GDP growth is forecast at 2.5% y/y in 2020 and 6.2% y/y in 2021. We expect the C/A deficit to widen to 8.2% of GDP in 2020. We expect USD/UGX trading at 3830 – 3850 by end 2020.
Medium-term outlook: downside risks
We now expect GDP growth to expand by 2.5% y/y in 2020. The COVID-19 impact will weigh on economic activity. Of course, the longer pandemic endures, the more severe the impact on GDP growth. Due to the pandemic, which has now made it impossible for expatriates working in the oil fields to travel, the FID will probably have to be postponed into H2:21. The international oil price plummet too will now serve as a disincentive for oil firms to finalize the FID. Thus, we see GDP growth recovering to 6.2% y/y only in 2021, boosted by oil-related investments. Owing to the disruption of the pandemic, output in the tourism, trade, manufacturing, construction and transport sectors is likely to drop sharply in 2020. Uganda’s ongoing lockdown has also cut economic activity.
Balance of Payment - rising FDI
We see the C/A deficit widening to 8.2% of GDP in 2020. Owing to COVID-19, tourism receipts will probably decline further in 2020. With elections expected to be held in Feb 21, tourist arrivals would anyway be only a trickle due to greater political risks around that time. We reiterate our view that a wider C/A deficit will probably be funded by an increase in oil-related FDI in 2021. FX reserves have been hemmed in a USD3.0bn - USD3.3bn range since May 18. Perhaps government demand for FX has been elevated, due to both external debt service as well as increasing infrastructure expenditure related to oil. We suspect this is something that will probably persist through to the end of 2021.
Monetary policy – near-term accommodative bias
We expect the MPC to cut its key policy rate by a further 25-50 bps before the end of Dec. despite the slowdown in the economy that has now been compounded by COVID-19, the forward-looking inflation outlook has now improved for H2:20 in addition to weak domestic demand which is likely to curtail core inflation. Declining international oil prices will probably result in a notable reduction in imported inflationary pressures as well. We expect headline inflation to average 4.3% y/y in H2:20. However, inflation is likely to average 5.3% y/y in H1:21. It is perhaps during this period the MPC could tilt towards being slightly more hawkish.
FX outlook – weaker UGX bias in the medium term
We see USD/UGX at 3830 – 3850 by Dec 20. The strength of the USD globally will be key in determining the direction of USD/UGX or perhaps even the pace of movement. Larger C/A deficits will probably remain funded by higher FDI. Hence, even as import demand rises ahead of elections in Feb 21, the wider trade balance may still be sufficiently funded via this avenue. We nevertheless see a bias for a swifter pace of UGX weakness from Q3:20 onwards, as portfolio outflows increases, and corporates frontload their FX demand ahead of elections.