Blowback from Ukraine crisis could spark spike in Uganda lending rates

March 21, 2022 in Business, Financial Services, Foreign News, Markets, Policy by Editor

Fitch Solutions sees major combat operations  in Ukraine ending in  Q2 with the capture of Kiev by Russia

 

But that is unlikely to bring any relief to the global economy since it will be followed by even deeper western sanctions

 

Adding to the pain of a sharp rise in the price of consumer goods, Ugandan consumers could soon face higher lending rates as the central bank moves to insulate the economy from the fallout of the Ukraine conflict.  Global risk and industry risk research firm Fitch Solutions, predicts that central banks in many parts of the world will likely tighten monetary policy as they respond to a heightened risk of domestic and external shocks The conflict in Ukraine is driving up the cost of energy, global inflation and dampened export and growth prospects.

Western sanctions against Russia and tit for tat airspace restrictions will result in commodity supply constraints and a spike in prices for a broad range of raw materials.  This will cool growth and demand in major markets, dampening export prospects for emerging economies. A tighter monetary policy will smoothen out movements in inflation and exchange rate volatility such as the Uganda shilling has experienced in recent weeks.

A rise in the costs of crude oil, shipping and insurance will also drive-up prices, raising the risk of inflation. A net importer of refined oil products and intermediate consumer and industrial goods, for Uganda and East Africa, higher international commodity prices will be a pathway to higher inflation.

“We see inflation remaining persistent with potential for several central banks to tighten monetary policy more than the markets would expect,” says Joseph Gatdula, Fitch Solutions head of oil and gas analysis.

East Africa’s central banks had until now maintained single digit benchmark rates, with Rwanda and Tanzania having the lowest at 5percent while Uganda and Kenya’s are at 6.5 and 7 percent respectively. Rising inflation is also likely to worsen the flight of offshore investors from government paper, piling pressure on exchange rates. Meanwhile dampened demand and growth in major markets, will impact export earnings.

Fitch sees major combat operations in Ukraine ending in the second quarter with the capture of Kiev. But that will result in tighter sanctions that are likely to target Russia’s oil sector which has so far been spared. Even without sanctions however, supply will be impacted because western oil companies are self-sanctioning. For example, a recent decision by Shell to buy Russian oil resulted in a major backlash across western media, forcing the company to apologise.

There will be no windfall either for the region’s emerging energy producers such as Tanzania, Uganda and Kenya; from Europe’s reconfiguration of energy sources away from Russia because mature producers such as the United States are likely to soak up the bulk of the EU’s new demand for energy. Only Algeria and Egypt are likely to make early sales through existing pipeline networks that carry natural gas to Europe.

Fitch also projects prices for crude oil will max out in the $80-100 range, with Asia’s capacity to soak up stranded Russian crude taking time to develop. The bulk of Russia’s gas from western Siberia, will also remain stranded for some time because the transit pipelines there are configured to feed western Europe.

But more fundamental for the future oil market, are the measures Europe is taking to eliminate energy dependence on Russia. Decarbonisation efforts by the EU will over time, shift demand away from hydrocarbons – and potentially cause a glut that will drive down prices for oil.  Under its ten-point plan, the EU plans to break away from Russian gas, first by not renewing long-term contracts with Russia when they expire. These will save European countries the penalties in exit clauses. Opening up alternative sources will create a new market of about 30 billion cubic metres of gas annually.

But save for a handful of African countries, most producers are not ready to take advantage of this because they lack sufficient production capacity. Most of the benefits of any diversified demand will go the US which is leading investment in refining capacity for LNG. Some like Nigeria, also depend largely on imported refined oil products while Mozambique’s huge LNG project is behind schedule following disruptions by insurgents.

Another tier involves ramping up wind and solar to supply about terawatt hours of electricity. That will replace 6 billion cubic metres of gas annually. Other efficiency measures include replacing boilers with heat pumps to reduce quantities consumed.

Independent analysts also say, rising fuel prices and associated price increases for imported consumer goods, are likely to wipe out any revenue gains for African oil producing countries. Already facing 30percent higher costs for fuel, African airlines, most of them loss makers, will slide deeper into red from rising aviation fuel prices.