Wednesday, December 28, 2016

#Uganda elections throw country into recession

Drought, the war in South Sudan and an election at the beginning of the year impacted Uganda’s economy, sending shockwaves through the real estate market, the stock exchange and trade.
The biggest upset was in the banking sector, where the country’s third largest bank, Crane Bank, was put under receivership.
Executives now wait to see how the Bank of Uganda (BoU) handles the troubled Crane Bank as the decision is likely to shape the regulator’s stance towards failing banks in the future.
Fears of runaway inflation anticipated in the aftermath of the February general election prompted BoU to pursue tight policy actions in an effort to preempt a repeat of gloomy economic indicators experienced during the post-election period in 2011.
A spike in election spending and rising food prices drove inflation to a record high of 30.5 per cent in September 2011, while economic growth shrunk to a record low of 3.2 per cent at the end of 2011/12, government data shows.
In comparison, headline inflation averaged 6.6 per cent at the end of 2015/16 compared with three per cent by end of 2014/15, reflecting considerable exchange rate pressures driven by prices of imported goods and steep food prices. Core inflation averaged 6.8 per cent at the end of 2015/16 up from 3.3 per cent at end of 2014/15.
Food crop inflation averaged 6.2 per cent at the end of 2015/16, compared with 1.5 per cent recorded by close of 2014/15, according to BoU’s Annual Report for 2015/16.
Interest rates
Under the tight policy regime, the Central Bank Rate (CBR) — a benchmark policy rate that determines the cost of funding incurred by commercial banks — increased gradually from 13 per cent in July 2015, to 15 per cent in June 2016, alongside aggressive mop up measures carried out by the Central Bank in the interbank market.
The CBR currently stands at 12 per cent.
Subsequently, interbank lending rates and prime lending rates rose significantly at the beginning of the year as banks adjusted to higher costs of mobilising funds in the local market, a trend that discouraged borrowing among consumers, slowed down credit growth and caused a surge in non performing loans (NPLs).
As a result, average prime lending rates rose to 24.5 per cent by the end of May 2016, while NPLs grew from 7.5 per cent in December 2015 to a record high of 8.3 per cent in August. Overall NPLs dropped to 7.7 per cent in October on account of a decline in the volume of bad loans reported by lenders, BoU revealed.
“Tight monetary policies pursued by BoU since 2015 have deeply affected the banking sector performance this year. These actions directly raised lending rates at the beginning of this year and caused increases in funding costs. Though credit growth is projected to remain flat this year, interest incomes may post reasonable growth due to repricing of loans at higher interest rates during the first half of 2016. In contrast, profits are bound to remain flat.
“The election cycle will also affect bank earnings at the end of this year. Prior to the elections, lending and borrowing slowed down significantly as many investors  awaited the poll outcome while many projects were put on hold,” said Charles Katongole, head of Corporate and Investment Banking at Standard Chartered Bank Uganda.

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