What are the key internal factors that have influenced swings or impacted the financial markets in the past two or so months?
In the month of June, we had the reading of the national budget. That was the single most important economic event then and it is usually a big driver of the financial markets. We have also suffered a resurgence of the Covid-19 pandemic, what the health professionals have termed the second wave. The government responded with a very restrictive lockdown to lessen the spread. This has had a significant impact on domestic trade, tourism, and hospitality. These sectors are some of the biggest sources and consumers of foreign exchange and their disruption impacts exchange rates. The other sectors that have struggled are education and the transport sector. The two sectors were driving the recovery earlier this year when schools re-opened. There is also a large knockon consumer demand. Our PMI survey continues to show that output orders have dropped and other leading indicators point to an observable impact on aggregate demand leading to very low inflation. The other event is the decision by the Bank of Uganda’s monetary policy committee to reduce its policy rate to 6.5% at their June meeting. This is now the lowest the benchmark has been since inception in 2011 and we see this loose policy keeping short end rates low.
And the external factors?
In the region, we have seen Tanzania open its financial markets to offshore investors beyond the East African region. But more importantly, the economic situation in the advanced economies is changing, with strong recoveries and higher inflation outlook. This has triggered concerns on whether the central banks will start tightening their monetary policies marking an end to the era of cheap US dollar liquidity all over the world.
Initially, the jump in inflation was considered transitory but we are seeing more Central Banks confirming a more permanent outlook of higher inflation. We are seeing more offshore investors exit their positions in our government securities on the above concerns. This is leading to a reversal of yields.
As an example, the 1-year Treasury bill which had dropped to 9.5% has now bounced back to 10.25%. On the long end,
we can see the 20 Year treasury bond which had dropped to 14.85% is now back up to 15.85%. The question is how much further can these rates go?
Basing on the aforementioned factors, how does the […]