There has been a significant drop in the standard of living with GDP falling by 3.02% year on year from Ugx 33.5 trillion in quarter 4 of 2018/19 to Ugx 32.5 trillion in 2019/20 financial year. GDP dropped 5.86% from January 2019 to March 2020 following the global COVID-19 pandemic that caught the economy by storm. Tax collections on products dropped significantly in quarter 4 of 19/20, contributing 2.36% of the fall in GDP following a 31% drop in revenue contribution. Donor inflows will drop by more than 47.53% from US$ 207.4 million by May 2020
The biggest driver of the drop in GDP was the services sector that caused 2.55% of the total drop. Uganda’s fixed-income yields and economic indicators follow political cycles, see figure below Can you spot the 2011 elections, 2016 elections?
- Fixed Income Securities usually bubble before election periods as the government sources funding for elections, particularly the ruling party. Increased fixed income yield attracts funding from financial institutions and other large corporations to purchase these treasury bills for extra interest. However, this affects GDP adversely as the lending rates rise simultaneously to discourage private sector borrowing with a preference for risk-free investments. The lack of capital from loans and advances consequently drops production, thus GDP is affected. Nevertheless, banks still require customer deposits to grow to finance extra investment with rising t-bill rates. They thus increase time deposit rates to attract savings.
- Saving increases the flow of funds in the financial system and thus gives banks an extra push to lend to the private sector, though at higher lending rates to cover for the cost of deposits they incur on time deposits to maintain their net interest margins.
- Bank asset quality worsens during periods of recession and thus will be a reason for high provisions by year-end 2020. During the period to February 2021, we anticipate a high treasury bill rate that will attract financial institutions to invest at the expense of the private sector, which could continue reporting high default rates and restructuring proposals.
To read more about the;
- Noteworthy sector highlights
- Economic dynamics for 2021
- High-Risk Lending Sectors
- Microfinance Deposit-Taking Institutions (MDIs),
Download the full Report; Uganda Banking Sector Analysis 2020 below