Malawi Treasury-Bill Boom Imperiled by Donor Bust: Africa Credit

Malawi’s Treasury-bill rally, the best in Africa, is faltering as a freeze in international aid starts to squeeze development projects in the lead up to elections next month.

Auction yields on 91-day bills rose two days ago for the third time in a month, the first increases since Dec. 31, according to data compiled by Bloomberg. Malawi, Africa’s top exporter of burley tobacco, a low-quality variety of the crop, is struggling to narrow a budget deficit after donors froze as much as $120 million in aid during the second half of last year amid concern that politicians were stealing government money. Dubbed “cashgate” by the local media, the scandal prompted President Joyce Banda to fire her cabinet in October.

The government spent 30 percent less than budgeted in the fiscal second quarter, delaying projects including the construction of a commercial court, residences of local chiefs and a clinic in the capital, Lilongwe, according to the Ministry of Finance. Banda rose from vice president to lead the $4.2 billion economy after Bingu wa Mutharika died in April 2012, and faces the former leader’s brother in the May 20 vote.

“They’re getting into a tighter spot than they have been in the last couple of months,” Hanns Spangenberg, a fixed-income analyst at NKC Independent Economists, said by phone from Paarl, South Africa, yesterday. “The country was in trouble with the International Monetary Fund at the end of last year because they increased domestic spending. They’re cautious to increase spending quickly now.”

Poor Country

Malawi, a landlocked nation in southeast Africa, has a gross national income of $320 per person, which is less than a quarter of the sub-Saharan African average, according to World Bank figures for 2012. In 2009, when Mutharika won a second term, the budget deficit widened to 17.3 percent of gross domestic product in the fiscal year, the highest in four years, according to the IMF. The gap was 11.3 percent in 2012.

“With the coming election we expect the government expenditure to go up,” James Mbingwa, an equity and money markets dealer at Stockbrokers Malawi Ltd., said by phone from Blantyre on April 10. “After the election, then we’ll be expecting rates” on the bills to continue climbing, he said.

The yields on the bills dropped 24 percentage points this year, the most on the continent. Issuance in the first quarter rose 9 percent to 16.5 billion Malawian kwacha ($41 million) from a year earlier, according to data compiled by Bloomberg. Sales of all notes more than doubled from January to March, compared with the prior three months.

Bank Intervention

The kwacha gained 9.3 percent against the dollar this year. It weakened 0.3 percent to 393.50 by 5:12 p.m. in Lilongwe.

The currency is receiving a boost from the Reserve Bank of Malawi’s clearing of pent-up demand for foreign currency and the government’s IMF-led fiscal tightening, according to Yvette Babb, a Johannesburg-based fixed-income analyst at Standard Bank Group Ltd., the continent’s largest lender.

The central bank is “passively intervening to slow down the pace of appreciation by purchasing excess dollars offered by the foreign-exchange market players,” Reserve Bank spokesman Mbane Ngwira said in an e-mail April 15.

Inflation slowed to 24 percent in March from 24.6 percent the previous month, according to the nation’s statistics agency. The central bank estimates that consumer-price increases will average 19.7 percent in 2014 against its target for the year of 15 percent, Ngwira said. The bank kept its key lending rate at 25 percent in February.

Damp Enthusiasm

“Once stability and low inflation are recorded, the Reserve Bank of Malawi would certainly consider loosening monetary policy to achieve lower interest rates,” he said.

Growth will accelerate to 6.5 percent in fiscal 2015 from 6.1 percent this year, supported by improved tobacco production, according to the IMF. Questions sent to an e-mail address listed on the Ministry of Finance’s website weren’t replied to, while calls to the ministry’s office weren’t answered. Banda’s spokesman, Steven Nhlane, didn’t respond to questions e-mailed to him after he requested them by phone on April 15. The president isn’t involved in graft, Nhlane said Jan. 15 in a mobile-phone text message.

The fallout from the corruption probe will damp investors’ enthusiasm for Malawi, Charles Laurie, head of Africa research at Bath, U.K.-based risk consultancy Maplecroft, said in an e-mailed response to questions on April 14.

“The enormous scandal involving some of her senior officials tarnishes her reputation and will weaken her chances at the polls,” he said. “The prospect of a closer electoral contest coupled with disruption from the scandal is unsettling.”

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