Uganda shilling facing pressure as funding freeze effects kick in

Over recent weeks, the bond market in Kenya has been experiencing improved yield movements despite significant challenges facing the local currency. CNBC Africa recently interviewed Jibran Qureishi, the Head of Africa Region Economic Research at Standard Bank Group, to gain insights into the current economic landscape across Kenya and Uganda. Jibran Qureishi highlighted that in Kenya, there has been an uptick in bond yields, particularly driven by local investors. Yields have risen across the mid-end and long end of the curve, with some reaching as high as 18% in recent primary auctions. Additionally, T-bill yields are also on the rise, indicating a shift in the market dynamics. Qureishi suggested that long-end yields may need to stabilize, while front-end T-bill yields could rise further to support a more stable foreign exchange (FX) market. On the other hand, Uganda has seen fluctuations in government bond yields, particularly following the World Bank's announcement of suspending new project financing. Foreign portfolio investments have slowed down, leading to changes in bond yields. Qureishi mentioned a recent switch auction where the government converted maturing bonds into longer-term government bonds, resulting in complex developments in the market. When discussing the FX market, Qureishi highlighted that the Uganda shilling (UGX) has shown some stability post the World Bank announcement. However, factors such as interim dividend payments and subdued foreign portfolio investments have kept the UGX under pressure. Despite this, Qureishi expressed optimism for a potential stabilization or appreciation of the UGX towards the end of the year, driven by elevated real yields and improved market conditions. In contrast, the Kenya shilling has faced challenges against the US dollar, closing trading at around 147. Qureishi noted impending payments and dividend repatriations that could further impact the FX market. He emphasized the need for higher T-bill yields and complementary reforms to boost confidence in Kenya's FX market. While recent Central Bank of Kenya reforms may enhance interbank activity, Qureishi suggested a prevailing upside risk for the dollar-Kenya shilling exchange rate in the coming months. Shifting focus to inflation, Qureishi discussed positive trends following the appointment of a new central bank governor in Kenya. Inflation rates are expected to dip to the low 6 percent range, with potential further decline to high 5 percent levels by October. The governor's hawkish approach and favorable weather conditions have contributed to moderating inflation, despite recent tax adjustments. Qureishi commended the introduction of a new interest rate corridor by the Monetary Policy Committee as a positive step towards improving monetary policy transmission and inflation expectations. As the economic landscape in East Africa continues to evolve, insights from experts like Jibran Qureishi shed light on the intricacies of bond markets, FX dynamics, and inflation trends. While challenges persist, proactive measures and market developments could pave the way for a more stable and resilient economic environment across the region.