By Rafiq Raji, PhD
Growth forecasts revised downwards. We expect 2015 growth of 4.8%. The IMF revised downwards its growth forecasts in November 2015 to 5% from 5.8% previously, below potential of 6-6.5%. Weak exports performance expected in 2015/16 FY (begins July 1) may extend into 2016. We however expect a recovery to begin in 2017 as interest rates decline and the economy trends towards stability. Crude oil production should also boost exports in due course. Authorities issued crude oil production bidding documents to a globally diversified group of 16 companies in October 2015, a sharp contrast to an earlier 2013 licensing round where the only license issued was to a Chinese firm. With the bidding process expected to be concluded in January 2016, we expect successful bids to be announced by authorities before the end of H1-2016. This is in light of the presidential elections scheduled for February 2016. Additional reason to be optimistic is the authorities’ industrialization drive. It plans to boost Uganda’s power generation capacity to achieve this. Eight (8) projects are already afoot to almost double the country’s current capacity of 850MW to at least 1,500MW by 2018. This is even as the current peak power demand of 550MW leaves the electricity grid with a 300MW surplus.
|Uganda Macro Forecasts||2015||2016||2017|
|Real GDP, % change*||4.8||5.0||5.5|
|Inflation, % change||5.2||6.3||5.0|
|Policy rate, %**||18.0||20.0||19.0|
|Current Account Balance (% GDP)*||-10.0||-11.0||-12.0|
|Fiscal Balance (% GDP)*||-7.0||-7.0||-6.0|
|Source: IMF, Macroafricaintel Research, *fiscal year begins 01 July, **end of calendar year|
|Most competitive presidential elections yet. The February 2016 presidential election is almost a foregone conclusion with President Museveni expected to win, in our view. More importantly, his two major rivals – Kizza Besigye of the Forum for Democratic Change (FDC) and independent candidate, former prime minister Amama Mbabazi – get an opportunity to test their popularity. Mr Mbabazi – who was sacked as prime minister in 2014 amidst acrimony with President Museveni – failed to secure a nomination in the ruling National Resistance Movement (NRM) party. Attempts by Mr Besigye and Mr Mbabazi to agree on a united front failed. With both candidates believing strongly in their chances in a post-Museveni Uganda, they likely thought joining forces could jeopardize their chances when President Museveni either steps down or passes on. So, we don’t see a major coalition happening now or in the future. With that formed between Mr Besigye’s FDC and some smaller parties largely ineffective, President Museveni is almost certain of victory. Hence, why we think worries around the elections are overblown. However, judging from comments by President Museveni during the campaigns which started in November 2015, the incumbent has a preference for Mr. Besigye; even as the latter has been detained severally by authorities in the past. There are however expectations of relatively low voter turnout for the 2016 elections. In 2011, voter turnout was 59%, a far cry from above 70% participation in the 2001 polls. There are also indications President Museveni plans to attend the presidential debate being organised by the Inter-Religious Council of Uganda. Having snubbed past invitations, it could be inferred the incumbent is really keen on persuading voters this time around.|
Extra-budgetary spending likely as elections approach. In October 2015, authorities sought amendments from partliament to the Public Finance Management Act (2015) that would allow it get short-term loans from the Bank of Uganda (BoU) without having to seek legislative approval. Authorities also sought some leeway for supplementary budget spending without parliamentary approval as well. Both moves have been widely viewed to be motivated by the political cycle, reminiscent of similar spending around previous elections. Moody’s changed its outlook to negative from stable in November 2015, citing the February 2016 presidential elections. Precautionary capital outflows have been recorded on these concerns. Election-related spending in 2011, saw inflation shoot up to above 30%. The IMF has raised concerns. At its October 2015 monetary policy committee (MPC) meeting, the BoU highlighted its expectations of inflation continuing to rise over the course of the first half of 2016. Inflation has been resilient against monetary tightening. Since April 2015, the BoU has hiked its policy rate by 500bps to 17% as at October 2015. Inflation jumped to 7.2% yy in September from 4.8% in August as food prices shot up due to the El Nino effect. It has since been on an upward trajectory, rising to 9.1% yy in November from 8.8% in the prior month. The BoU targets a medium term core inflation target of 5% or less.
Further monetary tightening expected. With inflation likely continuing on an upward trajectory and the Shilling likely to weaken some more as the US Fed normalizes monetary policy, we expect an additional 100bps increase in the Bank of Uganda policy rate to 18% at its December 2015 meeting. We expect a minimum 100bps increase in the policy rate in each of the quarters in the first half of 2016. Power tariffs have been going up. In October, the Electricity Regulatory Authority (ERA) announced tariffs would rise by an average 17.4% three months thence. Dollar-denominated power purchase agreements are largely why, with significant pass-through from the weak Shilling. Electricity subsidies were removed in 2012. Authorities’ infrastructure projects amid Shilling depreciation have also depleted FX reserves to about 4 months of imports, below the East African Community (EAC) convergence criterion of 4.5 months. This highlights the need for authorities to shore up reserves. In November, finance minister Matia Kasaija announced it was seeking a USD 200mn loan from the Eastern and Southern African Trade and Development Bank (also known as PTA Bank) principally for this purpose. Amid scarce FX reserves, the BoU has been intervening in markets, futile in our view. Authorities are certainly keen to maintain their reputation for market-determined FX and interest rates. Dollarization persists, however. Interest rates on bank loans have also increased in tandem with the policy rate. Monetary policy tightening has not been accompanied by fiscal consolidation, however. In fact, the signaling by authorities point to likely continued fiscal expansion.
|Uganda||Q4 2015||Q1 2016||Q2 2016||Q3 2016|
|Policy Rate, %||18.0||19.0||20.0||20.0|
|Source: Macroafricaintel Research|
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