What are the key internal factors that have influenced swings or impacted the financial markets in the past two or so months?
In the month of June, we had the reading of the national budget. That was the single most important economic event then and it is usually a big driver of the financial markets. We have also suffered a resurgence of the Covid-19 pandemic, what the health professionals have termed the second wave. The government responded with a very restrictive lockdown to lessen the spread. This has had a significant impact on domestic trade, tourism, and hospitality. These sectors are some of the biggest sources and consumers of foreign exchange and their disruption impacts exchange rates. The other sectors that have struggled are education and the transport sector. The two sectors were driving the recovery earlier this year when schools re-opened. There is also a large knockon consumer demand. Our PMI survey continues to show that output orders have dropped and other leading indicators point to an observable impact on aggregate demand leading to very low inflation. The other event is the decision by the Bank of Uganda’s monetary policy committee to reduce its policy rate to 6.5% at their June meeting. This is now the lowest the benchmark has been since inception in 2011 and we see this loose policy keeping short end rates low.
And the external factors?
In the region, we have seen Tanzania open its financial markets to offshore investors beyond the East African region. But more importantly, the economic situation in the advanced economies is changing, with strong recoveries and higher inflation outlook. This has triggered concerns on whether the central banks will start tightening their monetary policies marking an end to the era of cheap US dollar liquidity all over the world.
Initially, the jump in inflation was considered transitory but we are seeing more Central Banks confirming a more permanent outlook of higher inflation. We are seeing more offshore investors exit their positions in our government securities on the above concerns. This is leading to a reversal of yields.
As an example, the 1-year Treasury bill which had dropped to 9.5% has now bounced back to 10.25%. On the long end,
we can see the 20 Year treasury bond which had dropped to 14.85% is now back up to 15.85%. The question is how much further can these rates go?
Basing on the aforementioned factors, how does the outlook (2022) look like for Uganda’s financial markets?
The current environment is very mixed with counter forces on either side for both interest rates and exchange rates. On the one hand, we have the national treasury seeking more from the domestic market and understandably so as tax revenues have been impacted by the lower economic activity. This should push interest rates higher, but now it is countered by the existence of a large supply of local shilling liquidity.
Banks are seated with tons of cash which they must deploy and with the current lower demand for loans, banks must put this cash into treasury securities. This creates a balance of sentiments with no clear direction in rates but more side-ways movements. In summary, we expect a lot more volatility in rates. For exchange rates, there is a lower demand for US dollars as trade activity (particularly imports) has dropped. This has supported the rally in the exchange rates, and we continue to see the Uganda shilling strengthen significantly against the US dollar. In January, the local currency was under pressure and rates climbed as high as Shs3, 725 per US dollar but they have since recovered to Shs3, 550 just this past week.In our view, this trend will continue, and we could see the Shs3, 450-level trade.
There are some upside risks however, especially events in the advanced economies. If the US Federal Reserve bank, as an example, starts tapering their bond purchases this year, which will point to an onset of tightening in US monetary policy, we could see some out flows of US dollars especially out of the fixed income market. That may reverse the strength of the UGX that we are currently seeing. Nonetheless, we still think the Shs3, 750 level is the worst we would see in such a scenario.
What impact will the forthcoming IPOs involving service/telecom companies likely to create on the Financial Markets in general?
I do not have full details about the IPOs beyond what we have seen in the media spaces, so it is difficult to size up the opportunity that these will present. However, the telecom sector is one of the largest sectors of the economy and it is growing at a much greater pace. The emergence of work-from-home, online schooling, digital interactions and digital transactions, the sector is on an upward growth. As such, I expect the IPOs to attract strong interest from both Ugandans and the offshore investors. Locally, the IPOs should generate strong positive vibe that should permeate into other sectors and lift the economy out of the doom caused by the pandemic. We could also receive tremendous inflows of USD as investors seek to purchase shares, especially if a significant portion of the offering is availed to institutional investors.