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Cablegate: The Global Financial Crisis and Uganda: Safe for Now, But


DE RUEHKM #1383/01 2890706
R 150706Z OCT 08





E.O. 12958: N/A
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.


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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.


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.

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