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Typography

Emerging market Economies have been an engine of global growth during the 2000s, especially after the 2007-08 global financial crisis. However, times are changing.

Growth rates in many emerging economies have been declining. And the global economy will need to adapt to a new period of more modest growth in large emerging markets characterized by lower commodity prices and diminished flows of trade and capital.

Global growth fell short of expectations in FY2015 declining from 2.6% in 2014 to 2.4% in 2015 due to continued growth deceleration in emerging and developing countries.

Advanced Markets

Recovery in the high-income countries gained traction last year supported by high domestic de­mand as labour markets heal and credit conditions improve. In the U.S, growth for 2015 is estimated at a post-crisis high of 2.5% despite a slowdown in their net exports due to the strengthening of the dollar.

In the Euro Area, growth picked up in 2015 as domestic demand strengthened and exports acceler­ated. Growth is estimated at 1.5%.

In Japan, GDP growth is estimated at 0.8% in 2015 characterized by a contraction in private consump­tion and stagnant investment.

Emerging Markets

In developing countries, growth in 2015 was estimated at a post-crisis low of 4.3% down from 4.9% in 2014. In China, sectorial re balancing became more pronounced and was accompanied by bouts of volatility in financial markets.

Growth is estimated at 6.9% in 2015 down from 7.3% the previous year. On average, activity in emerging and developing commodity exporters stagnated in 2015, as they continued to be hard hit by declining commodity prices.

Outlook

Global growth is expected to pick up, albeit at a slower pace reaching 2.9% in 2016 and 3.1% in 2017-18. The pickup in growth is predicted on continued gains in major high-income countries, a gradual tightening of financial conditions, a stabilization of commodity prices and a gradual re balancing in China.

Economic growth - GDP

Quarterly GDP grew at 1.4% in the fourth quarter of 2014/15 compared to a growth of 1.7% in the third quarter. Year-on-year, real GDP at market prices is estimated to have grown by 5% in FY 2014/15 compared to a growth of 4.8% for FY 2013/2014. The main drivers of growth in FY2014/15 include Food crops production, Manufacturing, Financial and Insurance and Real estate activities.

Sectorial Performance

Value added growth for the agricultural sector remained at 3% for FY2014/15 with the major contributors to growth being food crops growing activities and livestock. The overall contribution of this sector to GPD was estimated at 22.6% in FY2014/15.

The Industry sector grew by 7.9% compared to a growth of 3.9% recorded in the previous year. This was due to improved growth in mining & quarrying and manufacturing. This sec­tor contributed 20.4% to the overall GDP.

The services sector grew by an estimated 5.3% in FY2014/15 up from 4.3% the previous year. In this sector, administrative and support services registered the highest growth followed by finance and insurance activities.

Real economic growth is projected at 5.0% for FY2015/2015. Major risks to the forecast include slower growth in major emerging markets, further decline in global commodity pric­es; as well as reduced access to external finance for developing countries due to heightened perceptions of risk.

Interest rates

There was a significant rise in interest rates during the year but the rise was more pronounced on the short end of the curve.

Short term rates rose on average by 890bps while long term rates rose on average by 515 bps. At close of year, the yield curve was largely inverted reflecting the faster rise in interest rates on the short end.

During the first 3 quarters of the year, the size and persis­tence of the nominal depreciation of the Uganda shilling was more than anticipated.

Thus, despite the fall in global commodity prices, there were fears that inflation would rise at a faster rate.

In order to ensure that inflation converges to the medium term target of 5%, the MPC increased the CBR by 600 bps from 11% at the start of the year to 17% as at end of year.

MPC decision

During the first 3 quarters of the year, the size and persis­tence of the nominal depreciation of the Uganda shilling was more than anticipated. Thus, despite the fall in global com­modity prices, there were fears that inflation would rise at a faster rate.

In order to ensure that inflation converges to the medium term target of 5%, the MPC increased the CBR by 600 bps from 11% at the start of the year to 17% as at end of year.

Inflation exhibited an increasing trend during the year. Headline inflation was up 750 bps from 1.8% at the start of the year to 9.3% at close of year. The movement was mainly due to a high rise in Food Crops Inflation.

Headline Inflation

Inflation exhibited an increasing trend during the year. Headline inflation was up 750 bps from 1.8% at the start of the year to 9.3% at close of year. The movement was mainly due to a high rise in Food Crops Inflation.

Food & Core Inflation

Food inflation was up 21.32% y/y increasing from -2.7% at the start of the year to close the year at 18.6%. Core inflation exhibited a persistent increase through the year.

It increased 470 bps y/y from 2.7% at the start of the year to close the year at 7.4%. EFU inflation was up 10.16% y/y increasing from 2.0% at the start of the year to 12.2% at close of year.

Both Core and Headline Inflation were above the BOU medium term target of 5% for the second half of the year. The high rates are attributed to the sharp depreciation of the shilling and increases in food inflation. The tightening of the monetary policy stance by the BOU, however, helped slow down the rate of increase. Core inflation is thus, projected to peak at around 10% during Q3 of 2015 and then gradually decline towards the 5% target over the medium term.

Currency

Due to the strengthening of the dollar globally, many emerg­ing and developing markets have experienced depreciation pressures. The dollar is estimated to have appreciated more than 20% in nominal effective terms and 18% in real effective terms since mid-2014. The shilling, thus, experienced strong depreciation pressures in the first three quarters of the year. The Uganda shilling depreciated against a basket of curren­cies. The shilling lost 22% against the dollar y/y, 16% against the pound y/y, 9% against the Euro y/y, 8% against the Kenya shilling and gained 2% against the Tanzania shilling y/y.

The depreciation pressures were mainly due to elevated dollar demand from key sectors of energy and manufacturing, continued strengthening of the US Dollar, continued weaken­ing of the Current account balance and sentiments for a weaker shilling.


For more information about Financial Investment, visit UAP Offices located at Nakawa Business Park

or visit: https://www.uap-group.com/sites/uganda/Pages/Home.aspx

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