UGX: The Worst Is (Almost) Over

We expect that due to intervention by the Bank of Uganda (BoU), the shilling, which is currently threatening to reach record lows not seen since the end of June, will appreciate beyond the psychologically significant level of UGX2,600/US$. Indeed, the bank announced on August 4 that it intended to defend the value of the currency by selling foreign exchange on the market. The UGX2,600/US$ target represents a significant shift to the downside in BoU perceptions of an acceptable exchange rate, a shift which we believe is necessary given the shilling's persistent weakness over the past two months. Apart from open market intervention, the BoU Monetary Policy Committee (MPC) also announced a 100bps hike to the benchmark Central Bank Rate (CBR) in their meeting at the beginning of August (to 14.00%) in a bid to stave off rising inflation. This is also expected to support the currency over the near term.

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