Fitch, the international ratings agency, has upgraded Malawi's long-term foreign currency Issuer Default Rating (IDR) from CCC to B- with a Stable Outlook and its short-term IDR from C to B-.

The upgrade has been welcomed by Malawi's business and banking communities, and it should mean improved pricing for letters of credit (L/Cs), according to one business leader.

L/C significance

Bankers Association of Malawi president George Partridge said the Fitch ratings upgrade is "of utmost importance" for Malawi.

"Basically it determines outsiders' perspective on whether they can lend you money or deal with you in general. It gives the outsiders a chance to assess a country's ability to pay back credit," he told Malawi's Nation newspaper.

"Such ratings are also important for the banking sector when we want to establish L/Cs. Outsiders look at the country risk, which usually determines the price at which one may borrow. The higher the risk the lower the cost," he added.

IDR meanings

The long-term foreign currency IDR reflects the ability of an entity to meet financial commitments on a timely basis and is used by foreign banks and investors to decide whether to do business with the country and to what extent.

The short-term IDR is based on the liquidity profile of the rated entity and relates to the ongoing capacity to meet financial obligations with a relatively short time horizon, usually of less than 13 months.

Underlying improvements

The ratings upgrades reflect Malawi's improved economy. In 2004 it qualified for the Multilateral Debt Relief Initiative (MDRI), which cancelled debt to the World Bank, African Development Bank and the International Monetary Fund to reduce its external debt to 23 per cent of GDP at the end of 2006 compared with 142 per cent at the end of 2005.

Improved fiscal discipline since 2004 meanwhile has allowed Malawi to reduce domestic borrowing, which meant the Reserve Bank of Malawi could ease monetary policy and lower interest rates.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.