Taking a look at global debt for
households, firms and governments, it is glaringly in excess of 300% of
World GDP. This implies that debt is an imperative factor in leveraging
economic activity across the globe particularly where economic return is
foreseeable. However, in the global debt composition, there are a few
bad oranges in the basket. Turning back to Uganda, government is the
largest borrower from the domestic market, with an outstanding stock of
UGX 12.7 trillion in February 2017 compared total private sector credit
of UGX 12.1 trillion. Over the last four years, commercial banks have
increased their investment in government securities at an annual rate of
19% compared to growth in commercial bank credit of 13% (and slowing.
As of June 2016, commercial banks held 43% of the total government
securities.
Source: BoU Financial Stability Report FY 2015/16
The rest were held by NSSF (33%), offshore investors (10%) and others (14%). This trend suggests shrinking space for private sector borrowing due to heightened government borrowing, yet government employment accounts for about 6% labour force.
Private sector credit for Uganda as a share to GDP, a measure of financial depth at 15%, is low comparable with low-income countries - far below the Sub Saharan Africa average of 24% and over 40% for other regions (North Africa, East Asia, Middle East and Latin America and the Caribbean). The limited credit penetration reflects the quality and size of the private sector. That is why the banks that account for over 75% of the financial sector still hold substantial excess reserves (beyond the required levels by Bank of Uganda).The other telling sign is in the notable weakness in the banking sector. The loss making banks in 2015 were 5 including Crane bank (defunct now) and taken over DFCU. The level of non-performing loans (NPLs) reached 10% of gross loans in December 2016, twice the ratio in December 2015. Uganda has the second highest NPL ratio in East Africa after Burundi. The leading NPLs are in building and construction sector, the agriculture sector and trade services. While the agriculture sector accounts for 10% of the outstanding private sector credit, together with building and construction, they continue to account for largest composition of NPLs. This performance coincides with the tight economic conditions and slowing economic growth particularly in agricultural sector. The agricultural output growth has averaged less than 3% per annum since 2010, lower than population growth rate. On a quarterly basis, the sector output exhibited recessionary trend in 2015/16 - that is two consecutive negative quarterly growth. Also a slowdown in investment growth impacts negatively on building and construction, since 70% of the total investments in Uganda go buildings and structures. With such composition of investments, capital productivity is likely to slow further in long run.
On the supply side, financial sector assets as share of GDP also remain low at less than 50% of GDP, which is half the share in the aforementioned regions. Another important source of capital for the private sector is through equity markets either through listing or issuance of corporate bonds. Uganda's equity market remains small, illiquid and shallow with only 16 companies registered on the equity segment and 5 corporate bonds listed on debt segment of the Uganda Securities Exchange (USE). There hasn't been any activity on the primary market (initial public offers) since 2012, when UMEME was converted into a public company. The secondary market activity on USE remains subdued and registering annual total turnover less than 3% of GDP.
The Ugandan private sector is arguably small and prefers to stay informal. According to the last business census by Uganda Bureau of Statistics, more than 90 percent of businesses had less than 4 employees. Those entities are arguably not also covered by the insurance sector, which also remains rather small with a market penetration of less than 1% of GDP.
The Ugandan private sector is arguably small and prefer to stay informal. According to the last business census by Uganda Bureau of Statistics, more than 90 percent of businesses had less than 4 employees. Those entities are arguably not also covered by the insurance sector, which also remains rather small with a market penetration of less than 1% of GDP.
Overall, Uganda’s financial system is characterised by small and concentrated private bank-dominated financial systems, a large informal financial sector, shallow capital markets, high borrowing costs and underdeveloped long term savings, development banks and other financial institutions. Without pragmatically improving the general business environment and growing a substantial middle income class, the level of financial leverage for private will remain low. No more pussyfooting on structural and long term reforms.
The rest were held by NSSF (33%), offshore investors (10%) and others (14%). This trend suggests shrinking space for private sector borrowing due to heightened government borrowing, yet government employment accounts for about 6% labour force.
Private sector credit for Uganda as a share to GDP, a measure of financial depth at 15%, is low comparable with low-income countries - far below the Sub Saharan Africa average of 24% and over 40% for other regions (North Africa, East Asia, Middle East and Latin America and the Caribbean). The limited credit penetration reflects the quality and size of the private sector. That is why the banks that account for over 75% of the financial sector still hold substantial excess reserves (beyond the required levels by Bank of Uganda).The other telling sign is in the notable weakness in the banking sector. The loss making banks in 2015 were 5 including Crane bank (defunct now) and taken over DFCU. The level of non-performing loans (NPLs) reached 10% of gross loans in December 2016, twice the ratio in December 2015. Uganda has the second highest NPL ratio in East Africa after Burundi. The leading NPLs are in building and construction sector, the agriculture sector and trade services. While the agriculture sector accounts for 10% of the outstanding private sector credit, together with building and construction, they continue to account for largest composition of NPLs. This performance coincides with the tight economic conditions and slowing economic growth particularly in agricultural sector. The agricultural output growth has averaged less than 3% per annum since 2010, lower than population growth rate. On a quarterly basis, the sector output exhibited recessionary trend in 2015/16 - that is two consecutive negative quarterly growth. Also a slowdown in investment growth impacts negatively on building and construction, since 70% of the total investments in Uganda go buildings and structures. With such composition of investments, capital productivity is likely to slow further in long run.
On the supply side, financial sector assets as share of GDP also remain low at less than 50% of GDP, which is half the share in the aforementioned regions. Another important source of capital for the private sector is through equity markets either through listing or issuance of corporate bonds. Uganda's equity market remains small, illiquid and shallow with only 16 companies registered on the equity segment and 5 corporate bonds listed on debt segment of the Uganda Securities Exchange (USE). There hasn't been any activity on the primary market (initial public offers) since 2012, when UMEME was converted into a public company. The secondary market activity on USE remains subdued and registering annual total turnover less than 3% of GDP.
The Ugandan private sector is arguably small and prefers to stay informal. According to the last business census by Uganda Bureau of Statistics, more than 90 percent of businesses had less than 4 employees. Those entities are arguably not also covered by the insurance sector, which also remains rather small with a market penetration of less than 1% of GDP.
The Ugandan private sector is arguably small and prefer to stay informal. According to the last business census by Uganda Bureau of Statistics, more than 90 percent of businesses had less than 4 employees. Those entities are arguably not also covered by the insurance sector, which also remains rather small with a market penetration of less than 1% of GDP.
Overall, Uganda’s financial system is characterised by small and concentrated private bank-dominated financial systems, a large informal financial sector, shallow capital markets, high borrowing costs and underdeveloped long term savings, development banks and other financial institutions. Without pragmatically improving the general business environment and growing a substantial middle income class, the level of financial leverage for private will remain low. No more pussyfooting on structural and long term reforms.
No comments:
Post a Comment