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BoU Intervenes As Shilling Hits All-Time Low Of 3890/3900

The Uganda shilling weakened to an all time low on the back of strong interbank demand, energy and manufacturing sector during the week ending 22nd June 2018.

Trading was in the range of 3890/3900.
However, after watching from the sidelines for a while,  Bank of Uganda (BoU) intervened on the sell side of the market.

An action seen as too little too late, will only provide an interval of temporary relief given the structural headwinds facing the shilling, says Stephen Kaboyo, an analyst and Managing Director at Alpha Capital Partners.

“The fundamentals factors are very strong and therefore the intervention is likely to wear off fast.  In the post intervention trading session, the shilling was already surrendering it’s earlier gains and was likely to go back to pre intervention levels,” Kaboyo said, adding that while the depreciation can be seen as double edged, the downside risks to the economy are huge.

In the interbank money market, rates for overnight and one week funds held at the previous week’s level of 6% and 9% respectively.

In the fixed income market, treasury bills yields edged up across all tenors with 91 days up 81 basis points , 182 days up by 258 basis points  and 364 day 141 basis points and traded at 10.124%, 11.686% and 14.499% . 91 day tenor was undersubscribed while the rest were oversubscribed.

In the regional currency markets, the Kenya shilling was firm backed up by inflows from  portfolio investors. The fx market was evenly matched on both sides. Trading was in the 100.75/95.

In the international currency markets, the US dollar pulled back from an 11 week peak against the major currencies as investors took profits after the earlier currency rally. The markets remained sensitive to the potential for an all out trade wars, European political risks and emerging markets volatility, all seen as potent factors that are likely to contain the dollar at current levels.

In commodities market, the oil prices rose by about 1% on uncertainty over  whether OPEC would agree on production increase . Brent de oil futures were at $73.78 per barrel.

Impact of falling shilling

“Uganda being a net importer, sustained weakness of the currency is likely to bring about import induced inflation, as imports become more expensive and prices edge up. It is also likely to affect investments,” Kaboyo says.

He adds: “Prospects of exchange rate losses will discourage investments more especially portfolio investors who will be less willing to hold government debt because it effectively reduces the value of their holdings.  It also spells trouble for  businesses holding dollar debt that have  their cash flows  in shillings, while on the government side the cost of servicing dollar denominated debt will go up.”

Forecast

“Forecast for the Shilling indicate further weakening as speculative trading sets in  and confidence in the shilling continue to be dented. It is expected that importers will exert more pressure by front loading their fx requirements in absence of adequate supply of dollars in the market,” Kaboyo says.

Taddewo William Senyonyi
https://www.facebook.com/senyonyi.taddewo
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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