When stock tumble, Malawi should worry

Tom Sangala January 17, 2017

355 3 minutes read

January has been an interesting year so far in many fronts. The Maizegate has dominated the debate in many circles of life in Malawi to the extent that some important events have gone unnoticed or indeed have received very few press coverage. There has been much progress in the fight for corruption just like there has been some doubt about the government’s ability to decisively deal with corruption in general.

One positive thing for many Malawians is that the Director of Public Prosecutions (DPP) has had a good week indeed. I took time to attend the court sessions of the Cahsgate cases involving Paul Mphwiyo and the revelations coming out of one Leonard Kalonga paint a very interesting picture of the mechanics and the software issues surrounding the infamous Cashgate. Since these matters are still in court, the Nutcracker will respect the basic principles of natural justice that include the concept of innocent until proven guilty before a competent court of law. That is perhaps why I am celebrating the conviction of another Cashgate beneficiary in the name of Godfrey Dzanjalimodzi by the High Court in Lilongwe.

Another piece of information that was released last week that went unnoticed is contained in the Malawi Stock Exchange’s (MSE) Annual Market Performance Review of 2016 that was published on the MSE’s website on January 9 2017. The information on the MSE is extremely important because in conventional economics, the stock market has traditionally been viewed as an indicator of the health of an economy. Large decreases in stock prices are reflective of a future recession whereas large increases in stock prices suggest future economic growth. If one goes by this conventional economic wisdom, then Malawians have a valid reason to be worried.

The released figures do not bring confidence to investors. This country needs investment in all sectors of the economy and the MSE is one area where that investment should be harnessed. Any potential investor will look at the return on his investment as a major factor determining whether to increase his or her investment. In 2016, those who invested their hard-earned kwacha in the stock market made a loss. The stock exchange market registered a negative return on investment of -15.70 percent in dollar terms.

In fact, by any measure of analysis, MSE has perhaps its worst year in terms of performance since it started trading in 1996. The value of stocks traded in 2016 was $8.6 million down from $101.9 million in 2015. This is a 91.51 percent reduction on the 2015 figures. This is cause for concern and it is important that the people in charge of this entity take a hard look at themselves. The volume of shares traded also experienced a massive reduction; this is an indication of the lack of confidence in the economy by potential investors. In 2016, the volume traded experienced a massive 82.6 percent reduction. There is something not going on right in this economy. If the stock market is becoming such an unattractive investment option, how will this nation then turn itself from an importing economy to an export economy? Without access to long-term loans at an affordable interest rate, the real sector cannot grow but Malawi is in dire need of a real sector that can grow and lead to the much-sought transformation and diversification of the economy.

This macroeconomic environment gives an unfair advantage to foreign investors who can borrow and invest in their home countries; this means that if the situation continues, then the Malawian investor will simply be a bystander in their own country. How then can the private sector thrive and create jobs with this type of stock market performance. A good performing stock exchange makes it possible for the private sector to access funds/capital that would enable it to invest in industries that will create jobs, increase exports, pay more taxes and propel this country to diversify from tobacco into agro-processing industries and other types of economic activities.

Interest rates have become very high making it almost impossible to rely on borrowed capital to start a business in Malawi. As of today, interest rate stands between 35 and 40 percent. It is practically impossible for businesses that borrowed at flexible rates to plan and survive in this environment. However, for real investment to take place, for investments that are productive to take root in Malawi, the last thing needed is a stock exchange that is showing all the wrong indicators like the market capitalisation decrease from $936.3 million on January 4 2016 to $796.2 million by December 30 2016!