Countries like Uganda face tough 2015, warns World Bank

Kaushik Basu

Kaushik Basu,World Bank Chief Economist and Senior Vice President says slowdown in capital flows would be challenging to developing economies

The World Bank says Uganda and other developing countries face a series of tough challenges in 2015.

The World Bank Group’s latest Global Economic Prospects (GEP) Report says low prices of oil and other key commodities will trigger off higher borrowing costs as the countries attempt to adapt.

For over six months now, global oil prices have come down from over 100 dollars a barrel to about 50 dollars. For Uganda’s oil to be profitable, if production starts in 2020, a barrel of crude oil should go for over 60 dollars.

The report says with an expected liftoff in United States interest rates, borrowing will become more expensive for emerging and developing economies over the coming months.

This process is expected to unfold relatively smoothly since the U.S. economic recovery is continuing and interest rates remain low in other major global economies.

The development comes at a time when Uganda is planning to finance half of its 2015/16 spending by borrowing from foreign and domestic sources. About eight trillion Shillings of the borrowed money will actually go to repaying government debts.

According to Dr. Fred Muhumuza, an economic and development analyst, 20 percent of commercial banks’ reserves are held up in borrowings by the government.

Commenting on the report, Jim Yong Kim, the President of the World Bank Group, said although “developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment”.

Kim added that although they will do all they can to help low- and middle-income countries become more resilient, they believe that countries that invest in people’s education and health, improve the business environment, and create jobs through upgrades in infrastructure will emerge much stronger in the years ahead.
 
Kaushik Basu, World Bank Chief Economist and Senior Vice President, said for commodity-exporting emerging markets that are already struggling to adjust to persistently low commodity  prices, or for countries experiencing policy uncertainty, a slowdown in capital flows would add to their policy challenges.

Ayhan Kose, the World Bank’s Director for Development Prospects, said unless emerging markets have taken the prudent policy steps to be fiscally and externally, they may face significant challenges dealing with the turbulence and other fallout that could be associated with a US federal bank tightening.

Lower prices for oil and other strategic commodities have intensified the slowdown in developing countries, many of which depend heavily on commodity exports.

Meanwhile, the Uganda Shilling has opened the week on a low, weakening against all major currencies traded in Uganda.

The Dollar traded against the Shilling at an all-time low of 3195 on the sell side with the Pound Sterling going at 4950 and the Euro at 3,600.

The Pound Sterling and the Euro’s performances are particularly interesting because for the entire six-month period when the Dollar has been strengthening against the Shilling they remained relatively stable.

For example, the Pound Sterling had a resistance level at 4,000 for a long time with the Euro hovering just over 3,000 for some time.  The sudden resurgence of the two big currencies is of great interest to analysts.

Stephen Kaboyo, whose Alpha Capital Partners watches the financial market, says the weakening of the Shilling is driven by high demand from importers, the interbank and corporates amidst low levels of foreign exchange inflows in the market.

Kaboyo says the dollar strength in the international markets is also a big factor, influencing the shilling rapid depreciation. The US Dollar has strengthened 8% against the major currencies over the last 12 months.

According to Kaboyo, on the overall most of the emerging markets currencies and regional currencies such as the Kenyan Shilling, the Tanzanian Shilling and the South African rand are all under pressure.

Kaboyo predicts that the Uganda Shilling will continue to weaken, increasing the risk of higher inflation. He says the situation will require further tightening of the monetary policy going forward.

The Bank of Uganda has set the current Central Bank Rate (CBR) – the rate at which the commercial banks borrow from the central bank and which determines inter-bank lending – at 12 percent. This is expected to increase when the central bank announces the new CBR next week.

James Mutuku, the Head of Financial Markets at Standard Chartered Bank Uganda, says concerns around increased government spending, a widening fiscal deficit as well as increased corporate demand will continue to weigh heavily on the currency in the coming weeks.