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Year of mega infrastructure projects and related risks

It’s the politics, stupid! Nothing will be riskier to Uganda’s growth prospects more than the politics at play.

In what could easily be defined as the year of infrastructure take-offs, Ugandans will witness both the launch and commissioning of key infrastructure projects throughout 2018, in what is likely to lead to an expansion of the economy.

However, the recent amendments of key sections of the constitution are bound to carry political risks for the ruling party into 2018, as many Ugandans grapple with the prospect of a life-presidency.

While such political sentiments will easily hurt sensitive sectors such as tourism, a key export for the country, the large infrastructure projects could go on as if it is normal business.

The list of the projects is long. The Entebbe expressway, the Isimba power dam, the Kampala northern bypass, the new Jinja bridge, and a host of small renewable power plants such as Nkusi and Waki, are all expected to be completed and commissioned in 2018.

The Kampala-Entebbe Expressway is one of the projects set to be completed this year

On the other hand, the financing structure of some key infrastructure is set to be concluded in 2018, paving the way for construction to start. The final investment decision for the crude oil pipeline from Hoima to the Chongoleani peninsula in Tanzania is to be concluded in June 2018.

The Exim bank of China is also expected to commit funds to Uganda’s section of the standard gauge railway, while a financing deal for the construction of the oil refinery might be sealed before the end of this year.

Also, Standard Chartered bank and the United Kingdom Export Finance will, in 2018, put pen to paper on a combined loan facility of €307 million for the construction of the Kabaale airport in Hoima. The Exim bank of China will also commit nearly a billion dollars for the construction of 600km of roads in the oil areas.  

All this is colourful, considering these projects come with a number of trickle-down effects. One industry that enjoys the trickle-down effects is the real estate, which is going through some hardships.

With the industry struggling – a bag of multipurpose cement is now about Shs 27,000, from Shs 30,000 six months ago, while Hima Cement has witnessed a huge drop in profit, all because of a weakening in the real estate market – 2018 might come with a little bit of relief.

Still, the buzz around local content is expected to gain renewed momentum when construction of these infrastructure projects starts. There is going to be a push, especially from the private sector, to get contractors to hire Ugandans to supply goods and services to newly-launched infrastructure projects, such as the Kabaale airport.

At the end of it all, not many Ugandan businessmen will be able to offer goods and services to these projects, partly because credit to finance their businesses will remain high.

This infrastructure speed train comes with a plethora of risks. The obvious one is the public debt. A glut of imported equipment is set to widen Uganda’s debt burden, which, at more than 35 per cent of the country’s gross domestic product, is shifting closer to the East African cap of 50 per cent.

A country with an unsustainable debt burden finds it difficult to borrow money, as creditors push for higher interest rates to cover the risks. Also, a huge debt burden hits the local currency as foreign investors, in fear of an economy overburdened by debt, keep their dollars safely tucked in their wallets.

Uganda’s import bill, which far outstrips export receipts, is already high. With petroleum supplies still Uganda’s biggest import, the increased price of crude oil on the international market over the last three months, has started to get reflected on the local pump stations.

With global politics playing out – from tensions in the Saudi Arabian kingdom to the growing anxiety from Russia and in the Middle East – the price of crude is likely to further shoot up in the first half of 2018.

Banks are expected to keep their lending rates to the private sector at an average of 20 per cent in 2018 – quite high for many - partly as a result of covering financing costs and also meet expected appetite for credit from the central government.

While Bank of Uganda has managed to knock down its key rate, the central bank rate, to below 10 per cent, the rate could rise in the second half of 2018 if the central government borrows from the local credit markets to finance its budget.

New accounting rules for banks, where the international financial report standard 9 replaces international accounting standard 39, are meant to cushion the financial markets from default. Part of the requirements for the banks will be to hold more capital for partly the purpose of impairment provisions and capital adequacy. This could eat into their profit margins.

Already banks are facing tight margins, and many are expected to announce a drop or flattened annual 2017 profits over the next four months. While more banks are expected to sign up for bancassurance licenses in 2018, on top of engage in agency banking, it will take time for these new avenues to pick up.

Instead, new financial technology platforms are expected to gain traction in 2018 as online banking, especially over the mobile phone, picks up pace. Not many bank branches will be opened up in 2018 as banks carefully watch their costs.

Although the Uganda Revenue Authority is expected to become even more aggressive in collecting tax, as demand for money from the cabinet grows, the tax body will likely try to close revenue leakages than lure more businesses into the tax bracket.

All said, there will be quite exciting opportunities in 2018, which will see the economy expand by at least five per cent, as estimated by the World Bank. However, Uganda’s business environment being the jungle that it has now become, life will be all about survival of the fittest in 2018.

Twitter: @jeff_mbanga

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