Uganda Business Forecast Report Q2 2008

Weak Infrastructure To Cloud Long-Term Growth Potential

Despite the signing of a permanent ceasefire agreement on February 23 between the Ugandan government and the Lord's Resistance Army (LRA) in Juba, Southern Sudan, we believe that the disarmament progress will be slow at best over the course of 2008. This is mainly because several preconditions for a successful permanent accord remain largely unaddressed and no concrete provisions for rebel disarmament and demobilisation have been made. Aside from the possible indictment of LRA leaders by the International Criminal Court, an internal power struggle within the LRA could complicate the peace process going forward. That said, Uganda's macroeconomic outlook is likely to remain positive over our five-year forecast period, with our 2008 and 2009 real GDP growth projections currently standing at 7.2% and 7.3%, respectively, (slightly up from an estimated 7.0% in 2007). Nevertheless, weak infrastructure, a worsening electricity crisis and limited access to credit will weigh on the country's growth prospects over the longer term.

Apart from the slow peace negotiations with LRA rebels, the Ugandan government will remain preoccupied with easing tensions between itself and the Democratic Republic of Congo (DRC) government along their shared western border. In fact, a potential conflict with the DRC would pose a far greater risk to political stability and investor confidence than rebel activity in the northern parts of the country. In our view, the overall conflict is likely to remain within the diplomatic realm.

Yet should the oil reserves in the Lake Albert basin turn out to be larger than initially anticipated, the two countries will need a solid political settlement in order to prevent a potential escalation of the crisis.

Uganda's current account deficit is likely to increase further to 6.6% of GDP in 2008, slightly up from an estimated 5.9% in 2007. In our view, surging import demand is likely to represent the main propellant of the shortfall over the coming years. Indeed, aside from rising international commodity prices (in particular crude oil), strong real GDP growth significantly raised the demand for capital good imports, which has led to a renewed uptick in the current account deficit since 2004. Considering that real GDP growth is expected to peak at 7.3% in 2009 and oil prices should remain relatively lofty, we forecast that the shortfall will decrease only slightly to 6.4% of GDP that year.

The Ugandan government announced in the beginning of February that it will lift a ban on exploration licensing after a new national oil and gas policy has been approved. In September 2007, the government decided to temporarily suspend all negotiations with oil companies seeking new oil exploration licences in the country until a coherent energy law had been composed and passed by the parliament. As well as clarifying the fiscal regime, the law is intended to ensure that the country's potential oil wealth does not become a curse. While the government has not released any details on what the new policy will entail or when it is likely to be approved, the energy ministry stated that it is hoping to launch a competitive bidding round before the end of Q108.