Saturday , August 19 2017
Home / ARTICLES 2008-2015 / Shilling could end year at 1,700 to the dollar

Shilling could end year at 1,700 to the dollar

By Patrick Kagenda

Buoyed by returning off-shore investors especially in the oil sector, increased remittances from Ugandans working abroad, and inflows from exports, the shilling has appreciated 25% against the dollar over a six months ending October 31.

Globally the dollar has seen some depreciation lately, against other currencies. It was trading at Shs 1,850 at end of October.

But in what could be either bad news or good depending on whether you are an exporter or an importer, a buyer or seller of dollars, analysts are predicting that the shilling could rise as high Shs 1,700 to the dollar by year end.

Kenneth Kitariko, the Investment general manager at the African Alliance stockbrokerage firm told The Independent that “the trend the shilling has taken is likely to end in between the first and second quarter of (Q1-Q2) 2010. In the interim, the exchange rate may get to the Shs 1700 as Diaspora inflows have recovered and emerging interest in debt continues to increase on addition to NGO inflows, which are also returning.”

Kitariko explained that players in the money market are aware that the shillings appreciation is being caused by a dropping demand for dollars from importers. The other reason is that portfolio inflows to the debt market here in Uganda have picked up and are increasing.

Predictions regarding the shilling are of course dicey.

A few months ago at the height of the global financial crunch in the capitals of the rich economies, Citigroup Inc was forecasting that the shilling was to slump to as low as Shs 2,500 by year end.

At the time, it was felt that Uganda’s widening current-account deficit and negative real interest rates were encouraging wary citizens to buy foreign currency as a store of wealth. At the time, the shilling was trading at Shs 2,208 to the dollar.

A Huge decline in the price of Robusta coffee, of which Uganda is a leading exporter, and rising inflation were seen to be eating away at savings in real terms and narrowing the countries export base further.

At an October 28 press conference, the Bank of Uganda refused to be drawn into predictions.

“The Central Bank doesn’t know where the market will take the exchange rate,” said Central bank Director for research Mary Katalikawe, “But as the Central Bank, it is interested in the stability of the exchange rate.”

She said however that the shilling is not expected to continue with a very strong appreciation.

“If a strong and sustained appreciation were to happen it would also pose a new set of challenges,” she said.

She said the bank has the reserves that enable it to bring stability in the market equivalent to 5.2 months worth of imports of goods and services and that between Sept and October it had intervened on the buying side to increase its reserves.

The weak dollar demand comes through the cross currency that has an impact on the import demand to finance both the goods and the services. According to analysis the central bank has been conducting over a period of time, it has been found that, at the losing exchange rate, exporters of raw agricultural products like coffee are really comfortable, while other exports like cotton, flowers and fish are at a margin.

The exporters, especially those operating on a margin, are taking a beating.

But according to Patrick Mutimba, an investment manager at Stanbic Bank, this too has a silver lining because a stronger shilling means exporters can import required machinery at a lower cost.

Importers meanwhile are smiling because they require fewer shillings for a unit of the dollar.

Uganda’s Fitch rating improves to B+

Uganda’s credit rating by the international rating agency, Fitch, has been revised from ‘B’ to ‘B+ with a stable outlook’.

This is a notch higher and means that institutional investors who use such frameworks and thresholds for investment will view Uganda as less risky.

A sovereign credit rating is one of the measures of risk.

Some institutional investors who had no interest in Investments in Uganda at the ‘B’ rating now have interest at the ‘B+ with a stable outlook’ rating.

It has been established that during troubled times investors tend to go in a herd towards assets that are considered less risky.

During 2008, they needed to avoid currency exposure risk at that time and hence a sale of local investments.

Less than a year later, some of these investors have realised that emerging markets that had not been closely integrated to global financial systems were not as badly affected as the more integrated ones.

Now there is a rush to these economies.

The increased attention to the oil discoveries in Uganda is also another factor that is likely to lead to increased investment and speculation.

 

Leave a Reply

Your email address will not be published. Required fields are marked *