Download 2015 Quarter 1 UGANDA SNAPSHOT

UGANDA
SNAPSHOT
2015 Quarter 1
Inflation – After reaching a multi-year low of 1.3% y-o-y in January this year, consumer price inflation has only shown a marginal uptick, with the most
recent figure being a 1.9% y-o-y increase in March. This is slightly higher than the 1.6% y-o-y increase recorded in February. Food prices continued to
decrease in March, with the sub-index recording an eighth consecutive month of deflation. The food sub-index decreased by 2.2% y-o-y in March compared to
a 3% y-o-y reduction in February.
Growth – The most recent figures from the Uganda Bureau of Statistics (UBOS) show that the Ugandan economy expanded by 1.2% q-o-q in Q3 2014, which
is equivalent to the revised 1.2% q-o-q expansion in Q2 2014. Real GDP growth is expected to remain on an upward trajectory over the medium term as public
investments materialise and private sector investment increases due to the development of the country’s oil sector.
National development plan – The 2014/15 fiscal year (ending June) marks the final year of the current five-year national development plan (NDP), which has
attempted to address structural bottlenecks in the economy to accelerate socioeconomic transformation, thus reducing poverty. Looking forward, the
authorities have stated that the goal of the second phase of the NDP (NDP2, starting FY 2015/16) will be to propel Uganda to middle-income status by 2020.
OPPORTUNITIES
STRENGTHS
The development of the oil sector has seen strong progress more recently, and
production should start over the medium term.
Ongoing integration within the East African Community (EAC) presents
significant business opportunities.
A substantial oil endowment ensures that strong prospects for economic
growth and foreign direct investment (FDI) will continue.
Kampala continues to demonstrate a steady commitment to macroeconomic
reforms.
Substantial hydropower potential.
Extensive infrastructure projects underway to increase power capacity.
Large-scale infrastructure development opportunities to address a severe
infrastructure deficit.
Fast-rising FDI inflows; set to continue on increasing interest in the oil sector
and downstream related activities.
VULNERABILITIES
WHAT IS BEING DONE?
Significant infrastructure shortfalls (transport, water, power).
Progress in addressing infrastructure shortfalls has been slow.
Dependence on agriculture and hydropower for electricity renders the
economy vulnerable to weather developments.
Development of the nascent oil sector should reduce the economy's
dependence on agriculture going forward.
President Yoweri Museveni has taken a firm stance on corruption issues, and
steps have been taken to remedy donor aid fraud.
The National Population Policy Action Plan (2011-15) does not seem to
significantly address population growth.
Although improving, bureaucracy and corruption remain problems.
Significant development challenges due to rapid population growth.
MEGA TRENDS
Population
35,918,915 (July 2014 est.); Age 15 - 64: 49.3%
Population growth rate (%)
3.24% (2014 est.)
Life expectancy at birth
Total population: 54.46 years; male: 53.1 years; female: 55.86 years (2014 est.)
HIV/AIDS
Adult prevalence rate: 7.44%; People living with HIV/AIDS: 1.6 million (2013 est.)
Adult literacy rate (age 15 and over can read
Total population: 78.4%; male: 85.3%; female: 71.5% (2015 est.)
and write)
Urbanisation
Urban population: 15.4% of total population (2013); Urban population growth: 5.4% (2013)
Population below $1.25 (PPP) poverty line 37.8% (2013 est.)
Unemployment rate
3.8% (2013)
Employment (% of total)
Agriculture: 65.6%; Industry: 6%; Services: 28.4% (2009 est.)
Labour participation rate (% of total
population ages 15+)
77.5% (2013)
Business language
English
Telephone & Internet users
Main lines in use: 207,474; Mobile cellular: 16.57 million; Internet users: 5.82 million (2013)
Sources: CIA World Factbook, World Bank, UNESCO, ITU, UNAIDS & NKC Research
1
Total
Uganda
Corruption Perceptions Index 2014 (1 least, 175 most corrupt)
Doing Business 2015 (1 best, 189 worst)
Global Competitiveness 2014-15 (1 most, 144 least competitive)
Economic Freedom 2015 (1 most, 178 least free)
HDI Ranking 2013 (1 most, 187 least developed)
189
144
178
187
92
164
0
Source: NKC Research
175
142
150
122
20
40
60
80
100
120
140
160
180
200
Risk environment / Risk outlook
Sovereign Risk Ratings
S&P
Fitch
Moody’s
B/Stable
B+/Stable
B1/Stable
Fitch Ratings upgraded Uganda’s long-term foreign and local currency Issuer Default Rating (IDR) by one notch to “B+” on February 13, setting the outlook
at stable. According to the agency, Uganda has established a long track record of prudent macroeconomic policies, with significant fiscal investment
supporting economic growth while effective monetary policy implementation has helped contain inflation. In addition, Uganda’s fiscal dynamics have
improved, supported by higher revenue collection capacity, and the country has consequently become less aid-dependent. Although government debt has risen
steadily, the agency notes that current levels remain below that of most peers, with the majority of liabilities on concessional terms. In turn, Standard and
Poor’s (S&P) affirmed Uganda’s sovereign credit rating at “B” on January 16, maintaining the stable outlook. This follows a one-notch downgrade in January
last year. According to the agency, Uganda is expected to record strong real GDP growth figures in coming years – exceeding 6% p.a. – largely driven by
investment in the country’s key economic sectors.
On 20 December 2013, Moody’s assigned the government of Uganda an inaugural credit rating of “B1” (one notch above that of S&P and on par with that of
Fitch) with a stable outlook. More recently on March 3, Moody’s stated that Uganda continues to boast strong growth prospects and solid public finances, but
the agency noted that public debt is expected to rise as infrastructure spending grows and donor support declines. The agency also stated that the long-term
health of Uganda’s government finances will largely depend on mobilising new sources of revenue. In turn, the level of earnings from Uganda’s minerals and
other exports will depend on improvements in domestic security.
Infrastructure
Diversity of
the Economy
Banking
Sector
Continuity
of Economic
Policy
GDP Growth
Key Balances
Foreign
Investment
Socioeconomic
Development
Forex
Reserves
Improving; but
severe deficit
Limited, but
improving
Fair, and
improving
Generally stable
Strong
Twin deficits
Strong and rising
Low
Modest
Daily Trading
Volume
USh323m (Daily Avg.
turnover March 2015)
Stock Market
Listed Companies
Liquidity
Market Cap
Dominant Sector
Uganda Securities
Exchange
16 (including cross-listed
companies)
Limited
$8.3bn (USE, end March
2015)
Banks
Capital Market
Development
Liquidity
Maturity Range
Municipal Bonds
Corporate Bonds
Yes
Underdeveloped
Fairly low
91-days to 364-days
(T-bills)
1-Yr to 10-Yr (Govt.
Bonds)
No
Yes
Macro-economic overview
Uganda is a country with a strong economic growth track-record, stable macroeconomic fundamentals, and positive development prospects. After maintaining
an average real GDP growth rate of nearly 8% p.a. between 2008 and 2011, the economy endured a significant downturn in 2012 due to a balance-of-trade
shock as well as a severe drought. These exogenous shocks required tight management of monetary policy and, in support, prudent fiscal policy, which
exacerbated the economic downturn. However, prudent policy management restored macroeconomic stability, and the economy was back on a strong growth
trajectory the following year. Most macroeconomic variables remain sound, with an adequate level of foreign reserves, strong FDI inflows, a stable monetary
environment, while public and external debt levels are not particularly high. The largest concern from an economic perspective involves the country’s twin
deficits, particularly the widening current account deficit. While largely investment driven, the wide current account deficit will continue to put pressure on the
shilling exchange rate, which could in turn negatively affect the country’s monetary environment and the Bank of Uganda’s (BoU) ability to accumulate
foreign reserves. In turn, the fiscal budget is under pressure due to the government’s ambitious investment programme. The infrastructure deficit needs to be
addressed, but the scale thereof will test public financial management and effectiveness of public spending.
The country faces numerous challenges, including a severe infrastructure deficit, donor dependence, vulnerability to exogenous shocks (adverse weather
conditions, regional conflict, cuts in donor support), and institutional shortcomings such as widespread corruption and a relatively cumbersome business
environment. Still, the country’s growth prospects remain strong. Two salient sources of upside economic growth potential stem from the development of the
country’s nascent oil sector, and more rapid integration into the East African Community (EAC). The development of the country’s oil industry is regarded as
the catalyst to propel Uganda onto an amplified development path, while EAC integration would allow Uganda to take advantage of the larger regional market.
2
Economic Structure as % of GDP
2014 Estimate
Source: NKC Research
Agriculture/
GDP
26.9%
Service/GDP
50.7%
Industry/GDP
22.4%
Historically, the primary source of economic activity was the agricultural sector, which now only accounts for around a quarter of the country’s output, but
still engages nearly three-quarters of the country’s population. Agricultural exports are salient sources of foreign exchange, particularly coffee, tea, and
tobacco. The sector remains largely rain-fed, and highly vulnerable to adverse weather conditions. In turn, the services sector is the largest contributor to
overall GDP, while also maintaining its role as a driving force behind the country’s strong GDP growth performance. The transport, telecommunications, and
financial services sub-sectors have shown strong growth in recent years, while the historically important tourism sector has faced numerous headwinds in
recent quarters. Furthermore, the Ugandan industrial sector is dominated by construction, which, in turn, is primarily driven by large infrastructure
investments by the government.
Real GDP Growth & Net FDI/GDP
14.0
9.0
Source: NKC Research
8.0
12.0
7.0
10.0
6.0
8.0
5.0
6.0
4.0
4.0
3.0
2.0
2.0
0.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
GDP Growth (y-o-y, %) (lhs)
Net FDI/GDP (rhs)
The most recent figures from UBOS show that the Ugandan economy expanded by 1.2% q-o-q in Q3 2014. From a sectoral point of view, the agricultural and
services sectors were the primary drivers behind the quarter’s growth, while the services sector largely disappointed. More specifically, both the agricultural
and services sectors expanded by 1.8% q-o-q in Q3 2014. In turn, the industrial sector recorded a dismal 0.3% q-o-q expansion in Q3 2014 compared to a
growth rate of 3.5% q-o-q in the previous quarter. Turning to FDI, Uganda’s oil sector is expected to be the country’s main FDI drawing card going forward.
According to Tullow Oil, over the next few years the company and its partners plan to invest between $8bn - $10bn in upstream facilities, and between $3bn $4bn when the construction of the oil pipeline commences. Tullow expects to make a final investment decision for work in Uganda by the end of 2015 or early
2016.
Exports ($ bn)
Imports ($ bn)
2014E
2015F
2016F
Machinery equipment, vehicles &
accessories
Petroleum products
Vegetable products, animals,
beverages, fats & oils
Chemicals
Coffee
Base metals & products
Fish & fish products
Tea
0.0
Source: NKC Research
0.5
1.0
1.5
2.0
Main Imports: % share of total
2014E
2015F
2016F
Machinery equipment, vehicles &
accessories
23.19
23.59
25.67
Petroleum products
21.65
17.50
17.20
Vegetable products, animals,
beverages, fats & oils
9.33
9.55
9.87
Chemicals
8.87
8.88
8.68
Main Exports: % share of total
2014E
2015F
2016F
Coffee
15.42
13.80
12.46
Base metals & products
4.60
4.39
4.13
Fish & fish products
4.46
3.86
3.47
Tea
3.19
2.95
2.76
According to the most recent figures from the BoU, total exports in 2014 reached $2.7bn, reflecting a 6% decrease. Most major exports disappointed over the
year, particularly coffee (-15% to reach $410m), tobacco (-44% to reach 65m), and base metals & products (-11% to reach $122m). The only export
commodities that recorded notably stronger performances in 2014 were sesame and electricity exports, both of which nearly doubled to $56m and $34m,
respectively. In turn, total imports in 2014 reached $5bn, reflecting a marginal 1% increase. Machinery & equipment and petroleum products remained the
country’s largest import categories, increasing by 3% (reaching $1.2bn) and 7% (reaching $1.1bn), respectively. Overall, this resulted in a merchandise trade
deficit of just under $2.4bn, which is 11% wider than the deficit recorded in 2013.
3
Current Account & Budget Balance
(% of GDP)
-2.0
-2.0
-4.0
-3.0
-6.0
-4.0
-8.0
-5.0
-6.0
-10.0
Source: NKC Research
-12.0
-7.0
2009 2010 2011 2012 2013 2014E 2015F 2016F
Current Account/GDP (lhs)
Budget Balance/GDP (rhs)
The most recent data from the BoU shows that the country recorded a $1.9bn deficit in the current account over the first three quarters of 2014. This reflects a
54% y-o-y widening compared to the 2013 deficit. While the transfers account recorded a 6.6% y-o-y larger surplus over the first three quarters of 2014,
reaching $905m, all the other components in the current account recorded significantly wider deficits over the period. The merchandise trade deficit widened
by 12.8% y-o-y, reaching $1.8bn, while the services deficit widened by 89.6% y-o-y to reach $542m. In turn, the income account deficit more than doubled,
reaching $521m for the first three quarters of 2014. Turning the fiscal balance, in early March the Ugandan government requested Parliamentary approval of a
5.3% increase in public expenditure for the current fiscal year. Kampala asked for an additional USh800bn (around $270m) in additional spending for the
fiscal year ending June. Opposition figures have criticised the request to increase expenditure, stating that the funds will be used to finance Museveni’s
campaign in the 2016 elections. A government spokesperson has denied that the extra funds would be used for campaigning, stating that the additional funding
will be directed towards unforeseen security and other needs, without providing further details.
Average CPI (% change, y-o-y)
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Source: NKC Research
2009
2010
2011
2012
2013 2014E 2015F 2016F
The Monetary Policy Committee (MPC) of the BoU decided to increase the country’s benchmark interest rate by 100 bps to 12% at its most recent meeting in
April. While annual headline inflation reached a marginal 1.9% y-o-y in March, core inflation has shown stronger upward momentum, reaching 3.7% y-o-y in
March. The rise in core inflation was driven by the pass-through effects of the recent shilling exchange rate depreciation, which is pushing the core rate toward
the country’s medium-term target of 5% y-o-y. In turn, the low rates of headline inflation have been due to deflation in the food crop index, which has been the
result of a good agricultural harvest. The April MPC statement notes that indicators of economic activity point to strong GDP growth in the second half of
2014, supported by faster growth in private sector borrowing. As a result, real output is now expected to be slightly above its sustainable level. Furthermore,
the central bank notes that real output growth may accelerate over the medium term, stimulated by higher public investment spending and private
consumption, pushing real output even further above the sustainable level. This, in turn, may exert upward pressure on prices of goods and services in the
domestic economy.
CONTACT DETAILS
KPMG
NKC
Benson Ndung’u –Partner/Country Leader
KPMG
3rd Floor, Rwenzori Courts
Plot 2 & 4A, Nakasero Road
P O Box 3509
Kampala, Uganda
NKC Independent Economists CC
Tel +256 414 34 03 15/6
Email [email protected]
12 Cecilia Street Paarl, 7646, South Africa
P O Box 3020, Paarl, 7620
Tel: +27(0)21 863-6200
Fax: +27(0)21 863-2728
Email: [email protected]
GPS coordinates
S33°45.379'
E018°58.015'
The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon
such information or opinions.
(Uganda) © 2015 KPMG East Africa Limited, a Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss
cooperative. All rights reserved
KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International
provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such
authority to obligate or bind any member firm. All rights reserved.
4