Voting in the February election 2016: Increased election spending and
drought caused an increase in inflation. AFP PHOTO | ISAAC KASAMANI
By BERNARD BUSUULWA
In Summary
Drought, the war in South Sudan and an election at the
beginning of the year impacted Uganda’s economy, sending shockwaves
through the real estate market, the stock exchange and trade.
The biggest upset was in the banking sector, where the country’s third largest bank, Crane Bank, was put under receivership.
Executives now wait to see how the Bank of Uganda (BoU) handles
the troubled Crane Bank as the decision is likely to shape the
regulator’s stance towards failing banks in the future.
Fears of runaway inflation anticipated in the aftermath of the
February general election prompted BoU to pursue tight policy actions in
an effort to preempt a repeat of gloomy economic indicators experienced
during the post-election period in 2011.
A spike in election spending and rising food prices drove
inflation to a record high of 30.5 per cent in September 2011, while
economic growth shrunk to a record low of 3.2 per cent at the end of
2011/12, government data shows.
In comparison, headline inflation averaged 6.6 per cent at the
end of 2015/16 compared with three per cent by end of 2014/15,
reflecting considerable exchange rate pressures driven by prices of
imported goods and steep food prices. Core inflation averaged 6.8 per
cent at the end of 2015/16 up from 3.3 per cent at end of 2014/15.
Food crop inflation averaged 6.2 per cent at the end of 2015/16,
compared with 1.5 per cent recorded by close of 2014/15, according to
BoU’s Annual Report for 2015/16.
Interest rates
Under the tight policy regime, the Central Bank Rate (CBR) — a
benchmark policy rate that determines the cost of funding incurred by
commercial banks — increased gradually from 13 per cent in July 2015, to
15 per cent in June 2016, alongside aggressive mop up measures carried
out by the Central Bank in the interbank market.
The CBR currently stands at 12 per cent.
Subsequently, interbank lending rates and prime lending rates
rose significantly at the beginning of the year as banks adjusted to
higher costs of mobilising funds in the local market, a trend that
discouraged borrowing among consumers, slowed down credit growth and
caused a surge in non performing loans (NPLs).
As a result, average prime lending rates rose to 24.5 per cent
by the end of May 2016, while NPLs grew from 7.5 per cent in December
2015 to a record high of 8.3 per cent in August. Overall NPLs dropped to
7.7 per cent in October on account of a decline in the volume of bad
loans reported by lenders, BoU revealed.
“Tight monetary policies pursued by BoU since 2015 have deeply
affected the banking sector performance this year. These actions
directly raised lending rates at the beginning of this year and caused
increases in funding costs. Though credit growth is projected to remain
flat this year, interest incomes may post reasonable growth due to
repricing of loans at higher interest rates during the first half of
2016. In contrast, profits are bound to remain flat.
“The election cycle will also affect bank earnings at the end of
this year. Prior to the elections, lending and borrowing slowed down
significantly as many investors awaited the poll outcome while many
projects were put on hold,” said Charles Katongole, head of Corporate
and Investment Banking at Standard Chartered Bank Uganda.
“The real estate downturn is also likely to affect some banks
that rely more on physical collateral than cashflows for secured loans.
The biggest opportunities for banks in 2017 lie in large infrastructure
projects being done by government in the transport and energy sectors.
However, the biggest risks are pegged to external factors such as the
changing US monetary policies,” Mr Katongole said.
Real estate developers were affected by the rising dollar and
low occupancy rates leading to loan defaults, and commercial banks faced
devalued real estate collateral with few buyers.
“The downturn in the real estate industry has hit banks and our
real estate clients equally hard. Nevertheless, we expect strong growth
in our top line revenues this year, driven by fees from certain windfall
corporate finance transactions,” said Patrick Mweheire, the managing
director at Stanbic Bank Uganda.
Meanwhile, BoU’s planned sale of Crane Bank, Uganda’s fourth
largest lender by assets with a balance sheet of roughly Ush4 trillion
($1.1 billion), has taken a twist.
The former shareholders of National Bank of Commerce, a defunct
lender that was closed by the Central Bank in 2012 due to problems of
insufficient capital, have obtained a court order against the sale. Its
assets and liabilities were transferred to Crane Bank despite a court
order that halted liquidation of NBC’s balance sheet.
Assets seized by the Central Bank during NBC’s closure include
Ush30 billion ($8.2 million) and new ATMs, while its depositors had
grown to around 3,000. The court order is dated November 3, 2016.
The former shareholders had filed a case in the Constitutional
Court in 2012, challenging BoU’s power to close the bank. They are
demanding $200 million in compensation. The case has dragged on for
nearly four years, compelling the petitioners’ lawyers to seek judicial
intervention.
When contacted by The EastAfrican, Uganda’s Chief
Justice Bart Katureebe said he had received the letter and passed it on
to the head of the Constitutional Court.
Real estate
“The real estate downturn is also likely to affect some banks
that rely more on physical collateral than cashflows for secured loans.
The biggest opportunities for banks in 2017 lie in large infrastructure
projects being done by government in the transport and energy sectors.
However, the biggest risks are pegged to external factors such as the
changing US monetary policies,” Mr Katongole said.
Real estate developers were affected by the rising dollar and
low occupancy rates leading to loan defaults, and commercial banks faced
devalued real estate collateral with few buyers.
“The downturn in the real estate industry has hit banks and our
real estate clients equally hard. Nevertheless, we expect strong growth
in our top line revenues this year, driven by fees from certain windfall
corporate finance transactions,” said Patrick Mweheire, the managing
director at Stanbic Bank Uganda.
Meanwhile, BoU’s planned sale of Crane Bank, Uganda’s fourth
largest lender by assets with a balance sheet of roughly Ush4 trillion
($1.1 billion), has taken a twist.
The former shareholders of National Bank of Commerce, a defunct
lender that was closed by the Central Bank in 2012 due to problems of
insufficient capital, have obtained a court order against the sale. Its
assets and liabilities were transferred to Crane Bank despite a court
order that halted liquidation of NBC’s balance sheet.
Assets seized by the Central Bank during NBC’s closure include
Ush30 billion ($8.2 million) and new ATMs, while its depositors had
grown to around 3,000. The court order is dated November 3, 2016.
The former shareholders had filed a case in the Constitutional
Court in 2012, challenging BoU’s power to close the bank. They are
demanding $200 million in compensation. The case has dragged on for
nearly four years, compelling the petitioners’ lawyers to seek judicial
intervention.
When contacted by The EastAfrican, Uganda’s Chief
Justice Bart Katureebe said he had received the letter and passed it on
to the head of the Constitutional Court.
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