Businesses will try and recover from the bruises they suffered from a tough 2016, although it will take some bit of acumen to overcome the lurking pitfalls that much of the year 2017 intends to serve up, writes JEFF MBANGA
Ugandan businesses will face a tight balancing act in the year 2017 as the debt hangover of 2016 continues its slow and painful attack on many of their profit margins.
At least two options will be available for businesses looking to survive in 2017 – cut costs by downsizing their operations or raise prices of their goods and services in a market where consumer expenditure remains soft. Both options are tricky and agonizing, but they are the only avenues to try and make up for the revenue lost in 2016.
At the end of it all, the performance of many businesses in the year 2017 will largely depend on how events play out in the economy; how much debt the central government will rack up through the central bank’s securities as it seeks to pay for its heavy bill of infrastructure projects, a factor that often times influences commercial bank interest rates; the level of fluctuation in the exchange rate market, which determines the price of key consumer goods such as fuel and electricity, among others.
For good measure of how tough 2017 could turn out, the Electricity Regulatory Authority (ERA) has already announced a 9.2 per cent increase in its annual base power tariff to reflect the movement of the dollar to the Uganda shilling.
While ERA considers other factors such as the rate of inflation and the costs the electricity industry incurs – 85 per cent of which are denominated in dollars – as it calculates the tariff, it is the foreign exchange fluctuation that carries more weight.
The increase in power tariffs is set to entice other manufacturers of products to adjust their prices too. The issue of power tariffs is bound to shade some light on the new captains of the electricity sector. Ziria Tibalwa Waako, the new acting chief executive officer of ERA; Stephen Isabalija, the new permanent secretary in the ministry of Energy and Mineral Development, and Proscovia Margaret Njuki, the designated incoming chairperson of the Uganda Electricity Generation Company Limited, will be in the spotlight over their plans to make power cheaper and more accessible.
And yet, power tariffs will not jolt the private sector any deeper than the interest rate on credit. As banks add up their 2016 annual figures, which are likely to be better than the 2015 numbers, they are likely to increase private sector credit marginally, with limited flows towards the real estate sector, at least in the first half of 2017.
High interest rates tend to hurt the real estate industry, where the more-affordable low-cost housing continues to be neglected, and thereby locking out many customers.
Facing the pressures of a tough 2016, a couple of banks will be tempted to expand their loan books and avoid another year of low performance. That temptation will be peppered by the limited sale of government securities as the central government seeks other avenues to finance its public expenditure outside treasury bills and bonds. When the yields on government securities, a lucrative market for banks, drop, interest rates on credit tend to follow suit.
The other factor that could attract more private sector credit could be the push by government to promote local content. This year presents the best chance for government to make good on its promise of promoting local content as key industries such as electricity and the oil and gas industry pick up.
Some progress is being made. Government has already allowed local cement producers to supply to a key power dam – the 600MW Karuma dam – stripping Kenya’s Savannah Cement Limited of the monopoly it enjoyed.
Expect more cement players to enter the market as government paves the way for local suppliers to key infrastructure projects. Local steel manufacturer, Roofings Limited, is already holding negotiations to supply steel to Karuma dam. ERA has also offered an olive branch to local players to supply the electricity industry and limit the influence of the dollar on the sector.
Local players will have a large market to supply to as a couple of infrastructure projects make preparations for execution. Access to land for the standard gauge railway is nearly complete; the paperwork for the issuance of new oil exploration licenses is nearly signed, while the Petroleum Authority has already issued a pre-qualification call to local suppliers who are interested in being included in national data base for the oil sector.
However, it is still a long way before the oil industry can get to the active mode it was in around 2010. This year, many oil companies will be engaged in the preparation work as they set up for what could be an active 2018. At least the construction of the two main oil-related infrastructure – the oil pipeline and the refinery – is not expect- ed to start before 2018.
If activity is what business people are looking for, then the telecom industry is the place to go. The profit margins are bound to narrow for the voice market as the telecom players seek for more opportunities in the data and the online phone payments.
The telecom industry is set to widen these online payments beyond borders, making it easy to send and receive money. The innovations for these products could spark off a price war, especially among the two main players, MTN and Airtel.
When it comes to the export market, Uganda’s tourism is set to be the most-watched segment, especially as more initiatives to promote local tourism grow. After an election year, Uganda’s tourism sector is bound to exploit the relative calm in the country’s political realm in order to attract more tourists.
With Rwanda and Kenya, Uganda’s main tour- ism competitors, heading for elections in 2017, the country has a good chance to lure more foreign tourists.
That will, however, depend on whether the region will be relatively peaceful. Tension in neighbouring DR Congo and South Sudan – both crucial markets for Uganda’s exports tend to affect the regional outlook, and therefore scaring away capital.