GDP growth: strong medium-term prospects
Our GDP growth forecast for 2018 is 5.6% y/y, due to the notable upward revisions to historical national account data as well as a faster recovery in agricultural output. We see GDP growth at 5.9% y/y in 2019.
Even if private investment remains sluggish over the coming year, we think that that public investment will counterbalance it. More importantly, while we have pushed forward our expectation for a Final Investment Decision (FID) on Uganda’s oil to the tail end of H2:18, we don’t think this will have a material downside impact on GDP growth, since most of the investment spending on new roads and the heated crude oil pipeline will take place prior to the FID. As the FID is concluded and expenditure on oil infrastructure commences, there is likely to be both direct and indirect opportunities for other sectors, which could boost employment and foster development of local personnel and technology transfer. However, local content rules will have to be adhered to by foreign oil firms for such robust GDP growth to be inclusive.
Balance of payments: C/A deficit widening
We expect the C/A deficit to widen to 6.1% of GDP in 2018 and 8.1% in 2019 primarily due to an increase in fiscal expenditure, which will probably boost import demand. However, over the near to medium term, public infrastructure projects predominantly linked to oil investments are likely to increase import demand for capital goods over the next two years. Additionally, as economic activity recovers, private sector imports for consumer goods are likely to pick up.
Despite the BOU’s gross FX reserves rising to USD3,472.3m (equivalent to 5.1 months of import cover) in November 2017, we doubt that these buffers will continue to grow on a multi-month basis once the government intensifies its fiscal expenditure over the next two years. Although increased FDI inflows after the FID is made should assist in financing these larger C/A deficits that we expect.
FX outlook: still gradual weakness
We expect the USD/UGX to increase to levels between 3750-3800 by the end of 2018. With credit extension expected to improve over the coming year, import demand is likely to rise and thus place upward pressure on the USD/UGX. The expansionary fiscal policy over the next couple of years as well as declining portfolio investments should keep the USD/UGX on a gradual upward trajectory. Additionally, a higher oil import bill, combined with improved economic activity, will probably take the USD/UGX to a 3900-3950 range by the end of 2019.
Monetary policy: on hold, with an easing bias
We expect the MPC to leave its CBR unchanged at 9.5% in 2018; however, the bias is still for a cut in Q1:18. The MPC seems content with the current policy stance implied by their decision to leave the CBR unchanged, despite both headline and core inflation declining.
In fact, the outlook for headline inflation remains benign in H1:18, underpinned by both favourable base effects and declining food prices, the latter a beneficiary of improved weather conditions.