STANLIB UGANDA LIMITED QUARTER 1 2013 Economic Update Issue Date: 15 th April 2013 1
GDP Having come off a low base in the FY 2011/13, increasing economic activity, improved revenue collections, transparent public financial management systems and regional trade and favourable rainfalls are expected to drive growth in the current financial year. Latest economic data shows that growth slowed in Quarter 2 of FY2012/13 to 0.8% from a revised figure of 3.3% in the previous quarter. The slowdown in growth was largely due to a decline in value added for Agriculture, forestry and Fisheries which came in at -4.1% during the period compared to 5.3% in Q1 2012/13. This was further compounded by the reduced growth in the services sector from 5% to 1.5% in Q2 2012/13. There was a decline in value added for personal and community services and hotel and restaurant activities due to a reduction in tourism activities. However, the industrial sector which was the laggard in Q1 2012/13 rebounded in the second quarter to post growth of 0.9% from -0.1%. This growth was underpinned by a 2.1% growth in the construction subsector which has continued to post strong growth. Quarterly GDP Growth rates Source: Uganda Bureau of Statistics 2
Private Sector growth has continued to grow in line with GDP growth however Shilling loans have stagnated in light of the high lending rates on local currency denominated credit. Money in circulation has increased gradually over the past year attaining growth of 14.73%. This speaks to increasing buoyancy in the economy which will drive growth in the future periods. Money in circulation vs. Private sector credit Outlook Peaceful elections in Kenya and resumption of oil production in South Sudan are expected to augur well for Uganda s economic output. Improving economic indicators further support a positive outlook for better growth and a narrowing of the negative output gap. Inflation Headline inflation continued to trend downwards on a quarter-on-quarter basis with year ended March 2013 registering 4% growth compared to 5.3% reported in year ended December 2013. During the quarter, we saw inflation dropping to 3.4% in February largely driven by drops in the food index, energy, fuel and utilities index. Core inflation which guides inflationary targeting by the Central Bank continued to rise during the quarter however this increase was largely due to base effects as core inflation dropped in March 2012. Month-on-month, Headline inflation rose by 0.9% in March 2013 compared to 0.4% in February 2013 while the Core index in March 2013 increased by 0.4% compared to 0.9% in February 2013. Food crops experienced an upward rebound with the index registering a 3.8% growth in the month of March 2013 compared to a -2.2% 3
growth in February 2013. The monthly index had a significant increase for the first time since November 2012. Similarly, the monthly EFU index increased by 0.9% in March 2013 from a 0.2% decrease recorded in February 2013. A comparison between the food and non-food inflation in March 2013 shows that the monthly food inflation rate has gradually increased from January 2013 to the current reporting period of March 2013. Monthly Food vs. Non-Food inflation index Source: Uganda Bureau of Statistics We can see that the main driver of inflation during the Quarter has been Food inflation with the Food index increasing almost 200% while the monthly non-food index has halved during the same period. 4
Inflation Movements Source: Uganda Bureau of Statistics Outlook Having a significant portion in the Consumer price index, movements in Inflation will be sensitive to changes in food prices over the period. Interest rates Interest rate movements during the quarter were influenced by liquidity levels on the interbank with the banking system being awash with liquidity mainly from maturing repos and Government flows. The high liquidity condition was further compounded by the fact that auction sizes were kept constant (averagely 100 BN). With the excess interbank liquidity looking for a haven, interest rates on the primary auctions experienced significant downward pressures which filtered through to the secondary markets. On the short end of the curve, rates across the 182-Day and 364-Day treasury bills dropped by about 3 percentage points to 11.656% and 11.765% respectively while rates on the 91-Day Treasury bill remained flat at 9.6% during the period. Most demand on the treasury bills was seen on the 182-day and 364-day treasury bills with bid to covers ratios averaging 2 during the quarter, this spoke to the high liquidity levels chasing a small pool of assets. 5
In the middle of the curve, the 2 yr bond experienced a 300 basis point decline in yields from the last auction coming in at 12.3% while the 3 yr which auction early in the quarter saw the yield rise to 14.7% from 11.76% when it last auctioned in September 2012. The drop in rates filtered through to the long end of the curve with the 5 yr bond shedding 1.5% to register a yield of 13.8%. There was no auction for the 10 year bond during the quarter. UGX Yield Curve Source: Bank of Uganda BOU held its benchmark rate during the quarter at 12% largely due to the expected uptick in Inflation. Lending rates however remained sticky during the quarter with the weighted average lending rate remaining at 24.88% albeit the significant drop in the Central Bank rate and increasing availability of low cost liquidity within the banking system. 6
Market Interest Rates and Inflation Trend Source: Bank of Uganda Outlook The continued high liquidity levels expected to exert downward pressure on rates. Open market operations to guide interest rate movements during the quarter. Exchange Rates The quarter was characterized by impressive performance of export, subdued foreign currency demand and increased forex flows from abroad. Having come off a background of a depreciated currency on the back of donor aid withdrawal, Uganda s trade competitiveness abroad was enhanced by her weak currency position thus boosting exports during the period. The weakness in the economy continued to have an effect on imports with import demand being low during the period under review. During the quarter, the local unit strengthened against most foreign currencies with a 1.5%, 2.7% and 1.2% gain against the Dollar, Euro and Kenya shilling respectively. Bank of Uganda was very active in the interbank Foreign exchange market as it continued to buy dollars as per the trend in the last quarter to beef up dollar reserves. 7
Currently, Uganda foreign currency reserves have reached an all time high of $3BN on the back of aggressive participation on the forex markets, improved export revenues and increased flows from abroad. With the current level of reserves, Bank of Uganda can ably maintain stability of the currency and avert volatile movements in the local unit. Source: Bank of Uganda With expected resumption of oil production in Southern Sudan, there could be increased foreign flows into the country underpinned by the fact that Southern Sudan was one of Uganda s biggest regional partners prior to the halt in production which would outstrip foreign currency demand thus leading to a strengthening of the local unit. 8
Exchange rate movements Source: Reuters Outlook We expect the local unit to trend within 2500-2650 levels against the US Dollar. Expected Increases in economic activity to exert downward pressure on the shilling. The currency will be supported on the downside by increased exports to Uganda s regional partners. Equity Market The USE All Share and Local Counter Indices were up 25% and 17% respectively during the quarter to close at 1,531 and 227.15 points respectively. This increase on the USE All share is partly attributed to the continued rally of the NSE-20 which affects the cross listed counters and the price increments of the largest counters on the local index which account for 80% of the market capitalization. The specific counters that drove growth on the LCI were UMEME, SBU, DFCU and BOBU. 9
On a quarter on quarter basis, market turnover increased 5.1% to close the quarter at Ushs.18.7BN. UMEME continued to dominate activity during the quarter accounting for 78% of total turnover with SBU accounting for 14.4%. The other counter with reasonable amount of turnover during the quarter was BOBU which saw high demand as clients sought to partake of the bonus share issue whose closure date occurred within the quarter. The three stocks accounted for 96% of total market turnover. The high activity witnessed across these counters was significantly driven by investor expectations of impressive company results. With SBU and UMEME releasing impressive annual results during the quarter with average dividend yields of 5%, the counters continued to witness strong demand. Market capitalization during the quarter increased 25% to Ushs. 19.52BN largely underpinned by cross listed counters and price increases on Local counters like UMEME and SBU which saw significant demand on the counters push prices upward. The price increments of the counters with the highest float of shares led to the 17% growth registered by the Local index which had historically traded sideways. Securities Exchange Index Performance Source: Uganda Securities Exchange Please see last page for full individual stock performance. 10
Outlook The ALSI will continue to track NSE-20 growth while the local index will remain sensitive to movements in stocks with the highest number of listed shares. 11
Uganda Securities Exchange: 27.March.2013 Securities Sector 27/03/2013 M-M YTD Market Cap P/E Ratio % Change % Change UGX BN 27/03/2013 BATU Consumer 2,266 0.04% 0.00% BOBU Banking 150 0.00% -46.43% CENT Investment 566 31.63% 42.57% DFCU Banking 1030 0.00% 0.00% EABL Brewing 9464 10.14% 3.67% EBL Banking 928 8.92% 16.15% JHL Insurance 7212 26.35% 27.42% KA Transport 333 1.83% 0.91% KCB Banking 1217 2.96% 19.43% NIC Insurance 35 0.00% 0.00% NMG Media 10,103 23.30% 29.69% NVL Media 600 0.00% 0.00% SBU Banking 25 0.00% 0.00% UCL Building 35 0.00% 16.67% UMEME Utilities 300 0.00% 0.00% 111.22 375.00 342.40 256.06 7483.89 3436.18 324.54 153.72 3590.36 14.14 1587.37 45.90 1279.72 31.50 487.16 5.04 13.56 10.39 8.33 23.11 10.93 6.41 1.43 10.74 1.10 25.99 11.89 10.52 52.08 21.18 Source: Uganda Securities Exchange; Stanlib Research Sources Stanlib Uganda Research Team IMF Policy statements BOU Annual reports Stanlib Uganda 4 th Floor, Crested Towers (Short Tower) 17 Hannington Road 7131 Kampala Uganda (: +256 312 224 589/634/322 Ê: +256 414 231116/230 608 customercare.uganda@stanlib.com Disclaimer This document was produced by Stanlib Uganda with the greatest of care and to the best of its knowledge and belief. However, Stanlib provides no guarantee with regard to its content and completeness and does not accept any liability for losses which might arise from making use of this information. The opinions expressed in this document are those of Stanlib at the time of writing and are subject to change at any time without notice. If nothing is indicated to the contrary, all figures are not audited. This document is provided for information purposes only and is for the exclusive use of the recipient. It does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. The recipient is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other Consequences, if necessary with the he professional advisor. This document may not be reproduced either in part or in full without the written permission of Stanlib. It is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under local law. Every investment involves risk, especially with regard to fluctuations in value and return. It should be noted that historical returns and financial market scenarios are no guarantee of future performance. Investments in foreign currencies involve the additional risk that the foreign currency might lose value against the investor's reference currency. 12