The Bank of Uganda Annual Report for 2019/20 has revealed that the slowdown in economic activity is likely to depress real estate prices and hence result in an increase of banks’ credit risk.
“These vulnerabilities are likely to further increase the deterioration in asset quality with the ratio of NPLs to total loans forecast to rise to between 6.1 percent and 12 percent in the next one year, with adverse effects on the profitability of SFIs (Supervised Financial Institutions),” the recently released report reveals.
It adds that from July 2019 through to early 2020, systemic risks to financial sector stability remained moderate, supported by domestic GDP growth which had been projected to reach 6.3 percent for the fiscal year 2019-20, despite early indications of a rise in non-performing loans and early concerns about the outbreak of the coronavirus (Covid-19) pandemic in Asia.
“Credit growth remained in double digits and the liquidity and capital buffers of supervised financial institutions (SFIs) had increased, enhancing their resilience to shocks. However, since early 2020, several shocks including the spread of the pandemic have posed a serious threat to financial stability. The necessary measures to contain the pandemic have resulted in a slowdown in global and domestic economic activity, adversely affecting the financial health of corporations and households, and inhibiting their ability to meet their debt obligations,” the report reveals.
It adds: “This has led to a negative knock-on effect on financial institutions’ asset quality. Secondly, it led to a tightening of financial conditions and sharp exchange rate depreciation, particularly in March and April 2020, driven by increase in financial markets volatility and a pickup in outflow of offshore funds. The liquidity and funding markets were also affected by increased uncertainty, leading to a rise in systemic liquidity pressures, liquidity hoarding by SFIs, and liquidity concentration amongst select SFIs, as well as higher borrowing costs and tightening of credit lines for some banks.”
According to the report, in order to safeguard financial stability and alleviate the impact of the COVID-19 pandemic on economic growth and systemic risk, Bank of Uganda implemented decisive policy interventions in the year to June 2020, which led to relative stability in the financial system.
