Local businesses struggle to persist

Malawi businesses will continue to struggle in a high operating cost environment and volatile economic conditions characterised by rising inflation and weakening exchange rate against the dollar, according to a report.

Nico Asset Managers Limited forecast, in the monthly economic review for September 2012, is on account of a drop in real gross domestic product (GDP) to 1.6 percent in 2012 announced by Reserve Bank of Malawi (RBM) Governor Charles Chuka last week, from an earlier forecast of 4.3 percent as agricultural performance weakens than last year and the manufacturing sector records negative growth.

The investment advisory firm says structural problems such as insufficient power supply and water shortages will likely remain a major challenge to economic activity.

Nico Asset Managers has projected that inflation, currently at 25.5 percent as of August 2012, will continue rising as a result of the liberalisation of the exchange rate regime which has culminated into the weakening of the local unit

“The increases in electricity tariffs, which are required to support much-needed investment in the sector, and the withdrawal of fuel subsidies, will also generate upwards inflationary pressures,” says the firm.

Food inflation, which accounts for about 58.1 percent national Consumer Price Index (CPI), a measure that examines the weighted average prices of a basket of consumer goods and services—is expected to increase as the lean season continues.

“Inflation will be moderated by aid-funded subsidies for poor households and falling global food. Inflation is likely to remain in double digits,” says Nico Asset Managers.

Rising inflation rate will continue to erode the purchasing power of money, resulting in lower disposable incomes and reduced savings which could reduce funds available for capital investments resulting in low private sector activity and slow economic growth.

On the flexible exchange rate regime, the firm says it poses a challenge to businesses in planning for expenditures due to the volatile operating environment.

“A weakening currency increases external liabilities for companies that have foreign currency liabilities on their balance sheet. Weakening currency will also discourage foreign direct investment as foreign investors risk recording forex losses on their investments.”

The bank rate—the rate at which commercial banks borrows from the central bank— was raised in July to 21 percent and Nico Asset Managers observes that high interest rates are likely to result in reduced private sector investment and growth.

With high borrowing costs, the risk of defaults of existing liabilities and foreclosure of property pledged as security could be high, a development that likely to dampen the performance of the property market.

The firm also says the new debt offers are expected to decline due to increased cost of borrowing.