America’s Financial Crisis Hits Uganda

Published on 7th October 2008

The spillover effects troubling America’s financial markets are coming to a door step next to you. What is not yet known is how much effect the United States of America’s worst financial woes, since the economic depression of the 1920s, will have on our economy.

So, just how much is Uganda’s economy likely to suffer as a result of the shock effects of the troubled US financial markets? The answer depends on who you talk to.

According to Razia Khan, Standard Chartered Bank Head of Research for Africa, investors have over the recent months withdrawn millions of dollars from Uganda’s financial system –the first indications of the effects of the collapse of the US financial markets on Uganda. The investors are moving their funds away from Uganda’s securities market (Treasury Bills and Bonds), some of the tools used by Bank of Uganda to control inflation. 

“The anecdote evidence like the pressure on the Uganda shilling currently suggests that not only are we not seeing investors putting money into Ugandan bonds as readily as they had earlier but a lot of investors in bonds are deciding to exit the investment altogether. This might be because they themselves (have) experienced the tightening of credit in their home economies,” she said.

If the current tide of funds withdrawal by foreign investors persisted much longer, the effect will reduce liquidity in the financial markets that could in turn have a negative impact on the rate at which the economy will grow.

Indeed, Bank of Uganda’s economic review for September, the latest assessment of Uganda’s economic performance, notes that commercial banks’ investment in government securities and government deposits declined in July by Shs15.9 billion and Shs19.8 billion respectively. This means that central bank could be forced to offer more of its debt instruments at higher interest rate to attract investors. Should this happen, there is a risk of pushing the country’s domestic debt to unsustainable levels. The same report also points out that estimates of services and income outflows exceeded inflows by about $55 million.

It is also feared that the recent muted demand for shares at the Uganda Securities Exchange (USE) across most of the counters is indeed the other indication of the effects of the global financial problem on the domestic market. Institutional investors account for about three quarters of the trade on the USE. But Simon Rutega, the USE Chief Executive Officer says that pressure to pay school fees has resulted into low demand for shares. Rutega does not think the local market will suffer a lot as a result of the American economic problems. He said that they are “observing the interventions by the US government” in dealing with the chaos, adding that it is very unlikely the market will be affected by the global financial crisis in the US because the two are not that inter-linked.

However, recent figures show that foreign currency held in local bank accounts fell by $52.9 million or 6.2% in July down from 9.4% decline in June– an indication of a decline in the foreign currency coming to Uganda. While this may not be directly linked to the crisis eating up the US economy, it is difficult to assume that the situation will be any better at the time when the global financial markets plunge deeper in turmoil.

These figures are expected to bother officials at Bank of Uganda especially coming at a time when the bank is trying to develop a financial instrument to improve liquidity in the market by guarding against exchange rate, interest and other risks. These instruments called Derivatives are the most recent tools in managing financial markets.

Uganda is trying to build a derivatives market under the recently launched 5-year Financial Market Development Plan. BoU hoped that foreign investor funds flowing into the country would be used to prop up Uganda’s derivates market – where financial instruments would be used to mitigate risks. A derivatives market helps to ease the flow of liquidity and guard against risks.

However, events in the US are expected to leave BoU officials rethinking this part of the plan, especially since the same derivative instruments are at the centre of the US financial market crisis.

The US is going through its worst financial crisis since the Great Depression of the 1920s after a number of financial companies lent out huge sums of money to mortgage borrowers now unable to pay.

As a result, a number of financial institutions were left grappling with bad debts and facing mounting pressure from creditors demanding for cash, leading to the collapse of some of the world’s biggest investment banks like Bear Stearns and Lehmann Brothers. And because America is the world’s biggest economy, a number of investors have direct or indirect links with it. It is for that reason that many investors affected by the US crisis are looking at restructuring their investment portfolio in as far as Sub Saharan Africa.

The fact that banks in Uganda borrow from abroad due to the cheaper interest rates pegged on the stable US dollar, it is likely that a number of them will find it difficult to shore up credit during this period. That alone could see interest rates move upwards in the coming months.

However, Tumusiime- Mutebile, Bank of Uganda Governor, during last week’s press conference offered strong assurances that Uganda’s entire financial system is “generally robust, healthy, and better able to weather the ongoing financial storm in the global economy.”

He said: “Uganda’s financial institutions had not invested in derivatives that had exposure to the investment bankers who are at the centre of the current turmoil.”

He however cautioned players in the country’s business sectors to keep abreast with risks the US financial market turmoil might pose.

Mutebile said the US crisis, which has spilled over to Europe and Asia, “could naturally affect demand for Uganda’s exports.” Uganda exported goods worth $2.4 million to South Central America in 2007, according to figures from the Uganda Export Promotion Board. But the country exported a lot more to the European Union, $324 million, and East Asia, $64 million – of which both blocks are facing huge repercussions from the US financial crisis.

Uganda’s tourism industry, the country’s third most valuable export, is likely to be affected as foreigners postpone their vacations to save some money.

Mutebile also said that workers’ remittances from abroad – Uganda’s biggest export earner in value– might slump as the industrialized countries affected by the US problems carry out cost cutting measures like pay and job cuts.

That prediction, if at all it comes to pass, means that Uganda’s balance of payment will lean further towards the deficit side, as import costs outstrip exports earnings. This will likely increase the country’s debt burden, push up the costs of goods and services, and affect the country’s savings levels. Mutebile, however, said that these effects could probably be felt six months from now.

Jeff Mbanga writes for The Weekly Observer

jeff@observer.ug

 

 


This article has been read 1,409 times
COMMENTS