2016 Year in Review and Outlook for the shilling

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By Stephen Kaboyo

2016 has been a rather challenging year. There was a general slowdown in almost all sectors of the economy.

 

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A number of economic factors  inhibited economic expansion for much of the year and these were; weak consumer demand, weak currency, inflationary pressures, weak exports just to mention a few.

In addition exogenous headwinds such as the strengthening of US dollar impacted on Uganda’s growth trajectory in particular the volatility of the Uganda shilling.

The year started off with an election and typical of any election cycle, investments were held back as investors postponed investment decisions.

Read: Uganda: economy projected to bounce back next year-experts

This was accompanied with slow economic activity. The lingering effects spilled over into the second half of the year.

In order to mitigate inflationary pressures arising out of election spending, Bank of Uganda (BoU) tightened policy in the early part of year and this resulted in high lending rates.

Due to high lending rates, credit was constrained and many businesses struggled and some went out to seek bailouts.

 

This was followed by turbulence in the financial sector where the Central Bank moved in one of the large local banks and took over its management.

As the year comes to a close, the general economic sentiment is weak, characterized by inflationary pressures mainly from food prices as a result of a dry spell in most parts of the country, depreciation of the shilling and poor credit appetite among key sector players in the economy.

 

The effects of these are likely to spill over into 2017.

 

However, there is reason to remain optimistic and focus on the medium term prospects that indicate growth likely to bounce back primarily driven by the multibillion infrastructure investments in the key sectors of the economy which could offset the prevailing challenges and put the economy back on a good footing.

Outlook for the shilling- 2017

The Uganda shilling is likely to weaken among other frontier market currencies going into the New Year following a decision by the US Federal Reserve Bank to raise its key lending rate.

Read: How petty issues threaten to bring down NSSF

The decision to raise the rate by 25 basis points  was widely expected  by the financial markets and is likely to strengthen the dollar globally which will result in reversal of flows  from emerging markets back into the US.

The US Fed has indicated that at least, there would be three rate hikes in 2017, with the Donald Trump administration eyeing a stimulus package that will include tax cuts and increased government spending.

This scenario is also likely to affect the cost of servicing the country’s external debt making it more expensive in the short run.

READ: Uganda is steadily moving towards a cashless economy
In the event that BOU steps in to protect the Shilling, we may see the nation’s foreign reserves decline.

A weaker shilling by implication raises the cost of living considering the fact that Uganda is a net importer.

 

However on the other hand, a weaker shilling plays in favour of exports by boosting export revenues.

It is very likely that there would be a transmission  of US high rates to the domestic fixed income markets as most international investors will be looking back at the US market.

 

The writer is the managing Director, Alpha Capital markets

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