BusyMarkets Kampala #017: UGX takes a hit after World Bank embargo

BusyMarkets Kampala #017: UGX hit by World Bank embargo

Disclaimer: This article is for informational purposes only and should not be construed as financial advice. Financial investments are subject to market risks, and readers should do their own research and consult with a professional advisor before making any investment decisions. Furthermore, the views, information, or opinions expressed herein are solely those of the author in their personal capacity; they do not necessarily reflect the views of the author’s employer or BusyContinent.

The shilling dropped 1.76% to 3,729.35 per dollar as of 10th August 2023, heading for the most significant one-day decline since Dec. 2015 and a fifth day of losses. Because World Bank halted new funding to the country for its passage of anti-LGBTQ legislation. Uganda will revise its 2023-2024 budget to consider less financing after the blocked new lending.

The Ugandan shilling weakened further against the dollar on Wednesday, 16th August, due to increased demand for dollars from commercial banks and general merchandise traders.

My outlook is a weaker shilling. On the better side, global inflation might further decrease, potentially affecting domestic inflation. A huge global economic slowdown could also impact inflation by reducing global demand, leading to lower prices for goods and commodities. Could that be why BOU reduced Central Bank Rate (CBR) for the first time in a year?

What is Central Bank Rate?

Central Bank Rate (CBR) is the interest rate a nation’s central bank charges other domestic banks to borrow funds. Bank of Uganda said the Central Bank Rate reduction comes from decelerated inflationary pressures amid the growing need to support economic growth.

Bank of Uganda building

Over the last 12 months, BOU has administered a tight monetary policy to control inflation. Still, on the other hand, it has impacted economic growth and slowed credit uptake.

What are the implications?

  • The Central Bank reduced the Cash Reserve Requirement for commercial banks by 50 basis points to 9.5 per cent, which is expected to release more cash in the financial markets.
  • Commercial banks will reduce their lending rates.

Half of Year Results for listed companies are out!

  • Uganda Clays Ltd informed shareholders and the general public that according to the unaudited financial statements for the half-year January – June 2023, the Company had made a loss. The loss position is mainly due to a shortage of products that was occasioned by machinery breakdowns.

This was exacerbated by the unfavorable macroeconomic conditions, characterized by high inflation and the depreciation of the Ugandan shilling against the Euro, which impacted the Company’s overall operating and production costs, thus negatively impacting the bottom line.

  • Stanbic Uganda Holdings Ltd reported Ush 200 billion as profit after taxing. Implying they went up 23.5% compared with June 2022’s results.
  • MTN Uganda Limited, Profit After Tax increased by 17.8% to Ush 228 billion.
  • Equity Group Holdings Plc is in the same place they were last year due to their increased liabilities. In a market with so many uncertainties since 2020, their enormous appetite for risk has got them here.

My take on the matter. Investing in Stanbic Bank and MTN stock should be no harm. However, trade in Equity stock with caution and avoid Uganda clays at all costs.

Money Markets

BusyMarkets Kampala #017: UGX hit by World Bank embargo

In the Money markets, the overnight money was trading at an average of 10% compared to the one-week cash, trading at an average of 10.5%. The results of the Bank of Uganda Treasury Bills auction held on Wednesday, 16th August 2023, for the 91, 182 and 364-day tenors were 10.384, 10.776 and 12.502, respectively. There is a bond Switch Next Week.

What is a bond switch?

In a bond switch auction, only holders of that particular bond to be switched (source bond) are given the privilege through their commercial banks to exchange part or the entire holding of that bond for another bond (destination bond) issued by the govt. The govt likes switches because they ease her pressure to settle the local debt. Something that started in 2022.

Source Bond is one maturing on 18-JAN-2024 whereas the destination bonds are a 3-year bond maturing on 9-July-2026, a 10-year bond maturing on 03-FEB-33, a 15-year bond maturing on 14-MAY-37 and a 20-year bond maturing on 18-Jun-43. My Take; The rates are only favourable for switching to long-term securities if you’re sure of a ready market whenever you want to sell. Otherwise if you hold the source bond, hold on to it till maturity.

Seth Nuwagaba is an investment banker at one of the biggest banks in East Africa.