What are the implications of Bingu wa Mutharika’s death on Malawi’s economy?

On Thursday, 5 April 2012 it was reported that Malawi’s President Bingu wa Mutharika had died of a heart attack. Subsequently, Joyce Banda who has been serving as Vice President was sworn in on Saturday as president.

Banda (61) took charge of the southern African country under the terms of the constitution and has become the first female head of state in southern Africa.

The two-day delay in the official announcement of Mutharika’s death had stoked fears that the late president’s brother, Foreign Minister Peter Mutharika, whom he had been grooming as a possible successor, might be foisted on the country in defiance of the constitution. The charter stipulates that the vice president takes over in the event of the president’s demise, and there was widespread relief when Banda, who was expelled from Mutharika’s ruling DPP party in 2010 after an argument about the succession, was sworn in with the backing of the judiciary, army and police chiefs.

Joyce Banda is an educator and grassroots gender rights activist. She was Minister of Foreign Affairs from 2006 to 2009 and was also Member of Parliament and Minister for Gender, Children’s Affairs and Community Services. She is the founder and leader of the People’s Party created in 2011, and prior to Bingu wa Mutharika’s death was considered likely to contest the Presidency of Malawi in the 2014 general election. The People’s Party is scheduled to have a convention later this year, with Joyce Banda likely to be confirmed as party leader.

Nonetheless, the real question in the minds of many (including Malawians) is whether this event will in any way change the fortunes of a “collapsing” Malawan economy? As part of our discussion, we analyse the current economic situation in Malawi as follows:

On the brink of economic collapse

Our own assessments in past economic reports point to the fact that Malawi has been facing serious structural constraints that were threatening its economic growth. Chief amongst them were acute foreign exchange, electricity and fuel shortages. While the Minister of Finance had estimated GDP growth of 6.6% in 2012, the IMF doubted whether this was achievable due to the aforementioned structural constraints, giving a forecast growth rate 4.2% for 2012. The IMF also cited that agriculture has largely been affected by the reduced government inputs (especially fertiliser) support due to forex shortages. Furthermore, foreign reserves are at low levels due to the poor tobacco proceeds recorded in 2011 with foreign reserves at approximately USD 440.0m, which is tantamount to 3.4 months import cover.

Inflation threats and forex shortages

With food prices accounting for around 60% of the consumer price index, weather conditions tend to influence the inflation outcome. In previous years, bumper harvests had helped reduce inflation to average approximately 7.4%. However, CPI figures for February 2012 showed that headline inflation stood at 10.9% up 0.6 percentage points on January 2012.

On another note, the MWK has been under pressure. Although the Reserve Bank of Malawi devalued the USD/MWK by 10% to 165 from 150 in August 2011 this has failed to eliminate the forex shortages as it remains insufficient and well below the parallel market rate of approximately MWK 260 : USD 1. The current forex shortage has also been impeding economic activities with the country failing to procure its daily fuel requirements with service stations countrywide rationing fuel.

All fingers of blame pointing at Mutharika

It is worth highlighting that Bingu wa Mutharika, a former World Bank economist, is widely blamed for the economic collapse in Malawi. Furthermore, his antagonistic relations with western donors such as Britain and the USA, which bankrolled about 40.0% of the budget led to the freezing of millions of dollars of aid, punching an enormous hole in the impoverished nation’s finances.

According to a Reuters report, Finance Minister Ken Lipenga indicated that former President Bingu wa Mutharika had blocked plans called for by the IMF to devalue the currency because he was worried the move would hurt the poor. The IMF, which suspended a USD 79.0m aid facility due to conflict with Mutharika, wanted to see Malawi’s currency further devalued, saying too much of the state’s precious reserves are being used to defend it.

Mutharika plunged the country into isolation last year when he expelled the ambassador from former colonial master and biggest aid donor Britain. In a watershed moment for the normally peaceful state known as the “Warm Heart of Africa” Mutharika’s police reportedly killed 20 people in anti-government protests in July 2011, leading to international condemnation and a cut of aid packages from other donors.

High hopes for Malawi

While it is a bit too early to predict how things will play out in Malawi, there is indeed a general view that Malawi can rebuild bridges with the outside world and restore aid funding in the nation. Finance Minister Ken Lipenga has said the economy could return to its fast rate of growth if aid was restored but added that the country needed to move away from its biggest cash crop tobacco, which at one point provided up to 80.0% of its foreign currency, by increasing the strength of its value-added businesses. “We really need to start generating forex for ourselves,” he said.

Hopes are also high that Banda can repair the damage inflicted by Mutharika’s mercurial rule. UN Secretary-General Ban Ki-moon, while expressing condolences for the death of Mutharika, welcomed the “peaceful transition in Malawi”, also raising hopes that the international community would be happy to lend a helping hand to the new president. It has also been reported that the MWK rate on the black market had dropped to 270-275 from about 295, with many anticipating moves to end the foreign currency crisis.

So what strategy should investors take?

We maintain our view that the Malawi Stock Exchange (MSE), which is capitalised at approximately USD1.0bn (excluding Old Mutual), remains attractive in relation to its sub-Saharan African peers. While the main setback has to do with issues of repatriation of currency and devaluation risk, we feel that these risks may fall away under a new political and economic dispensation.

The case for equities is further strengthened by the generally good dividend yields with a market average dividend yield of around 5.0%. Nonetheless, earnings growth for most listed companies this year is generally expected to be weaker given the economic woes. Companies that rely on local inputs commanding a dominant market share should continue to do well especially Press Corp (PER of 2.8x) and NICO (PER of 4.4x). This could turn out to be a key transition moment and therefore a good entry point from a timing perspective into the MSE.

Imara is an investment banking and asset management group renowned for its knowledge of African markets.