Uganda – FID on oil by year-end

Uganda – FID on oil by year-end

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This is an excerpt from the latest edition of Global Focus

COVID-19 takes toll on economy; election boost unlikely Uganda’s economy should recover gradually in the months ahead, after strict pandemic containment measures were relaxed in June. Total’s acquisition of
Tullow’s stake in the Lake Albert oil development project will be a key driver of themedium-term outlook.

The tax treatment of asset transfers is now less likely to be astumbling block to future oil development. Final Investment Decision (FID) on oil is expected by end-2020. Risks to Uganda’s future oil production have subsided since March, when oil prices collapsed.

The recent oil price recovery could potentially support investment in new markets; at the same time, Uganda’s government has shown a willingness to facilitate faster progress towards first oil. Domestically, elections in February 2021 will be a key driver of activity, with the
budget for FY21 (ends 30 June 2021) incorporating a 13.5% spending increase.

The boost to GDP growth from higher spending may be offset by an increase in election related uncertainty, which could keep private-sector credit growth weak in the run-up to February 2021. A united opposition may pose a challenge to the incumbent government. However, all campaigning will have to be done virtually, as Uganda has banned mass rallies ahead of the election due to the need for social distancing.

We raise our current account (C/A) deficit projections to 9.2% of GDP for 2020 (5.6% prior), and to 8.7% and 7.4% for 2021 and 2022 (5.0% and 4.9% prior). Risks to eventual oil production appear to be fading, and oil-related developments should cause capital-goods imports to rise in the medium term.

FDI should be able to largely finance the C/A gap. We had lowered our C/A deficit forecasts in April, when Uganda’s transition to becoming an oil producer looked less certain.

Lower oil prices should benefit Uganda’s C/A balance in the near term. But
weaker exports, tourism receipts and remittances are likely to widen the deficit and weigh on FX reserves. The 90-day deferral of dividend outflows by financial institutions (announced in March) is likely to have provided only a temporary reprieve for the C/A balance.

Of the USD 491.5mn Uganda received from the IMF under a Rapid Credit Facility in May, c.30% will be used for budget support; 70% will be used
to support the Bank of Uganda’s (BoU’s) FX reserves. In the absence of such
support, import cover would have been at risk of falling to c.2 months, according to IMF estimates.

With an additional c.USD 300mn of support from other multilaterals,
we do not expect Uganda’s FX reserves to face significant pressure. Additional external borrowing, mostly project financing on commercial terms, is also planned.

We see gradual Ugandan shilling (UGX) depreciation for the rest of 2020.
Monetary policy to remain accommodative. The BoU cut the central bank rate (CBR) to 7.0% in June, the lowest level since the policy rate was introduced in 2011. We had previously expected 7.5% to be the
cycle low; we update our CBR forecasts accordingly. We now see the CBR
remaining at 7.0% for the rest of 2020 given COVID-related economic weakness.

We forecast the next policy move, a 100bps CBR hike, in April 2021 (although we see a risk of earlier tightening in February if election-related uncertainty puts more pressure on the UGX). We expect a total of 250bps of tightening to 9.5% by end-2021, more than reversing the 200bps of easing delivered in 2020.

CPI inflation rose to 4.1% y/y in June as the strictest lockdown measures were lifted, from earlier lows. This largely reflected an increase in transport costs as new social distancing regulations were imposed. We expect inflation to remain relatively contained overall, with headline inflation rising to just above 5.0% y/y by end-2020.

The BoU is likely to maintain ample market liquidity. At the June MPC meeting, the band around the CBR was reduced by 1ppt to +/-2 ppt, in addition to a 100bps policy rate cut.
We now see headline inflation averaging 4.2% in 2020 (3.3% prior), reflecting upward pressure on the prices of some goods and services as Uganda emerges from lockdown.

Continued accommodative monetary policy and an election-related rise in
spending should lead to higher average inflation of 6.0% in 2021 (5.6%) prior. With the BoU tightening monetary policy again in 2021, we expect inflation to slow to 4.8% in 2022 (4.9% prior).
Record budget in an election year. The fiscal deficit likely widened to 7.5% of GDP in FY20 due to revenue disappointment; we had previously expected a smaller deficit of 7.2%.

The government has announced a significant UGX 45.5tn (USD 12.2bn) budget for FY21, its largest yet. It includes economic support measures such as the payment of supplier arrears, which is likely to take on more importance in an election year.

We now expect the FY21 fiscal deficit to widen to 9.0% of GDP (7.6% prior),
given the six-month tax payment deferral from April 2020 for small companies and reduced taxes on mobile money transactions. Extraordinary receipts from oil would be a positive, resulting in a narrower deficit. However, the risk of a supplementary budget remains in the event that the domestic COVID-19 outbreak worsens.

Uganda has recorded only 911 confirmed cases to date and zero fatalities, largely as a result of strict containment measures.

While domestic financing of the FY21 budget will rise to UGX 3.56tn (from UGX 3.06tn previously), authorities will shift budget financing to cheaper external sources. Uganda’s revenue base remains weak. Despite a lower public debt ratio than regional peers, debt service payments exceed 20% of revenue.

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