Ugandan shilling posts losses as rating downgrade weighs on confidence

The Ugandan shilling lost ground on Monday as Moody’s downgrade of the country’s credit rating outlook to negative knocked market confidence and spurred a covering of short positions by commercial banks.

At 0933 GMT commercial banks quoted the shilling at 3,370/3,390, weaker than Friday’s close of 3,355/3,365.

“The depreciation is part of the market’s reaction to the downgrade,” said David Bagambe, trader at Diamond Trust Bank.

The downgrade “triggered short position covering in the interbank”, he said.

In justifying Saturday’s downgrade from stable to negative, Moody’s cited slowing economic growth, surging inflation, a weakening local currency and increasing debt levels.

The ratings agency also cited a growing fiscal deficit, fuelled by infrastructure spending, as justifying the negative outlook.

Uganda‘s headline inflation in October accelerated to 8.8 percent from 7.2 percent in the previous month.

Last week the International Monetary Fund (IMF) cut its growth projection for Uganda in the 2015/16 fiscal year to 5 percent from an earlier 5.8 percent on the back of tightening credit conditions.

Bagambe said the shilling was now likely to experience accelerated depreciation as the negative signals from Moody’s and the IMF drive a new wave of greenback demand by banks and importers.

So far this year, the shilling is 18 percent weaker against the greenback.

Possible political instability and capital flight ahead of a presidential election in February next year is also seen sapping the shilling in the coming weeks.