Global developments pose risk to financial sector - BoU

Global developments indicate that the financial market sentiment remains fragile. PHOTO/FILE

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  • Brent Crude oil averaged $79.9 per barrel (a 9.4% increase) in quarter ending November 2021 and is expected to decline in 2022 due to lower demand.

The Bank of Uganda has warned that higher global growth augurs well for Uganda as a source of external demand but this could be moderated by the slowdown in China, possibility of lockdowns and border closures on account of the omicron virus strain. 

As various global developments are taking place, the Bank of Uganda (BoU) says the uncertainties in the global financial markets pose a risk of volatility in the domestic financial markets. 

The Bank of Uganda further pointed out that while high commodity prices could lead to higher export proceeds, higher global oil prices coupled with high global inflation pose upside risks to domestic inflation.

“A tightening of monetary policy by Advanced Economies (AEs) is likely to lead to tighter financial conditions in emerging markets and developing economies, including Uganda, which in turn could lead to stronger depreciation pressures than is currently expected,” said the Bank of Uganda. 

Financial account surplus narrowed by 28 percent, on a quarterly basis.Other investment account posted a 43% contraction in net inflows on account of a decline in currency and deposit assets. Portfolio investment net inflows slowed. Net reversal of $30.8 million in the month of October 2021. Estimates of FDI inflows increased by $60 million.

Some Central Banks have started raising interest rates to curb Inflation. 

Bank of England raised the policy rate from 0.1 percent to 0.25 percent; Brazil hiked by 150 basis points despite the recession; South African Reserve Bank raised its key interest rate by 25 basis points to 3.75 percent. 

The US dollar strengthened leading to tightening financing conditions for the Emerging Economies. 

In his analysis on what the global development mean for Uganda’s financial market, the development economist who is also lecturer at School of Economic Makerere University, Dr Fred Muhumuza said once the US decides to raise interest, the US dollar will appreciate against the local currencies. 

“Once the US Federal Reserve raises the interest rate, the US dollar flowing in here will be taken to the US and our shilling will depreciate,” he said. 

Global economic recovery remains strong, due to rebound in services activities, despite the resurgence of Covid-19 cases and the Omicron variant. 

Imbalances, however, remain across countries due to differences in vaccination levels and policy mix. 

The downside risks remain elevated, and the Omicron variant could slowdown global economic growth by worsening the supply chain mismatches and depressing demands.

Inflation
The global developments also indicates that global inflation remains elevated driven by higher commodity prices amidst supply shortages; higher transportation costs; base effects due to a sharp fall in prices in 2020. 

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