3 US banks collapsing? Ugandan policymakers should take note
What you need to know:
- Financial markets are increasingly interconnected and it’s hard for any country, let alone a small market like Uganda to decouple from the world.
It was a crisis foretold. A week ago, all was well in the US financial system. Since then, three banks (majorly start-up lenders) have collapsed, with Silicon Valley Bank being the most consequential one.
American regulators, aware of the gravity of the situation, have invoked “exception” clauses in their play book to insure deposits that weren’t earlier covered. Their hope is that it will tamp down on the panic and prevent a contagion. Given the size and influence of the US financial system, all regulators must harbour the same hopes. So sad that some “educated” folks have already connected the collapse to sanctions on Russia.
The collapse also raises concern that rising interest rates could expose vulnerabilities in the global economy as a decades-long era of cheap money ends.
Two International Monetary Fund reports warned of the risks. In December 2022, IMF bi-annual financial stability report flagged it.
Last month, the Economic Survey highlighted the risks of financial contagion. Step back and look at the context. Last year, the world witnessed the most synchronised monetary tightening in 50 years by way of interest rate increases.
The tightening also happened to be faster than commonly seen in earlier episodes. It took place on the heels of a build-up of private debt when interest rates were low, and a surge in inflation in 2022.
In short, it was the recipe for a perfect storm as these conditions make it more likely that poor investment decisions will be caught out.
On the face of it, Uganda is so vulnerable to international shocks given that a large proportion of its debt is external and borrowed in a foreign currency. Additionally, it would be unwise to drop one’s guard based on historical data. For example, IMF had pointed out that 2022 was a year in which many debt ratios improved globally. It was mainly because nominal GDP grew fast following a surge in inflation.
Moreover, one of the lessons of 2008 financial crisis is that there are often invisible links between the balance sheets of tightly regulated entities and others operating in a lax environment.
The convulsions in the Ugandan money market in 2008 took policymakers by surprise. Since the heightened risk to financial stability in the backdrop of increasing rates is a phenomenon backed by considerable evidence, it’s important for Uganda’s policymakers to be prepared and take note.
Financial markets are increasingly interconnected and it’s hard for any country, let alone a small market like Uganda to decouple from the world.
Phillip Kimumwe, [email protected]