{UAH} Pojim/WBK: Firms decry tough times as BOU cuts growth forecast

http://www.observer.ug/business/38-business/39760-firms-decry-tough-times-as-bou-cuts-growth-forecast

Firms decry tough times as BOU cuts growth forecast

Written by Alon Mwesigwa

Last Updated: 09 September 2015

Stanbic bank profits grew only marginally

When an official dropped his books, making loud noise, at Stanbic bank's release of half-year results last year at Sheraton hotel, everyone turned their heads.

The then managing director, Philp Odera, who was giving a presentation, joked: "The results are not that bad [to scare people]."  The bank had registered a 19.2 per cent jump in profits.

Briefing investors last month at Serena hotel, Stanbic MD Patrick Mweheire did not joke. Instead, he used the phrase "there is a concern" referring to the uncertainty in the economy before delivering what most shareholders regarded as bad news for the bank whose accounts always glowed with the finest numbers.

For the six months to June 2015, Stanbic, the country's largest bank by assets and a subsidiary of South Africa's Standard bank, registered flat earnings – Shs 91.9bn in profit before tax versus Shs 90.5bn last year, it said in a statement. The bank said it got a lot of its income from investment in government securities and income from foreign exchange sales.

Yet Stanbic is not the only big corporate firm whose half-year results are but a telling testimony of how the economy is struggling. Power distributor Umeme announced a Shs 4.7bn loss, the first time since it was listed on the Uganda Securities Exchange in 2012. Managing director Selestino Babungi said the loss was as a result of volatility in the foreign exchange market.

Umeme operates a dollar concession but it collects most of its money in Uganda shillings, which has lost more than 25 per cent of its value this year alone. Dfcu bank also reported a drop in profits for the period between January and June, the first time in recent times. The bank's after-tax profits dropped by 52.4 per cent to Shs 13.66bn from Shs 19.10bn in the same period last year.

The bank attributes the drop to increment in operating expenses and the opening of new branches. The performance of Stanbic, Umeme, and Dfcu – some of the biggest companies in the country – shows the economy's vulnerability amid a weak currency, rising inflation, uncertainty over the 2016 elections and less foreign direct investment (FDI) due to a slowdown in some countries in Europe and China.

"Banking in this kind of environment is going to be hard," Stanbic's Mweheire was quoted  as saying in Daily Monitor last month.

Paul Bwiso, the Uganda Securities Exchange (USE) managing director, told a meeting at Serena last week that close to Shs 2tn of value had been lost at the bourse in the last few months because of currency volatility. In May, oil firms Total E&P and Tullow Uganda laid off some staff as they scaled down some operations in the country in what many saw as a result of low global oil prices – which dipped to less than $50 a barrel.

Since April 2015, Bank of Uganda has raised the Central Bank Rate, a signal to interest rates direction, by five percentage points to 16 per cent last month. It said the move was to stem inflationary pressures as a result of a depreciating shilling. Core inflation, which measures changes in prices of goods and services less food, electricity and metered water, hit 5.4 per cent last month. BOU projects it could go above ten per cent by next year. 

A higher CBR, however, pushes up interest rates, slows down economic activity and affects growth. People who had borrowed money on floating interest rates are likely to default and most banks will make losses. Dfcu has set aside an allowance of Shs 7.81bn, up from Shs 5.15bn, for loan impairment.

Speaking to the manufacturers last month, BOU governor Emmanuel Tumusiime-Mutebile acknowledged the challenges the economy is going through.

He said: "We expect that real growth in the current financial year will be lower than the 5.8 percent forecast at the time of the budget in June, and will probably be around 5.4 percent…"

In its August 2015 report, BOU said growth would be affected by "tight monetary policy and the fact that public investments might not take off."

"In addition, commodity prices have continued to suffer, adding an extra layer of uncertainty about export growth and oil sector investments," BOU added.

In the report, BOU says that for 2014/15 financial year, Uganda's current account, money spent on imports compared to that earned from abroad, deteriorated to a deficit of $2.4bn (about 10 per cent of GDP) from $2.1bn  in 2013/14 and it is projected to deteriorate  to $2.8bn during 2015/16 because of high imports for government infrastructure projects.
amwesigwa@observer.ug. 

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Firms decry tough times as BOU cuts growth forecast

http://www.observer.ug/business/38-business/39760-firms-decry-tough-times-as-bou-cuts-growth-forecast

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