Worrying signals cap difficult 2023

Several Ugandan companies have this year been marred by continuing dropping of profits as they preen the post-Covid recovery track, with experts saying this shows daunting concerns on the economy they are operating in.

Consumers are struggling with accumulating the purchasing power they were once inherently so endowed with. They are now slashing their spending, which distorts the revenues of many firms.

Many companies are navigating the same problems as the rest of the economy. They made investments to meet demand after the pandemic’s aggressive consumer spending, which is now slowing, prompting them to adjust their operations. 

Furthermore, these businesses are finding it difficult to obtain bank credit because of stricter guidelines for access and repayment. 

And when they do, it costs them a lot because of the direct competition they have with the government for the same loans in the commercial banks, which prompts a preference for the latter due to its high interest rates and assurance for repayment. 

The economy managers point out that the economy is under control and on the right path. Mr Michael Atingi-Ego, the deputy governor of the Bank of Uganda, admitted a fortnight ago that borrowing from commercial banks comes with a high cost. 

This was, he added, the price the nation had to pay to keep its fundamentals—exchange rate, inflation, foreign direct investment, consumption, and many more—from deviating from par. 

Mr Atingi-Ego noted a six percent economic growth which he projected to reach seven percent in the medium term. But there are signs that something is wrong or not yet aligned. 

Jumia Uganda, the country’s e-commerce behemoth, is cutting off its food delivery operations because it believes it is no longer economically viable as expenses rise and demand falls. 

Strong headwinds

The country’s largest media publications, Vision Group and Nation Media Group, are experiencing a significant drop in profits post-Covid and have even issued profit warnings to their shareholders. 

The two have cited a challenging business environment that includes lower advertising revenues—the heart of their business models. 

The asset finance company Tugende Uganda has had trouble turning a profit. As a result, it borrowed $1.9 million from Tugende Kenya, a subsidiary, to fund its operations, which it eventually defaulted on. 

Both businesses found it difficult to refinance the loan, which was eventually settled with the US-based lender, Goldfinch, because the latter had also borrowed $5 million to break even. 

Lycamobile, another firm, which entered Uganda in 2021 with a planned investment of $100 million, has also struggled to post profits. 

Mr Dickson Sembuya, the acting chief executive officer of the Capital Markets Authority, told Sunday Monitor that the telecom’s lean revenues are daunting, despite the fact that its national operator’s licence requires it to sell 20 percent of its stake to Ugandans. The prerequisites for listing require the telecom to at least be profitable for the prior three months.

Many companies have appointed a flurry of new non-executive directors in response to their weaker balance sheets, perhaps hoping to get fresh perspectives and reap the profits they had previously celebrated before the business environment soured. 

“Some companies are now trying to see what they can do with new management depending on how profitable and competitive they have been. They are also looking at the balance of risk of their businesses now and in the future,” said Prof Augustus Nuwagaba, a Ugandan macroeconomist. 

The year ahead

In 2024, with the pandemic and its ugly aftermath still fresh in the economy, managers will have the difficult task of defending the profits they reported in 2019. 

They will, however, continue to face elevated operating costs due to energy expenses, which economists note could stop rising, particularly with the government taking over the supply chain of petroleum products in the country after slashing middlemen, “but they will remain elevated and may take some time to cool off.” 

This is the “giant corporate tapeworm of inflation,” as renowned investor Warren Buffet put it in 1981, which eats away at a company’s revenue. 

Ultimately, as the balance sheets of Hima Cement and MTN demonstrate, this has compelled businesses to increase their expenditure on inventories. 

When a company increases expenses on inventories, this typically means it has put additional costs related to acquiring or producing goods for sale.  

The operations of some of the largest companies in the nation demonstrate that the best-positioned companies with strong pricing power are likely to emerge victorious in the war for profits. 

Airtel Uganda is playing the same game in its business model. It charges relatively cheaper fees for its services than its biggest competitor, MTN Uganda, to get a competitive edge. 

Business bosses are now expected to mull a couple of brilliant strategies that generate extremely high profits. Some involve passing on the cost to customers, similar to how banks handle the cost of borrowing to cover business risk and Jumia Uganda handles the logistics of food and merchandise. 

But that is glaringly uncomfortable for customers, who may finally decide not to spend when prices go up, which would cost the company money and market share. 

Mr Steven Asiimwe, the Private Sector Foundation Uganda (PSFU) chief executive officer, believes the winners will ultimately be the firms with strong pricing power either because they sell essential products whose demand is sturdy or because they have brands that customers trust and value. 

“Consumers will take essential products with higher regards than any other product due to the tight purchasing power they uphold,” said Mr Asiimwe. 

Even though the nation has been intimidated by its contentious anti-homosexuality law, which was rejected by the US and the World Bank and further resulted in travel restrictions and the country’s withdrawal from the African Growth and Opportunity Act (Agoa) trade agreement, Mr Asiimwe is hopeful that the Non-Aligned Movement (Nam) summit has already brought the nation the benefits of an abundance of infrastructure, such as hotels and roads.

‘Inflationary pressures’

Simmering geopolitics, a global pandemic, high taxes, and cautious consumer spending have made anyone who has led a business in the past five years or so feel like they’ve seen it all after traversing multiple ups and downs. 

Consumers are already reeling from the inflation that raised the prices of commodities and services, which haven’t declined since. 

According to Bank of Uganda data, inflation has actually cooled off from the highs of 10.2 percent in October 2022 to the lows of 2.5 percent in November 2023. 

But this has not affected consumers because many commodities’ prices have remained high despite a slowdown in the rise in the cost of goods and services. 

Hima Cement revealed last month that its expenses for 2022 had risen by over Shs43.7 billion. The company, for instance, experienced a transport cost overrun of Shs4.3 billion between 2021 and 2022, which severely hurt its profits. 

Hima’s parent company, Bamburi Cement, has been investing billions in the local subsidiary, which has faced challenging operating conditions due to high costs for its supply chain and expensive raw materials. 

Swiss Holcim Group eventually acquired the company for a $120 million valuation. 

In the midst of the pandemic, when spending was at an all-time high due to mid-term access guarantees, and an increase in financial institution loans, companies enjoyed a flood of cash from consumers. 

Some of the local businesses saw their profits soar as a result. For instance, MTN Uganda’s profits in 2021 increased to Shs340.4 from 2020, a gain of Shs20b. The amount increased to Shs406b in 2022.