According to the latest Standard Chartered Economic Report, Uganda’s economy should recover gradually in the months ahead, after strict pandemic containment measures were relaxed in June. Total’s acquisition of Tullow’s stake in the Lake Albert oil development project will be a key driver of the medium-term outlook. The tax treatment of asset transfers is now less likely to be a stumbling block to future oil development.
Final Investment Decision (FID) on oil is expected by end-2020. Risks to Uganda’s future oil production have subsided since March, when oil prices collapsed, says the report extracted from that of the bank’s global focus. It says the recent oil price recovery could potentially support investment in new markets; at the same time, Uganda’s government has shown a willingness to facilitate faster progress towards first oil.
Domestically, the report says, elections in February 2021 will be a key driver of activity, with the budget for FY21 (ends 30 June 2021) incorporating a 13.5% spending increase. “The boost to GDP growth from higher spending may be offset by an increase in election- related uncertainty, which could keep private-sector credit growth weak in the run-up to February 2021. A united opposition may pose a challenge to the incumbent government. However, all campaigning will have to be done virtually, as Uganda has banned mass rallies ahead of the election due to the need for social distancing.”
It raises Uganda’s current account (C/A) deficit projections to 9.2% of GDP for 2020 (5.6% prior), and to 8.7% and 7.4% for 2021 and 2022 (5.0% and 4.9% prior). “Risks to eventual oil production appear to be fading, and oil-related developments should cause capital-goods imports to rise in the medium term. FDI should be able to largely finance the C/A gap. We had lowered our C/A deficit forecasts in April, when Uganda’s transition to becoming an oil producer looked less certain.”The report says lower oil prices should benefit Uganda’s C/A balance in the near term. But weaker exports, tourism receipts and remittances are likely to widen the deficit and weigh on FX reserves.
According to the report, the 90-day deferral of dividend outflows announced in March by financial institutions is likely to have provided only a temporary reprieve for the C/A balance. Of the USD 491.5 million Uganda received from the IMF under a Rapid Credit Facility in May, 30% will be used for budget support; 70% will be used to support the Bank of Uganda’s foreign exchange reserves. In the absence of such support, import cover would have been at risk of falling to 2 months, according to IMF estimates.
“With an additional …USD 300 million of support from other multilaterals, we do not expect Uganda’s FX reserves to face significant pressure. Additional external borrowing, mostly project financing on commercial terms, is also planned. We see gradual Ugandan shilling (UGX) depreciation for the rest of 2020.”
Monetary policy to remain accommodative
The report notes that BoU cut the central bank rate (CBR) to 7.0% in June, the lowest level since the policy rate was introduced in 2011. “We had previously expected 7.5% to be the cycle low; we update our CBR forecasts accordingly. We now see the CBR remaining at 7.0% for the rest of 2020 given COVID-related economic weakness. We forecast the next policy move, a 100bps CBR hike, in April 2021, although we see a risk of earlier tightening in February if election-related uncertainty puts more pressure on the shilling. We expect a total of 250bps of tightening to 9.5% by end-2021, more than reversing the 200bps of easing delivered in 2020,” says Razia Khan, Head of Research, Africa and Middle East Standard Chartered Bank.
Inflation to remain relatively contained
The report also notes that CPI inflation rose to 4.1% year /year in June as the strictest lockdown measures were lifted, from earlier lows. This largely reflected an increase in transport costs as new social distancing regulations were imposed. “We expect inflation to remain relatively contained overall, with headline inflation rising to just above 5.0% year /year by end-2020. The BoU is likely to maintain ample market liquidity, the report says.
Headline inflation is seen to be averaging 4.2% in 2020 from the prior low of 3.3%, reflecting upward pressure on the prices of some goods and services as Uganda emerges from lockdown. Continued accommodative monetary policy and an election-related rise in spending should lead to higher average inflation of 6.0% in 2021 (5.6%) prior. With the BoU tightening monetary policy again in 2021, we expect inflation to slow to 4.8% in 2022 from 4.9%.
Record budget in an election year
The fiscal deficit likely widened to 7.5% of GDP in financial year 2019/2020 due to revenue disappointment; “We had previously expected a smaller deficit of 7.2%, says the report, noting the government significant Shs 45.5trillion (USD 12.2bn) budget for FY2020/21, its largest yet.
It includes economic support measures such as the payment of supplier arrears, which is likely to take on more importance in an election year.
The bank expects the fiscal year 21 (FY21) deficit to widen to 9.0% of GDP from the previous of 7.6%, given the six-month tax payment deferral from April 2020 for small companies and reduced taxes on mobile money transactions. Extraordinary receipts from oil would be a positive, resulting in a narrower deficit. “However, the risk of a supplementary budget remains in the event that the domestic COVID-19 outbreak worsens. Uganda has recorded only 911 confirmed cases to date and zero fatalities, largely as a result of strict containment measures.”
“While domestic financing of the FY21 budget will rise to UGX 3.56tn (from UGX 3.06tn previously), authorities will shift budget financing to cheaper external sources. Uganda’s revenue base remains weak. Despite a lower public debt ratio than regional peers, debt service payments exceed 20% of revenue.”