The Uganda shilling continued to post significant losses undermined by strong demand from commercial banks, manufacturing and energy sector during the week ending 8th June 2018.
With very weak inflows, the trend was likely to throw the market into a panic as the Central Bank continued to remain on the fence. Trading was in the range of 3810/3820.
In the interbank money market, overnight funds rate edged up to 6%, while one week remained at 10%.
In the fixed income market, Shs 200billion was accepted against the offer of 220billion. The 91 and 182 day tenors were undersubscribed. Yields came out at 9.051%, 9.974% and 10.761% respectively.
In the regional currency markets, the Kenya shilling remained firm on account of sizable inflows from offshore investors, although the global rise in oil prices was seen as a major risk going forward.
In the international markets, the US dollar wallowed to a near three week low against the major currencies as US treasury yield fell sharply on the back of receding market appetite. Global markets were keenly watching the outcome of the Federal Reserve meeting due on 12th June, that was widely expected to raise interest rates for the second time this year.
In commodities markets, oil prices were stable with Brent crude futures trading at 77.24 US dollars per barrel.
“Forecast for the shilling indicate further weakening on expected demand from importers with global oil price developments being a major factor to watch. The Central Bank mute action on the sell side was likely to exacerbate anxiety in the market and fuel a speculative attack on the shilling,” Stephen Kaboyo, an analyst and Managing Director at Alpha Capital Partners said .
The Uganda Shilling on Thursday June 07, 2018 weakened further against the US dollar, crossing the 3800 mark. By close of the day, the Shilling was trading at 3,811.08/3,821.08 according to the Bank of Uganda. The surge in demand for dollars is driven mainly by energy and manufacturing.
How It will Affect You
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.