Uganda: joining the 6.0% club
GDP growth: an impressive recovery
We estimate 6.0% y/y and 6.3% y/y growth for 2018 and 2019 respectively. Broad-based growth was led by the industrial sector. Most of the economic rebound was due to increased domestic demand, helped by an accommodative monetary policy and better weather for the agricultural sector. The Final Investment Decision (FID) about the oil and gas sector should come in H1:19 instead of H2:18 because of production agreement delays with the government. The agricultural sector faces the usual risks of bad weather conditions.
Balance of payments: C/A deficit to widen
The C/A deficit will likely widen to 6.0% of GDP in 2018, from 4.4% in 2017, and thereafter to 8.1% in 2019. The government's public investment in infrastructure projects will likely prompt this widening, as import demand is likely to increase. In 2019, imports may rise further as the government plans to kick off the construction of its oil refinery, while developments with the crude oil pipeline to Tanga could also be in an advance stage by then. Exports are also likely to rise over the medium term. Import demand growth, however, will still probably outpace growth in exports, and widen the C/A deficit. The increased FDI associated with oil and gas projects should provide sufficient financing for the C/A deficit in the form of both greenfield investments and other external commercial funding. We still see FX reserves at USD3.5bn (equivalent to 4.9 months of import cover) at end-2018, thereafter rising to USD3.8bn (4.7 months) at end-2019.
Monetary policy: steady
The MPC will likely leave its policy rate unchanged at 9.0% this year. This is the lowest the CBR has been since the inception of the "inflation-targeting-light" framework in 2011. Core inflation pressures have remained muted, consistent with the trend of monetary aggregates despite the strong recovery in GDP. We see headline inflation bottoming out around May 2018 but, by year-end, 5.0% y/y is unlikely to have been breached.
FX outlook: UGX weakness as growth recovers
The USD/UGX should trade at 3800-3830 by the end of 2018, as economic activity and import demand are gaining momentum, as consistently reflected by both the official GDP estimates as well as the Stanbic Bank Purchasing Managers Index (PMI) as regards improving domestic demand conditions. While the BOU has not been selling USD to the market, it has sporadically opted to put on hold its USD purchases amidst the recent move higher in USD/UGX. More importantly, the BOU is content with moderate UGX weakness, as long as it's driven by the fundamentals, in this case improving real output. We expect economic output to grow further, and therefore see USD/UGX at 3970 - 4010 by end-2019.