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Uganda needs decisive economic policies to survive global recession

By Geoffrey Onegi-Obel

Last week Dr Onegi-Obel described the limitation of the government’s `resource envelop’ budget driven response to the global economic slowdown including its impact on Uganda’s job creation, domestic savings and domestic direct investment. In this last of a two part series, he discusses possible solutions including a private-sector driven stakeholder structured policy, stimulus package, interest market reform and oil.

Ssuggested, the Uganda Country Response to the economic downturn should be a structured one ” spearheaded by a range of new monetary and fiscal policy measures geared towards GDP expansion and past the Bevan hurdle rate of 8% and beyond ” as opposed to just seeking GDP growth below the Bevan 8%. In other words, an Economic Stimulus Package.

A recession is quarter on quarter negative growth on a sustained basis. As mentioned earlier, the economy shrinks and jobs collapse.

Unlike previous recessions which were regional (US 1997, Asia 1998, and the Great Depression 1929-1933) the current economic downturn is not only a ‘worldwide recession’ ” but it is likely that it will take another two years before we begin to see the comforting signals and indicators of a quarter on quarter upturn in investment and jobs .

But even then, the world economy will never be the same again as economic engines untangle from the effects of poor pricing of risk, move back to a ‘derivatives free’ single digit rate of return – and near normal Price Earnings (PE) ratios .

Since it is agreed that Uganda is part of the ‘world economy’, it therefore follows that arguments of Uganda being ‘recession proof’ based on so- called remoteness from the eye of the storm cannot hold. Our private sector needs to come out and trigger a stakeholder based structured policy response from our monetary and fiscal policy team.

Indeed, while a Tsunami hits a location hard, those in its wake as it recedes can even suffer more.

Japan, from where the word Tsunami originates, is now officially in recession ” completing the recession arc from the West in the USA, across Britain and Europe to the East.

On the local front, Uganda is also well set for a prolonged period of ‘sustained negative and jobless growth’ which can only get worse as demand for exports decline, currency exposure weakens and increased costs continue to price us out of competitiveness.

We consider any of the popular sub-Saharan GDP growth rate projections of less than 7% on a narrow GDP base such as Uganda’s as being insignificant for the critical jobs indicator ” hence the term ‘jobless growth’ .

As mentioned earlier, the hurdle rate for job creating GDP growth in Africa is a sustained 8% and above ” a rate which causes GDP not just to grow ” but to expand together with a deepening financial sector.

Oil – Uganda’s great black hope

International oil crude is set to fetch a low price, driving shares of exploration companies south and leaving them gasping for working cash.

Although from a shareholder perspective, these companies have already cashed out ” most when the price soared above US $100 ” making their owners extremely rich; they are not about to spend their market gains on further ‘exploration’ when the market is down and is likely to remain down well into the near future. Nor are their already stressed banks ready to lend them ‘digging money’ at this time.

But even more devastating for Uganda’s hopes of becoming an oil producer, research shows that because of the current worldwide economic downturn, oil as a product is set to be replaced at an accelerated rate by other substitutes over the medium to long term ” so the future of oil is not bright, but quite dim.

Nor should we argue that since our banks make money by playing the treasury without much lending, they therefore have little exposure and risk to manage.

The fact is that in a shallow financial sector dominated by commercial banks and such as we have in most of Africa, we have the worst kind of environment for the pricing of risk in contracts ” such as in an economy where official monetary and fiscal policy signals to all investors domestic and foreign that the Uganda economy is only for those with the appetite for short term, high risk investments. The result is what we have ” Foreign Direct Investments (FDIs) in low quality non-portfolio investment.

We recall President Yoweri Museveni’s struggles with investors over value addition in Uganda ” even the most enthusiastic FDI investors have always balked at the cost of domestic capital in Uganda ” a necessary part of any foreign investor’s portfolio.

Andrew Rugasira of Good African Coffee worked out a solution for value addition in agriculture by reverse engineering the investment process ” he exports to himself in Europe.

Similarly, we long ago advised that Uganda should have progressively bought shares of Nestle and Starbucks Coffee with the proceeds of periodic coffee surpluses. By now Uganda would be on the Nestle or Starbucks board – and exporting to itself.

Reading the Market and Pricing Risk

While many Ugandans have had a go at reading the current market situation – with assorted researched and un-researched pronouncements and predictions, no one has attempted to formulate a way forward on grounds that perhaps, just perhaps, we will not be affected.

Reading the market and understanding how it is trending, has always separated the very rich from the middle class, the just rich from the just poor.

The world’s rich individuals and the governments in the Official Development Assistance (ODA) countries – from Warren Buffet [President elect Obama’s market adviser] to George Soro’s – are experts at reading the market and positioning on the trend, and profiting from the trend.

In all markets, the rule is that if you price risk wrongly, and then go on to package and rate a portfolio around that risk ‘A’ instead of ‘B’ ” and then proceed to perpetuate trading in that portfolio at that wrong price – sooner or later the market will react by seeking to eject the ‘bicuppuli or ‘kiwani pricing’ – so that the portfolio settles at the ‘correct’ non-kiwani price and valuation.

This is the opportunity for Uganda to take a bold step and overhaul the tired engine for the pricing of risk in the economy- after acknowledging that the origin of today’s worldwide economic downturn is the bad pricing of risk, which bad pricing prevails in our economy. Beginning with our interest rate regime, the risk premium in all public and private contracts is very high.

Since for decades we have been pricing risk badly in Uganda though our AID influenced interest rate policy, this is the opportunity to review our interest rate policy regime as we have seen what results from the bad pricing of risk in the most powerful economies of the world “negative growth and recession.

It was only at the formation of the Uganda Securities Exchange Ltd in 1997, that the first signal went out that henceforth pricing of risk in the fledgling Uganda equities and fixed income securities market was going to be increasingly influenced by a market driven price discovery and an emerging yield curve.

However, even the USE is subject to the official interest rate regime ” already negatively priced because of aid inflows.

Indeed, while we do not have and do not trade mortgage backed securities, the risk in the Uganda’s 4,000 or so un-securitised mortgage contracts is that they are also badly priced in the upper double digits – primarily because of the absence of any useful industry pricing benchmark in the market, but largely because of the absence of a National Housing Policy.

Africa’s rich, even from the compromised ‘private sector,’ do not bother policy advocacy to correct pricing in a distorted market which presents hefty short term returns and punishes those who invest in long term risk ” they just target the Treasury directly and help themselves.

But raiding the national treasuries also results in the same thing ” bad pricing of risk in contracts which in turn leads to shrinking GDP’s, jobless growth and economies where profit margins of taxpaying entities are well below the cost of money.

The solution is clear- and has been with us for some time. The only way to cause the GDP to expand so as to create jobs at any stage in any growing economy is to actively promote domestic savings for DDI.

This is also the only way FDI gets ‘domesticated’ so that you get portfolio investment, as opposed to non-portfolio investment which typically has a high attrition rate[they tend to collapse early] – and shorts the economy.

The question is are we going to acknowledge the problem so we can deal with it , or as usual we shall just escort the rest of the world as the try to resolve the recession induced difficulties in their economies and ‘hope for the best’ i.e. more aid?

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Dr GA Onegi-Obel is a pioneer investment banker in Uganda who in preparing Uganda for the stock exchange published the ‘Financial Times’ with the help of USAID, then researched for Uganda Capital Markets Industry at Princeton University as an Albert Parvin Fellow . With the help of Governor Kikonyogo and Governor Kibirango, he finally set up the Uganda Securities Exchange ltd in 1997. He is now best known for the abortive attempt to position the NSSF as the key partner to international financial institutions under a new home-ownership dispensation in Uganda, as well as the key market-maker for the capital markets industry.

 

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