Uganda – A pivotal year
Economic outlook – Election risks, FID to shape recovery
2021 is likely to be a pivotal year for the economy, with the Final Investment Decision (FID) on oil expected by June. Prior to the FID, elections – brought forward by one month to mid-January – are likely to determine investor sentiment and the pace of Uganda’s post-COVID recovery. Political risk is seen as elevated.
Protests following the arrest of opposition leader Bobi Wine in 2020 (accused of flouting COVID restrictions on the size of political rallies) drew a heavy-handed response from police, with scores killed. A post-election calming of sentiment would likely lend itself to a faster growth recovery.
Ongoing political volatility poses further downside risks to our 4.0% GDP forecast for 2021 (revised from 5.0% prior). We also lower our 2020 GDP forecast to -0.3% (from 3.0%) to reflect the deep contraction in Q2-2020, when a lockdown was imposed. Oil-related developments will guide medium-term prospects.
A positive FID would also see construction on an oil pipeline to Tanzania begin, potentially lifting 2022 GDP growth to 6.0% (5.2% prior).
The COVID crisis will leave Uganda with an elevated debt ratio; public debt is forecast to reach 48% of GDP in FY21 (ends 30 June), from c.40.8% at end-FY20.
While Q1-FY21 revenue beat revised targets, a supplementary budget to cover COVID-related spending will cause the full-year deficit to widen. In line with the authorities’ guidance, we revise our FY20 deficit forecast to 7.7% of GDP (from 7.5%) and expect it to widen further to 10.4% (9.0%) in FY21, which covers the election period.
Authorities will seek additional multilateral financing to fund the deficit, alongside increasing the domestic borrowing requirement to UGX 4.3tn (from UGX 3.6tn) in FY21. Given closer engagement with the IMF, the FY22 budget (presented in June), will likely focus more on revenue mobilisation. However, we now see a more gradual narrowing of the deficit to 6.8% in FY22 (6.0% prior).
We expect the Bank of Uganda (BoU) to tighten its policy rate gradually post-election, having cut the central bank rate to a record-low 7.0% amid the COVID crisis.
Although core inflation is likely to remain elevated as economic activity normalises, the BoU is likely to look through current strength given the absence of demand-related pressures. We lower our headline inflation forecasts to 3.9% for 2020 (from 4.2%) and 5.7% in 2021 (6.0%). We expect policy tightening to resume around April 2021, but ongoing economic weakness would pose risks to the timing. We now expect only 200bps of tightening in 2021, to 9.0% (250bps prior).