Ugandan Shilling expected to grow weaker by 5 percent

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ugandan-shilling

Patrick Mweheirwe, Stanbic Bank?s Chief Executive Officer (CEO) said the shilling is expected to depreciate by a further 5% before the end of this year, in addition to the 4% depreciation suffered in the first three months of 2015.

The depreciation of the shilling is attributed to among others the strengthening of the U.S dollar against other currencies, huge trade balance and increased demand of the dollar from corporate buyers and interbank markets.

?There will be a remarkable decline in foreign currency denominated loans this year because people have recognized that with a weak shilling, you cannot afford to borrow in dollars yet you earn in shillings,? Mweheirwe said.

He speaking during a media briefing to release the bank?s 2014 audited financial results at Sheraton Kampala Hotel. Speculation is rife that a strong dollar coupled with high election could weaken the shilling this year.

Some private sector players resorted to borrowing in dollars in 2012 when commercial bank prime lending rates for shilling denominated loans rose to 30%, compared to an average lending rate of 8% for dollar denominated loans.

Foreign currency loan extensions were at sh1.18 trillion much higher than shilling loan extensions of sh335b in the first quarter of the financial year 2013/14.

Mweheirwe noted that the volatility of the shilling is also expected to spark off an increase in inflation from the current 1.4% to about 8% by the end of the year.

?The biggest risk to borrowing in foreign exchange currency is that the borrower has to pay back in forex, so the local currency has to be stable,? Stephen Kaboyo of Alpha Capital partners says.

?Forex loans are good if the local currency is stable but if it depreciates, paying back becomes very expensive,? he added.

Kaboyo pointed out that the shilling is expected to remain weak, due to weak fundamentals, elevated seasonal demand and the global strength of the dollar in the international currency markets.

By 4pm last Friday, the dollar was quoted at sh2980/90 buying and selling respectively from 2,970/80 at the close of trading on Thursday.

The shilling weakened by 1% at start of the week as interbank demand for dollars increased before stabilizing towards the end as demand slowed while end of month dollar inflows started trickling in.

?We expect the shilling to trade within a broad range in the coming week as we approach the Easter holidays,? David Kamugisha of the Stanbic Bank global markets says.

He noted that a 2year bond was undersubscribed while the 5year was oversubscribed as the Central Bank injected shillings into the banking system. Many commercial banks had converted their shilling reserves into dollars causing a shortage of local currency.

Kamugisha pointed out that short term interest rates, at which banks lend or borrow from each other dropped by over 20% last week, offering short relief in the money markets in the short term.

?Inflation statistics will be released next week on Tuesday ahead of the Treasury bill auction that is slated for Wednesday where sh175b will be on offer for 91day, 182day and 364day Treasury bills,? he revealed.

Meanwhile, Stanbic Bank posted 32.5% increase in net profit from sh101.8b posted in 2013 to sh135b last year, according to the company?s audited financial statements for the period ended December 31, 2014 on the back of growth in net interest income, improved loan recovery, coupled with deposit and loan growth.

The bank?s loans and advances to customers grew from sh1.4 trillion in 2013 to sh1.6trillion last year while customer deposits increased from sh1.78trillion to sh2.13 trillion.

The growth in the loan book and deposits propelled interest income up from sh284.9b to sh313.5b over the period while interest expense trimmed from sh37.2b in 2013 to sh33.3b in 2014.

Interest income constitutes 57% the banks? earnings while non-interest income accounts for about 43%.

The bank reduced the impairment for credit losses from sh44.9b posted in 2013 to sh37.3b last year, thanks to the aggressive loan recovery and credit quality efforts.

Stanbic is the second bank to announce profit growth, after Dfcu Group, whose net profit grew by 19.5% to sh41.5 b in 2014 supported by an increase in income from loans, government securities and forex trading.

The bank?s managing director Juma Kisaame, however, said 2014 was a challenging year due to the high non-performing loans in the industry and exchange rate market volatility.

Mweheirwe, however, noted that loan quality in the banking sector showed some improvement last year, with the level of non-performing loans easing from 6.9% to about 4%.

Deposits in the sector also grew to sh13.3trillion from sh10.5 trillion while loans increased to sh9.2 trillion from sh8 trillion over the period.

Mweheirwe further noted that loss making banks have also declined from nine in 2013 to five last year.

Banks that made losses in 2013 include Global Trust Bank, Imperial Bank, United Bank of Africa, Ecobank, and GT Bank among others.

By Faridah Kulabako, Samuel Sanya & Benon Ojiambo, The New Vision

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