IMF estimates, so I just report here what they state. In 2008 Malawi required an additional $62 million to finance its fuel imports. As we know oil prices have fallen by two thirds since their peak in July 2008, and the IMF now estimate that this will represent a saving of $77 million in 2009 to Malawi’s economy.
2. Maize prices
Something bizarre continues to go on with Malawi’s maize prices. The attached shows prices to the first week of December – more recent figures have confirmed further increases. So prices have remained above $350 per ton since July and have recently broken above the $400 per ton barrier. This did not even happen in the 2005-06 food crisis. And whereas in July those price levels might have been consistent with world maize prices (as shown in the chart below), those world reference prices (Chicago and Jo’burg) have now fallen back to about $160 per ton.
As I said above my view is that the huge improvement in Illovo’s business is a sure sign of greater prosperity amongst the bulk of Malawi’s population. And yet these price levels have worrying implications for some sectors of the population, particularly those right at the bottom of the income distribution.
Views on what is going on are more than welcome – I want to hear from people who might know something the rest of us don’t.
3. The latest macroeconomic indicators
The latest macroeconomic indicators from the Reserve Bank of Malawi are now available, with data to the end of December 2008 (I was actually just waiting for it before finalising this update). The figures are, as always, revealing.
(3.1) Forex reserves. The chart below shows the forex situation towards the end of last year became more precarious than it had been at any time since early 2005. Official foreign reserves fell to just $70 million in October, presumably as a result of the large forex requirement for fertilizer imports. This continued precarious situation, in which Malawi appears incapable of stabilising its reserves at a level above two months of imports, provided the justification for the IMF’s ESF approval. The $77 million ESF disbursement plus presumably other substantial donor inflows in December resulted in reserves rising back to safer levels of nearly $300 million.
Nevertheless, the continued precariousness of the foreign reserves surely should make the authorities question the wisdom of their strong peg to the US$. In the past four months, apart from the Japanese yen, all serious World currencies have depreciated against the greenback. In this context it does not make any sense for Malawi to remain pegged at an artificially overvalued rate of K140 per US$ - even more so when some commentators are convincingly arguing that this overvaluation is the main immediate constraint to faster economic growth.
(3.2) Inflation and interest rates. Inflation has continued to creep up slowly, hitting 9.9% in December. Commercial interest rates remain at 19.3%, which means that for the first time in the decade real interest rates are possibly below 10%.
(3.3) Credit growth. In the context of the rapid deterioration of the credit market globally credit to the private sector in Malawi grew 50% in the last four months of 2008, closing the year at $464 million. Credit to Government also experienced a large step increase. If I have to guess what is going on here I would say that this increase is the result of the huge financing costs of fertilizer imports after World prices more than doubled in the months to July 2008. So for the time being the effects of the global credit crunch have not been felt in Malawi.
Economic prospects are positive for Malawi despite the global financial and economic turmoil. It seems that the 2009 elections and improving the exchange rate management regime are, at the moment, much more important for Malawi’s continued progress than the potential impact of the global crisis.