ANNUAL REVIEW OF THE PUBLIC DEBT PORTFOLIO

MINISTRY OF FINANCE, ECONOMIC PLANNING AND DEVELOPMENT Debt and Aid Management Division ANNUAL REVIEW OF THE PUBLIC DEBT PORTFOLIO (JULY 2013-JUNE 2014) August 2014

PREFACE The Debt and Aid Management Division in the Ministry of Finance, Economic Planning and Development is the primary agent of Government of Malawi responsible for contracting and managing the country s public debt. It is responsible for compilation and dissemination of public debt statistics. Comprehensive and timely public sector debt statistics allow government and other stakeholders to monitor the evolution of the public sector s debt liabilities and its debt-service obligations over time. Debt statistics provide early warning signals of possible debt-servicing problems and serve as an indicator of the sustainability of government and public corporations policies. In addition, public debt statistics serve as essential inputs for government budget preparation, for approval by parliament, for execution, for forecasting, and for compiling other macroeconomic statistics. This report is a review of Malawi s external and domestic debt portfolios and risk analysis for the period July 2013-June 2014. The external debt portfolio review focuses on the evolution and composition of debt by creditor, currency and sector. The domestic debt portfolio review focuses on the main instruments and holders of debt. The risk analysis gives an assessment of the risks associated with the external and domestic debt portfolios. This report was printed with support from European Union under the Technical Cooperation Facility. An electronic version of this report is available on the Ministry s website: www.finance.gov.mw. All queries and comments on the contents of the report should be addressed to the Director of Debt and Aid Management in the Ministry of Finance, Economic Planning and Development on the address below: Ministry of Finance, Economic Planning and Development, Debt and Aid Management Division, P.O. Box 30049, Lilongwe 3 Malawi Tel No.: +265-1-789-355 Fax No.: +265-1-789-173 Email: dad@finance.gov.mw Website: www.finance.gov.mw 2

Table of Contents PREFACE... 2 ACCRONYMS AND ABBREVIATIONS... 4 SECTION I: RECENT DEVELOPMENTS THAT AFFECT PUBLIC DEBT MANAGEMENT... 5 1.1 DEBT MANAGEMENT POLICY OBJECTIVE... 5 1.2 MEDIUM TERM DEBT STRATEGY... 5 1.3 MACRO-ECONOMIC DEVELOPMENTS... 6 1.4 CONTINGENT LIABILITIES STUDY... 6 1.5 NEWLY SIGNED LOANS... 6 SECTION II: PUBLIC DEBT PORTFOLIO REVIEW... 8 2.1 COMPOSITION OF TOTAL PUBLIC DEBT... 8 2.2 PUBLIC DEBT SUSTAINABILITY ANALYSIS,... 9 SECTION III: PUBLIC EXTERNAL DEBT PORTFOLIO REVIEW... 10 3.1 EVOLUTION OF DEBT PORTFOLIO... 10 3.2 COMPOSITION OF EXTERNAL DEBT... 10 3.3 COMPOSITION OF MULTILATERAL CREDITORS... 11 3.4 COMPOSITION OF BILATERAL CREDITORS... 12 3.5 DISBURSEMENT RATE ANALYSIS... 14 3.6 DEBT COMPOSITION BY SECTOR... 15 3.8 TOTAL EXTERNAL DEBT SERVICE... 17 3.7 NET FLOWS AND NET TRANSFERS... 17 SECTION IV: PUBLIC DOMESTIC DEBT PORTFOLIO REVIEW... 18 4.1 TOTAL DOMESTIC DEBT STOCK... 18 4.2 COMPOSITION OF DOMESTIC DEBT... 18 4.3 DISTRIBUTION OF DOMESTIC DEBT BY HOLDER... 19 4.4 DOMESTIC DEBT YIELD CURVE ANALYSIS... 20 4.5 ANALYSIS OF COST OF DOMESTIC DEBT... 21 SECTION V: RISK ANALYSIS OF THE PUBLIC DEBT PORTFOLIO... 22 5.1 DEFINITION OF RISK... 22 5.2 REFINANCING RISK... 22 5.3 INTEREST RATE RISK... 23 5.4 EXCHANGE RISK... 24 STATISTICAL ANNEX 1: EVOLUTION OF EXTERNAL DEBT... 25 STATISTICAL ANNEX 2: COST AND RISK INDICATORS... 26 STATISTICAL ANNEX 3: NEWLY SIGNED LOANS... 27 STATISTICAL ANNEX 4: PROSPECTIVE LOANS... 28 3

ACCRONYMS AND ABBREVIATIONS ADF BADEA ComSec DAD DOD DSA ECF EIB GBP GDP IDA IFAD IMF KWD MEFMI MTDS NDF NNDB OECD OPEC RBM SDR US$/USD African Development Fund Arab Bank for Economic Development in Africa Commonwealth Secretariat Debt and Aid Management Division Disbursed Outstanding Debt Debt Sustainability Analysis Extended Credit Facility European Investment Bank British Pound Sterling Gross Domestic Product International Development Association (of the World Bank Group) International Fund for Agricultural Development International Monetary Fund Kuwait Dinar Macro-economic and Financial Management Institute of Eastern and Southern Africa Medium Term Debt Management Strategy Nordic Development Fund No Net Domestic Borrowing Organization for Economic Cooperation and Development Organisation of Petroleum Exporting Countries Reserve Bank of Malawi Special Drawing Right United States Dollar 4

SECTION I: RECENT DEVELOPMENTS THAT AFFECT PUBLIC DEBT MANAGEMENT 1.1 Debt Management Policy Objective The primary objective of the debt management policy is to ensure that financing and debt service obligations of the Government are met adequately and at the lowest possible cost and reasonable level of risk. The second objective is to support the development of a vibrant domestic debt market. To that end, Government remains committed in containing and controlling public expenditure thereby avoiding a rapid build up of public debt. Government shall continue with its policies of contracting external loans on concessional terms and restructuring of the domestic debt from the currently predominantly short term treasury bills to medium to long term papers. These policies will ensure that debt remains at sustainable levels. 1.2 Medium Term Debt Strategy To operationalise the debt management policy, Government formulated a medium term debt management strategy (MTDS) in 2010.The MTDS was reviewed in the 2012/13 FY with technical assistance from the World Bank and Macro-economic and Financial Management Institute of Eastern and Southern Africa (MEFMI). Given Malawi s public debt composition, the cost of domestic debt is very high with an average implied rate of about 18 percent. In view of this, the following strategies were considered. Strategy 1: Maintain status quo of 80 percent foreign borrowing, and 20 percent domestic financing Strategy 2: Assumed a drastic reduction in treasury bills to a level that can entirely be financed by the private sector within one year by increasing foreign borrowing; Strategy 3: Assumed a gradual reduction in treasury bills to a sustainable level within four years. Strategy 4: Refinance all the T-bills held by the central bank with a new 10-year domestic loan. Analysis of the above strategies revealed that reducing domestic debt would lead to reduction in the cost of debt. However, there is high risk associated with increased foreign borrowing emanating from exchange rate shocks. In 2013/14 FY, Malawi Government adopted zero net domestic borrowing with the aim of reducing domestic debt. As a way forward, Malawi Government will endeavor to contain domestic debt 5

accumulation at the same time continue to contract external loans that bear favourable terms while managing the exchange rate risk. 1.3 Macro-economic Developments The 2013/14 financial year real GDP growth was estimated at 6.3 percent. Inflation demonstrated a downward trend during the period under review with headline inflation declining from 27.9 percent in June 2013 to 22.5 percent in June 2014. Given the lowering of inflation, the all type yield for the treasury bills declined from 34.4 percent to 24.7 percent. Another positive development was the exchange rate which appreciated and remained relatively stable in the last quarter of the financial year. This was on account of sufficient build up of official foreign exchange reserves. As of June 2014, the reserves were reported at 2.5 months of imports. However, the 2013/14 FY was marred with the Cash gate scandal where Government funds were embezzled. This led to the suspension of general budget support by the development partners. This had a negative effect on Government s operations hence there was significant build up of domestic payment arrears which translated to increased domestic debt borrowing and domestic debt stock. 1.4 Contingent liabilities study The Ministry of Finance participated in the study on contingent liabilities by MEFMI, United Nations Conference on Trade and Development (UNCTAD), in collaboration with Organization for Economic Cooperation and Development (OECD). The study was aimed at a) assessing both explicit and implicit contingent liabilities and b) reviewing current legal and institutional arrangements and the procedures for managing contingent liabilities. The findings of the study are expected by late 2014. 1.5 Newly Signed Loans In 2013/14 financial year, Government contracted a total of five loans from the International Development Association (IDA) of the World Bank, Organization for Petroleum Exporting Countries (OPEC) Fund, Arab Bank for Economic Development in Africa (BADEA), Kuwait Fund and Saudi Fund. The new loans have an average interest rate of 1 percent, grace period and repayment period of 8 years and 22 years respectively. The total commitment under these newly signed loans amount to US$67 million. The loans proceeds will fund roads, water, health and agriculture sectors (refer to Annex 3).At the time of preparing this report, Parliament had approved several loans 6

as listed in Annex 4 of which the loan agreements were yet to be signed by Malawi Government. 7

in Billions of Malawi kwacha SECTION II: PUBLIC DEBT PORTFOLIO REVIEW As of end June 2014, Malawi public debt stock amounted to USD 2.62 billion equivalent of MK 1,045 billion. This shows a significant increase in the public debt stock from US$ 2.03 billion (MK 688 billion) reported in June 2013. The increase is attributed to domestic debt which increased by 44.5 percent from MK 295.4 billion in June 2013 to MK426.9 billion in June 2014. 2.1 Composition of total public debt The share of external and domestic debt on total public debt is 59 percent and 41 percent respectively. In June 2013, external debt accounted for 64 percent whilst domestic debt was 36 percent. Prior to June 2012 (before the devaluation), domestic debt used to account for over 50 percent of the public debt (refer to graph 2.1). Graph 2.1: Trend of Public Debt in billion of Malawi Kwacha 1200 1000 800 600 400 200 Domestic External Total Public Debt 0 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Domestic 158.8 165.9 222.97 295.37 426.9 External 118.7 147.6 301.7 437.5 618.3 Total Public Debt 277.50 313.50 524.65 732.86 1045.24 As of end June 2014, the total public debt as a proportion to nominal GDP was estimated at 66 percent compared to 38 percent of June 2013.However, the proportion of the total debt to GDP was reported at 54 percent in 2012. The swing in the proportions is attributed to debt 8

dynamics such as currency appreciation/depreciation and GDP growth. The current ratio of public debt to GDP signifies that growth in public debt is outpacing growth in GDP overtime. Hence the need for Malawi Government to promote growth oriented policies thereby up scaling the economy s growth rates. 2.2 Public Debt Sustainability Analysis, According to the Debt Sustainability Analysis that was undertaken jointly by International Monetary Fund and World Bank Staff in December 2013, Malawi s external and domestic debt is projected to remain sustainable and manageable for the next 20 years. Among other debt burden indicators, the present value of public debt is projected to decline steadily to 23.6 percent of GDP in 2018. However, the results indicated that Malawi remains at moderate risk of debt distress. This implies that debt burden indicators such as Present Value (PV) of Debt to GDP, PV of Debt to Exports and PV of debt to Revenue were below the thresholds in the baseline scenario but thresholds were breached in stress tests and alternative scenarios. Thus, the main risks to debt sustainability are sluggish growth, deterioration in the terms of trade and adverse weather conditions. 9

SECTION III: PUBLIC EXTERNAL DEBT PORTFOLIO REVIEW 3.1 Evolution of External Debt Portfolio As of June 2014, the total disbursed outstanding external debt stock totalled USD 1,553.20 million compared to USD 1,332.6 million that was reported in June 2013. This represents a nominal increase of 16.5 percent. Generally, this increase was on account of significant disbursements by the Peoples Republic of China, the World Bank and African Development Fund. From June 2014, external debt stock is expected to rise steadily from USD1, 553.2million to almost USD 1,900 million in June 2017 Graph 3.1: Trend in the External Debt stock in millions of US$: 2005/6 2016/17 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 0,500.0 0,000.0 3.2 Composition of External Debt As of June 2014, external debt owed to multilateral and bilateral creditors amounted to USD1, 129.4 million and USD423.8 million, respectively (refer to Annex 1). In June 2013 multilateral debt stood at USD965 million while bilateral debt was at USD 336.3 million. For the past 3 years, the share of external debt owed to bilateral creditors has increased although the ratio of multilateral to bilateral debt stock has remained constant between June 2013 and June 2014. Thus, from June 2013 to June 2014, bilateral debt stock increased by 16 percent due to disbursements that took place within the period mainly from People s Republic of China towards the National Stadium. 10

Chart 3.1: External Debt by Creditor Category June 2014 Bilateral 423.8 27% Multilateral 1129.4 73% June 2013 Bilateral 366.2 27% Multilateral 966.3 73% 3.3 Composition of Multilateral Creditors From June 2013 to June 2014, multilateral debt stock increased by 14%.This increase is mainly attributed to disbursements from ADF, IDA and BADEA. International Development Association (IDA) of the World Bank remains the largest multilateral creditor accounting for over 44 percent of the total multilateral debt. 11

Chart 3.2: Multilateral Debt by Creditor as of end June 2014 IMF 200.8 18% Nordic 28.5 2% OFID 42.5 4% PTA 2.2 0% ADF 226 20% BADEA 30.5 3% IFAD 75.8 7% IDA 501 44% EIB 22.1 2% Chart 3.3: Multilateral Debt by Creditor as of end June 2013 IMF 193.6 20% Nordic 28.3 3% OFID 36.3 4% ADF 180.5 19% PTA 4 0% BADEA 31.7 3% EIB 31.3 3% IFAD 75.3 8% IDA 385.3 40% 3.4 Composition of Bilateral Creditors Of the total bilateral external debt stock of USD423.8 million, Mainland China accounts for 56 percent (USD 237.9 million) while India accounts for 30 percent (USD128.2 12

million). For four consecutive years, Mainland China remains the top bilateral creditor for Malawi. Newest bilateral creditors for Malawi include Abu Dhabi funding Jenda- Edingeni Road and Saudi fund co-funding Thyolo Bangula Road. The debt owed to Government of France amounting to USD 6 million is under the Debt Relief and Development Agreement signed in January 2011. Under this agreement, the French Government refunds all debt service repayments made by the Government of Malawi. The refunded amounts are then channelled to the Mining Sector in support of the Mining Governance and Growth Support Project. This project is co financed by the World Bank and European Union). Chart 3.4: Bilateral Debt by Creditor as of end June 2014 Belgium 2.2 1% FranceSaudi Fund 6 1.1 1% 0% Kuwait 40.6 10% Abu dhabi 0.6 0% Taiwan 7.2 2% China(mainland) 237.9 56% India 128.2 30% Chart 3.5: Bilateral Debt by Creditor as of end June 2013 France 10.3 3% Belgium 2.1 0% Taiwan 10 3% Kuwait 40.7 11% Saudi Fund 1.1 0% 0 0% China(mainland) 204.1 56% India 97.9 27% 13

3.5 Disbursement rate analysis This analysis takes into account ongoing projects that are disbursing. Over the period under review, the total disbursements amounted to US$ 225 million. The IDA of the World Bank recorded the highest loan disbursements to the tune of US$ 104 million seconded by Mainland China at US$ 33million. Disbursements to the Education and Water Sectors were the driving force for the record high IDA disbursements whilst disbursements to the National Stadium project accounted for the Mainland China s loan disbursements. The top five disbursing creditors are given in the table 1 below. Table 1: Loan disbursements in US dollar Total Loan disbursements in US dollars for 2013/14 FY 1 International Development Association 104,447,358.60 2 Mainland China 32,969,927.10 3 African Development Bank 31,509,529.00 4 India 21,689,819.80 5 International Monetary Fund Total 20,136,947.50 210,753,582.00 It is noted that utilization rate which is defined as the cumulative disbursements as compared to the loan amount is high for the nontraditional creditors such as India and Mainland China. For instance, the National stadium loan which was contracted in 2012 has registered utilization rate of 70 percent whilst the US76.5 million Line of Credit from India also contracted in 2012 registered 62 percent as of end June 2014. This can be attributed to the disbursement method which these creditors adopted. Project loans in the roads sector record dismal utilization rates. This is attributed to the project performance and other project implementation challenges more especially, inadequate counterpart funding. The table below illustrates the low disbursement rate in the roads sector and such is the case largely as a result of Government of Malawi failure to disburse the required counterpart funds and some other contractual issues. 14

Table 2: Disbursement rate in the Roads Sector Creditor Project Signing Date Loan amount Thyolo Bangula BADEA Road 5/13/2008 10,000,000.00 Thyolo Bangula KUWAIT Road 3/19/2007 4,000,000.00 Thyolo Bangula SAUDI FUND Road 3/1/2011 4,000,000.00 Jenda Edingeni ABUDHABI Road 12/1/2010 36,730,000.00 Loan Currrency USD KWD SR EmD Disbursement Rate - 11.00 9.60 5.50 3.6 Debt composition by sector Of the outstanding external debt, the agriculture sector accounts for a large proportion of debt at 18.4 percent. This is followed by water, sanitation and irrigation sector at 13 percent. The integrated rural development and the education sectors account for 12 percent and 11 percent, respectively. The roads sector has its share at 7 percent of the total outstanding external debt. Noteworthy is the balance of payment support which has a share of 18 percent reflecting the loans that were contracted from IMF. 3.7 Currency Composition Malawi`s external debt portfolio is dominantly denominated in Special Drawing Rights (SDR), accounting for over half of the debt outstanding as of 30 th June 2014. However, SDR is a basket of four currencies namely; the United States dollar (USD), Japanese Yen, Euro and the British Pound Sterling (GBP). After decomposing, the United States Dollars account for51 percent of the total external debt portfolio. Euro and Chinese Yuan account for 24 percent and 13 percent respectively. 15

Chart3.6: External debt by currency composition June 2014 KWD 41 3% JY 94 6% others 50 3% EURO 372 24% CNY 204 13% USD 795 51% Chart3.7: External debt by currency composition june 2013 KWD 40.7 3% JY 124 10% others 1.1 0% EURO 324 25% USD 606 48% CNY 174.1 14% 16

3.8 Total External Debt Service As of end June 2014, the total debt service (TDS) which comprises principal repayments (amortization) and interest payments amounted to US$ 55.8 million. Of the TDS, US$ US$ 39.9 million and 15.9 million were in favour of multilateral and bilateral creditors respectively. Taking out debt service to the IMF which is not paid from the Governments budget, total debt service amounted to US$ 35.6 million. Table 3: Total Debt Service in Millions of US dollars Principal Repayment Interest Payment Total Debt Service Multilateral Creditors 33.3 6.6 39.9 Bilateral Creditors 8.9 7.0 15.9 Total 42.2 13.6 55.8 Amortization to bilateral and multilateral creditors amounted to US$8.9 million and US$ 33.3 million respectively. Interest payments to the bilateral creditors were greater than interest payments to multilateral creditor at US$ 7.0 million compared to US$ 6.6 million. This is due to the high loan disbursements and also the relatively higher interest rates charged by the bilaterals. 3.7 Net flows and Net transfers Net flows provide the difference between loan disbursements and amortization. Over the reporting period, the net flows were positive implying that the loan proceeds were more than total amortization. The total disbursements (including IMF disbursements) amounted to USD 226.5 million as compared to principal repayment of USD 42.2 million. Similarly, net transfers to Government were reported positive given that interest payments were recorded at USD13.6 million 17

SECTION IV: PUBLIC DOMESTIC DEBT PORTFOLIO REVIEW 4.1 Total Domestic Debt Stock The stock of Malawi s domestic debt (gross domestic debt stock) stood at MK 426.9 billion (USD1.07 billion) as of end June 2014 compared to MK 295.4 billion (USD 0.88 billion) in June 2013 reflecting a 44.5 percent increase in 2013/14 financial year. This increase was mainly due to a rise in short term borrowing by the Government from the Reserve Bank of Malawi (RBM),recapitalisation of RBM and the inclusion of arrears in the domestic debt stock. In nominal terms, domestic debt to GDP stood at 41 percent as of end June 2014. 4.2 Composition of Domestic Debt As of end 2013/14 financial year, the Treasury bills continued to dominate the domestic debt instruments at45 percent of the total domestic debt. This demonstrates a slight reduction of the TB s share as in 2012/13 it was recorded at 46 percent. Ways and Means advances from the RBM accounted for 25 percent of the total domestic debt stock whilst the RBM Treasury notes accounted for 13.7 percent of the total domestic debt. The Treasury notes which Government introduced to the market in December 2011, accounted for 2 percent of the domestic debt. Chart 4.1: Composition of Domestic Debt in June, 2014 RBM Recapitalization Notes 7% RBM Promissory Note 14% Promissory Notes 7% MG Treasury Notes 2% Securitized Arrears 0% Treasury Bills 45% LRS 0% Ways and Means 25% 18

Chart 4.2: Composition of Domestic Debt in June, 2013 Promissory Note 12% Treasury Notes 3% Advances (Banks) 0% RBM Treasury Note 12% Treasury Bills 46% LRS 1% Ways and Means 26% 4.3 Distribution of Domestic Debt by Holder As of end 2013/14 financial year, RBM continued to account for over 50 percent of the domestic debt stock. However, the proportion has declined from 67.3 percent reported in 2012/13 FY to 54 percent in June 2014. The major commercial banks 1 held 28 percent of the government domestic debt as compared to 14 percent in June 2013. The share of insurance companies and other financial institutions stood at 10 percent and 3 percent respectively. This distribution of domestic debt implies that there is crowding out the private sector. Going forward, Government intends to enhance participation of other market participants through development of the domestic debt market. Chart 4.3: Domestic Debt by Holder in June, 2014 Discount Houses 0% Other Financial Institutions 3% Insurance companies 10% Pension Funds 2% Corporate Sector 3% Households 0% RBM 54% Commercial Banks 28% 1 Commercial Banks comprises major banks and other banks as reported in 2013 19

Chart 4.4: Domestic Debt by Holder in June 2013 Other Financial Institutions 3% Other Banks 6% Discount Houses 1% Insurance Companies 8% Pension Funds 0% Other Residents 1% Foreign Investors 0% Major Banks 14% Reserve Bank 67% 4.4 Domestic Debt Yield Curve Analysis The yield curve which shows the relationship between the interest rates and the time to maturity of the given debt instruments of different maturity periods is given by the graph below. The yield curves are for the treasury bills. These are Government instruments which are actively traded on the primary market. The Treasury bills are issued in three tenors: the 91 days, 182 days and 364 days. Analysis of the yield curves indicates downward trend of the yields for all the tenors in the 2013/14 financial year with March 2014 having the lowest yields at an average of 14.7 percent (refer graph 4.1). This demonstrates a change in course of the yields as March 2013 had the highest yields with an average of 42 percent. In June 2013, the average yields for the 91 days Treasury bill was 33 percent and by December 2013 the yields remained at 33 percent. However, between January and February 2014, the yields tremendously declined and by March 2014 the rate averaged 12.5 percent. In April, the yields rose to 13. 5 percent and by June the yields settled at 21.1 percent. 20

Graph 3.1: Yield Curve June 2012 June 13, in % 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 91 Days 182 Days 364 Days Jun-13 32.93% 33.78% 36.35% 34.35% Oct-13 21.02% 24.28% 27.38% 24.23% Dec-13 33.15% 32.69% 37.17% 34.34% Mar-14 12.53% 13.23% 18.20% 14.65% Jun-14 21.13% 26.48% 26.44% 24.68% The average yields for the 182 days Treasury bill declined from 33.8 percent in June, 2013 to 29.3 percent and 26.5 percent in January 2014 and June 2014 respectively. Whilst the average yields for the 364 day Treasury bill dropped from 36.4 percent to30.4 percent and 26.4 percent in January 2014 and June 2014 respectively. These downward patterns are attributed to inflation which declined over the reporting period as pointed out in Section 1. 4.5 Analysis of cost of domestic debt Given the stock of domestic debt, there exists pressure on the Government in terms of interest payment. In 2013/14 FY, Government incurred huge interest costs amounting to MK 88 Billion compared to MK29 billion in 2012/13 FY. For 2014/15 FY, interest on domestic debt is projected at MK 80 billion. Considering that most of the domestic debt is short term, the effects of interest rate movements are more pronounced as it is shown in the risk analysis in the next section. 21

SECTION V: RISK ANALYSIS OF THE PUBLIC DEBT PORTFOLIO 5.1 Definition of risk Risk refers to the potential for the cost of debt to deviate from its expected outcome. This stems from unexpected variations of different economic variables such as interest rate and exchange rate. Malawi s public debt portfolio is exposed to market risk, operational risk and liquidity risk. It is important to assess the risks associated with the debt portfolio because such information enables decision makers to design forwardlooking strategies on the optimal debt structure in terms of maturity, interest rate and exchange rate. In this analysis, exposure of the debt portfolio to risk is captured using the following risk indicators: refinancing risk, interest risk and exchange risk and a summary of the indicators is provided for in Annex 2. 5.2 Refinancing risk Refinancing (rollover) risk is the possibility of having the debt to be rolled over at a higher interest rate. Two measures are used to assess the exposure of Malawi s public debt to refinancing risk, namely: the maturity/redemption profile of debt and the Average Time to Maturity (ATM) of the debt stock as discussed below. 5.2.1 Refinancing Risk Analysis using Redemption Profile The redemption profile refers to the outstanding debt stock or the amount of debt that is falling due in a given period of time. This indicator shows the specific points of a country s vulnerability which is manifested by high debt service payments in the debt repayment schedule. With new loans, it is feasible to choose repayment profile which does not coincide with humps in the redemption profile. When choosing the maturity of new borrowing, the redemption profile is useful in highlighting the specific points of a country s vulnerability, which is manifested by high debt service payments in the debt repayment schedule. As of end June 2014, the redemption profile of Malawi s public debt indicated that 27.5 percent of the total debt will fall due within one year.most of the debt falling due in 2014/2015 FY is domestic (Treasury bills).almost 72 percent of total domestic debt is falling due in 2014/2015 FY.In respect to external debt repayment, it will peak in 2017due to significant repayments to IMF and Mainland China. 22

2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 2054 2056 2058 2060 2062 in USD Millions Graph 5.1: Redemption profile of total public debt 800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 - Redemption Profile of Total Debt Domestic Debt External debt 5.2.2 Refinancing Risk Using Average Time Maturity The average time to maturity (ATM) of the debt portfolio is a measure of the refinancing risk of debt portfolio.atm measures how long on average it will take to finish paying back the entire disbursed outstanding debt. The ATM of the total debt portfolio stands at 12.4 years as of June 2014 compared to 9.4 years of June 2013. This implies a reduction in the refinancing risk as a higher ATM implies lower refinancing risk. This higher ATM of 12.4 years is a reflection of more concessional loans in the debt portfolio. For the external debt portfolio, the ATM has slightly increased from 13.9 years to 14.3 years. Similarly, ATM for domestic debt has marginally improved to 0.8 years from 0.7 years of June 2013. 5.3 Interest Rate Risk Interest rate risk is the risk associated with changes in interest rates on the maturing debt. This risk is measured by Average Time to Re-fixing (ATR).As of end June 2014, ATR for the total debt is reported at 9 years whilst for the external and domestic debt stood at 14.3 years and 0.5 years respectively. High (low) ATR will indicate low (high) risk it will take long(short) time to change the interest rate. The longer the maturity period of debt stock, the higher the ATR. Conversely, the shorter maturity period which in this case is associated with the treasury bills, the lower the ATR. In addition to ATR, the exposure of the debt portfolio to changes in interest rates is determined by the proportions of fixed and variable rates debt in the public debt portfolio. The higher the proportion of variable rate debt the greater the exposure. For Malawi, 71 percent and 29 percent of the total debt is on fixed and variable interest rate 23

terms respectively. Hence, Malawi s public debt is less susceptible to interest rate risk. Nevertheless, adverse interest rate movements on the domestic market would significantly affect 91-day and 182-day treasury bills which are classified as variable rate instruments given that they have to be rolled over more than once during the year. 5.4 Exchange risk Exchange risk refers to the exposure of the public debt portfolio to the changes in the exchange rate. The share of external on total public debt, currency composition of the debt portfolio and the degree of currency mismatch between debt service obligation and the composition of foreign exchange indicate the extent of the exchange risk. As of end June 2014, the proportion of domestic and external debt on total public debt was 41 percent and 59 percent respectively. Malawi s domestic debt is solely denominated in local currency (the Malawi Kwacha), while external debt is denominated in various foreign currencies. This currency composition implies that 59 percent of the total debt portfolio is exposed to foreign exchange risk, arising from foreign currency fluctuations vis-à-vis the Malawi Kwacha. Thus, any significant depreciation of the Malawi Kwacha against foreign currencies is expected to raise debt service payments in local currency terms, leading to higher payments in the budget than projected. Chart 5.1: Currency composition of Malawi s Public debt EURO 14% CNY 8% USD 30% KWD 1% JY 4% others 2% MK 41% MK USD CNY EURO KWD JY others 24

Statistical Annex 1: Evolution of External Debt US$ MILLION CREDITOR Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 I) MULTILATERAL IDA 219.5 269.7 294.1 385.3 501 ADF 145.1 162.4 166.4 189.5 226 ADB 2.8 1.1 0 0 0 IMF 130 152.4 141 193.6 200.8 EIB 18.1 28.8 26.2 21.9 22.1 IFAD 70.9 78.7 78 74.7 75.8 NDF 30.3 33.8 28.6 29.5 28.5 BADEA 29 29.7 31.6 31.7 30.5 OPEC Fund 20.4 23.75 29.3 36.3 42.5 PTA Bank 4.63 3.3 4 2.2 Sub-total Multilateral 666.1 785 798.5 966.4 1,129.4 II) BILATERAL Kuwait Fund 42.4 43.8 42.6 40.7 10.2 Taiwan 17 14.7 11.9 10.2 40.7 India 29.9 48.4 77.5 97.9 128.2 Belgium 2.1 2.4 2.1 2.1 2.2 China (PRC) 28.8 90.3 164.1 204.0 237.9 France 10.1 10.2 6.0 Saudi Fund 1.2 1.1 1.1 Abu Dhabi 0-0.6 Sub-total Bilateral 120.2 199.6 309.5 366.2 427.0 III) COMMERCIAL 0 0 0 0 0 GRAND TOTAL (I+II+III) 786.3 984.6 1,108.0 1,332.6 1,556.4 Exchange rate $/MK as of end June 150.97927 149.905 272.3771 335.5225 398.1053, Debt & Aid Management Division 25

Statistical Annex 2: Cost and Risk Indicators Cost and Risk Indicators Jun-12 Jun-13 Jun-14 Nominal external debt as % of nominal GDP 31.1 33.6 39.4 ATM External Portfolio (years) 14.2 13.9 14.3 ATM Domestic Portfolio (years) 1.1 0.7 0.8 ATM Total Portfolio (years) 8.6 9.4 12.4 Refinancing risk Percentage of Total Debt maturing in 1 year (%) 36.6 32.6 27.5 Interest rate risk Foreign exchange risk Debt refixing in 1 year (%) 34.1 30.7 24.2 ATR External Portfolio (years) 14.2 13.9 14.3 ATR Domestic Portfolio (years) 0.5 0.5 0.5 ATR Total Portfolio (years) 8.4 9.3 9.0 FX debt as % of total 58 66 59, Debt & Aid Management Division 26

Statistical Annex 3: Newly Signed Loans (July 2013- June 2014) CREDITOR SIGNING DATE GRACE PERIOD (YEARS) REPAYMEN T PERIOD (YEARS) INTEREST RATE/ANNU M Kuwait Fund Nov-13 4 24 1.5 Other terms of the loan LOAN AMOUNT CURRENCY Equiv in US$ SECTOR 0.5% administrative expense, 0.5% special commitment 3,000,000.00 KWD 10,000,000.00 Roads OPEC Nov-13 5 15 1 Service Charge 1% 6,000,000.00 USD 6,000,000.00 Roads BADEA Nov-13 10 20 1 None 10,000,000.00 USD 10,000,000.00 Water IDA Aug-13 10 30 0.75 Commitment charges on Unwithdrawn balances 0.5% 19,400,000.00 SDR 31,428,000.00 Agriculture Saudi Fund Aug-13 10 20 1 None 45,000,000.00 SR 10,000,000.00 Health 7.8 21.8 1.05 Total in US $ 67,428,000.00 27

Statistical Annex 4: Prospective Loans LOAN CREDITOR GRACE PERIOD (YEARS) REPAYMENT PERIOD (YEARS) INTEREST RATE/ANNUM OTHER LOAN TERMS LOAN AMOUNT EQUIV IN US$ National Cancer Treatment Center Project OPEC FUND 5 15 1 Service charge of 1 % US$ 13.5 million 13,500,000 MASAF 4 IDA 10 30 0.75 Commitment fees 0.5% SDR 21.4 million 32,800,000 Multinational -Nacala Road Corridor Development Project (Phase 4) ADF 10 40 0.75 Commitment fee 0.5% BUA 42.36 million 65,000,000 Sustainable Rural Water Infrastructure for Improved Health and Livelihoods ADF 10 30 0.75 Commitment fee 0.5% BUA 15 million 23,000,000 Sustainable Rural Water Infrastructure for Improved Health and Livelihoods PROSPECTIVE LOANS AS OF JUNE 2014 Nigeria Trust Fund of ADB 7 20 0.75 Commitment fee 0.5% BUA 5million 7,700,000 Skills Development for Higher Education IDA 10 30 0.75 Commitment fee 0.5% SDR 29.8 million 50,000,000 28