VZCZCXYZ0004
RR RUEHWEB

DE RUEHKM #1383/01 2890706
ZNR UUUUU ZZH
R 150706Z OCT 08
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 0784
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHXR/RWANDA COLLECTIVE
RUEHFR/AMEMBASSY PARIS 0216
RUEHLO/AMEMBASSY LONDON 0184

UNCLAS KAMPALA 001383 
 
SENSITIVE 
 
SIPDIS 
 
EEB/IFD/OMA FOR ANDREW SNOW AND RICHARD FIGUEROA 
TREASURY FOR DAN PETERS 
 
E.O. 12958: N/A 
TAGS: EAID EFIN ECON PREL UG
SUBJECT:  The Global Financial Crisis and Uganda:  Safe for Now, But 
Global Recession Will Hurt Later 
 
¶1. (SBU) Summary:  Economists and bankers in Uganda believe the 
global financial crisis will have little impact on economic growth 
this year, but could lead to slower growth over the medium term if 
the crisis results in a global recession.  Should the latter unfold, 
Uganda's economy would be vulnerable to reduced flows of donor 
assistance, remittances, and foreign direct investment.  It would 
also be hit by lower prices for critical exports and higher interest 
rates for government and businesses.  On the upside, however, 
Uganda's economy remains generally well-insulated from the 
international credit crunch because the Government of Uganda (GOU) 
has kept debt ratios low, and because domestic banks have little 
exposure to international markets.  End Summary. 
 
----------------------------------------- 
CONCERNS OVER MEDIUM-TERM VULNERABILITIES 
----------------------------------------- 
 
¶2. (SBU) Michael Olupot Tukei, Assistant Commissioner of 
Macroeconomic Policy at the Ministry of Finance, told Econoff that 
the global financial crisis is not expected to impact growth this 
year but that 2009 growth levels could fall "marginally," between 
0.5 and 1 percentage point.  He said Uganda is not re-evaluating its 
economic forecasts at this time, however, due to the uncertainty of 
the depth of the crisis and because the economy is also expected to 
benefit from Uganda's recent discovery of oil and other indigenous 
factors such as the recent stability and development of northern 
Uganda, a boom in construction, and a recent expansion of regional 
trade to southern Sudan due to improved security conditions there. 
 
¶3. (SBU) In contrast, Abebe Selassie, the International Monetary 
Fund Resident Representative in Uganda, agrees  that it will take a 
bit of time for the effects of the crisis to materialize, but that 
Uganda has several sources of medium-term vulnerability: 
 
--  Official Donor Assistance:  Selassie said donors in 2008-2009 
funded 32 percent of the Ugandan budget with direct budgetary 
support, while other donors such as the United States provide 
hundreds of millions of dollars in off-budget support.  Both 
Selassie and Finance Ministry Economist Tukei expect foreign donors 
to cut aid budgets in the event of a world-wide recession.  While 
assistance for the current 2008-2009 fiscal year has been allocated 
already, the impacts on the 2009-2010 budget could be significant. 
 
--  Less Foreign Investment and Increased Borrowing Costs: 
Nonresident players such as hedge funds, private equity investors, 
and pension funds currently own about $300 million in Ugandan 
government securities.  Heavily leveraged hedge funds in particular 
may have to liquidate assets and have already sold $20-30 million in 
Ugandan treasury bills, about 8-10 percent of the total stock. 
However, Selassie said, the Bank of Uganda (BOU) remains sanguine 
about these sales, as BOU foreign currency reserves, at about $2.7 
billion, or six months of import coverage, remain healthy.  "Capital 
flight at this level is affordable -- even if all of the $30 million 
left in a day," Selassie said.  Still, he noted, with less liquidity 
available worldwide, Uganda can expect smaller foreign investment 
inflows, which may hit growth and hamper development.  The mass sale 
of Ugandan treasury bills by foreign investors could also make 
borrowing more expensive for the government and businesses.  Bankers 
state that higher interest rates are already being passed on to 
businesses, a fact which could harm investment over the longer term. 
 Interest rates for prime borrowers had already risen by about one 
percentage point, Selassie said. 
 
--  Exchange rate vulnerability:  The Ugandan Schilling (UGSh) fell 
to 1705 to the dollar on October 14, down almost 9% from quoted 
rates in September.  Citibank Managing Director Shirish Bhide told 
Econoff that a combination of portfolio sales of Ugandan treasury 
bills and the halting of fresh dollar inflows from portfolios had 
caused the weakening.  While the decline may help exports, more 
costly of imports will hurt Uganda's developing economy, which 
relies heavily on imports for infrastructure development. 
 
--  Commodity prices:  Should commodity prices plummet and world 
growth slow, then revenues from key Ugandan exports such as coffee 
will be hit.  While such a commodities price reduction could be 
neutral for Uganda's balance of payments (as the price of other 
commodities such as oil also falls), the impact on the agricultural 
sector will be disproportionately large, Selassie said.  "In terms 
of poverty, the current high price of commodities is probably a good 
thing because the average coffee farmer depends less on fuel prices 
than does you or me living in the city," he said. 
 
--  Remittance flows:  Uganda currently receives some $500 million 
annually in private remittance flows, sent from Europe and the 
 
United States by Ugandan workers.  These flows will likely slow as 
workforces are cut worldwide. 
 
------------- 
ON THE UPSIDE 
------------- 
 
¶4. (SBU) Despite these vulnerabilities, bankers and economists note 
that Uganda remains generally well insulated from the current 
crisis, primarily because Ugandan banks do not fund operations from 
borrowing abroad, favoring local deposits instead.  Only 5-10% of a 
typical Ugandan bank's liabilities come from investments or lending 
abroad.  "Uganda should be ok.  There's not too much connectivity 
with the rest of the world, but of course you can't put away the 
impacts of a long-term recession," said Citibank's Bhide.  Insurance 
giant American Investment Group (AIG) also has little exposure to 
international markets, according to a company statement issued last 
week to reassure local policy holders. 
 
¶5. (SBU) Another critical safeguard is Uganda's low level of foreign 
debt.  At about 20 percent of GDP (compared to about 70 percent for 
the United States), the country is not nearly as reliant as many 
countries that have financed their deficits by borrowing on 
international markets. 
 
¶6. (SBU) Comment:  Entering its third decade of continued economic 
expansion, Uganda has received plaudits from international 
economists for its macroeconomic management.  The benefits of these 
policies will be witnessed if borrowing costs rise, as Uganda does 
not borrow heavily on international markets.  Ironically, though aid 
and trade could be hit over the medium term, Uganda's relatively low 
level of integration into international financial markets is 
currently protecting the country from the storm.  In the longer 
term, however, realizing the advantages of globalization through 
greater foreign trade, foreign investment and external financing 
will remain critical to the country's longer-term development 
prospects.  End Comment. 
HOOVER