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More Trouble As Outlook For Shilling Indicates Sustained Weakening

The Uganda Shilling continued on its losing streak against the dollar undermined by the surging dollar demand amidst low forex flows during the week ending 14th June 2018.

Bank of Uganda intervention in the previous week provided a short period of relief.   Trading closed the week at 3,844.04/3,854.04.

In the interbank money market, overnight funds at 6% while one week traded at 9%.

In fixed income market, Bond yields edged up with a 2 year increasing by 190 basis points to trade at 13.161% while the 5 year went up by 201 basis points to trade at 14.651%. Both tenors were undersubscribed.

BoU only sold Shs101 billion against the targeted amount of 180 billion.

In the regional currency markets, the Kenya shilling was relatively firm but depreciation pressures were building up mainly from importers taking advantage of a stable currency. Inflows were seen reducing and this was likely to add pressure to the market. Trading was in the range of 101/95/101.15

In the international markets the US dollar stretched its gains against the major currencies as US domestic retail sales posted their strongest rise in six months, supporting the view that the Federal Reserve would raise short term rates further after the Tuesday 12th hike.

“Outlook for the shilling indicates sustained weakening in the coming days on account of intense demand from merchandise importers and commercial banks covering positions. The trend was beginning to create market anxiety that could spiral into speculative trading. The shilling is so far 5.3% down against the dollar since the beginning of the year,” Stephen Kaboyo, an analyst and Managing Director at Alpha Capital Partners says.

What It Means

Given the fact that Uganda is a high net importer, the shilling depreciation will make her imports expensive in shilling terms.

It means that traders who import merchandise will have to pay more shillings to buy dollars needed to import the goods.

This automatically will lead to an increase in prices of the many imported goods which may lead to inflation.

In an earlier interview,  Kaboyo said: “The depreciation of the Shilling instantly hits consumer purchase power, prices of imported goods soar and inflationary pressures increase.”

He added: “It also results in loss of confidence by international and domestic investors and this could lead to capital flight. Of course one can argue that the economy can adjust but the pace of adjustment will depend on how domestic industries pivot towards import replacement and exporting.”

Additionally, even locally produced goods such as beverages, construction materials, cosmetics and printing materials among others are manufactured using imported raw materials.

Housing or mortgage prices are also likely to go north words as construction costs increase, a development that may see the property sector that has been recovering from the 2011 crisis backslide.





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