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AMR: Uganda

AMR: Uganda

GDP growth is forecast at 1.8% y/y in 2020 and 5.0% y/y in 2021. We still forecast the C/A deficit to widen to 8.3% of GDP in 2020 and 10.5% in 2021. We expect USD/UGX trading at 3720-3750 by end 2020.

Nominal GDP
Real GDP growth

Medium-term outlook: modest 2021 recovery

Our GDP growth forecast now stands at 1.8% y/y for 2020, down from 2.5% y/y previously. Lockdown measures have now been relaxed, so the broader services sector should recover gradually over the coming year. Indeed, the Stanbic Bank Uganda PMI rose to 54.6 in Aug, from an average of 36.7 Apr to Jun, indicating that economic activity and business confidence should pick up further in H2:20. The weather too should stay conducive for the agrarian sector over the coming year — but there are still concerns about desert locusts destroying key farming crops in H2:20. As global supply chains are being restored, the industrial and agriculture sub-sectors should however benefit over the coming year.  

Our 2021 GDP growth forecast too is lower now, at 5.0% y/y, from 6.2% y/y previously, due to the enhanced political risk to economic activity in Q1:21. The government hasn’t indicated though that the Feb 21 elections would be postponed because of the pandemic, and of course favourable base effects should underpin growth in 2021 — but we’d only see GDP growth back above 6.0% y/y from 2022.

Balance of Payment - services exports sliding

We still forecast the C/A deficit to widen to 8.3% of GDP in 2020 and 10.5% in 2021. Exports of goods should recover further over the coming year as external demand improves. Bar a global vaccine, the tourism sector will keep struggling over the next 12-m. Political risks ahead of the Feb 21 elections too could weigh down tourism. Funding the wider C/A deficit ahead of the Feb elections may prove cumbersome, considering that foreign portfolio investment outflows could ease, especially should government-driven capital goods import demand be elevated. Yet, if the FID on oil should transpire in Q4:20 or even in H1:21, direct investment inflows should rise from 2021, helping to finance the likely wider C/A deficit over the medium term.

Monetary policy – neutral, for now

The MPC has already cut rates this year by a cumulative 200 bps but will now likely adopt a more cautious stance because headline inflation might edge higher in Q1:21. Should, however, the economy not recover from H2:20 as we currently expect, an accommodative bias may persist into 2021. In fact, even as headline inflation rises, should the MPC believe that the output gap is widening, they could still look to ease further. In fact, should a second infection wave result in another lockdown, the MPC could still look to remain accommodative even if inflation temporarily exceeded the 5.0% y/y medium-term target.

FX outlook – UGX weaker bias ahead of elections

We now expect the USD/UGX pair to trade around 3720-3750 levels by year-end. However, due to the risk of fiscal slippage before the elections, foreign portfolio outflows will likely rise and put moderate upward pressure on the pair. Of course, increased public investment in infrastructure adds to this weakening bias.