Uganda shilling firms slightly

Oct 12, 2011

THE Ugandan shilling edged up slightly against the dollar on Wednesday ahead of a bond auction but traders said it could be undermined by a parliamentary decision to delay an oil deal that would have ushered in a $10 billion investment.

Reuters

THE Ugandan shilling edged up slightly against the dollar on Wednesday ahead of a bond auction but traders said it could be undermined by a parliamentary decision to delay an oil deal that would have ushered in a $10 billion investment.

Bank of Uganda (BoU) is scheduled to release results later on Tuesday of a three-year Treasury bond auction worth 95 billion shillings ($32.9 million) and yields are expected to rise on the back of a tightening in monetary policy.

The central bank of Uganda raised its benchmark interest rate by 400 basis points to 20 percent on Oct. 4 to curb high inflation.

That may encourage more foreign funds to come in to support the ailing local currency, which has lost 19 percent against the greenback in the year to date.

At 0820 GMT commercial banks in Kampala quoted the local currency at 2,875/2,885, marginally stronger than its Tuesday close of 2,880/2,890. One trader said the shilling could even cross the big figure of 2,900 on heavy dollar demand.

"I think the market is anticipating the bond auction to offer direction," said Faisal Bukenya, head of market making at Barclays Bank Uganda.

"Also the decision to delay the Tullow Oil deal and the whole debate in parliament is eroding confidence in the shilling and it's likely that we might see a depreciation after the auction."

Parliament passed a resolution late on Tuesday requesting the government withhold consent for UK explorer Tullow Oil's sale of stakes in local interests to develop oilfields until the country has all necessary oil laws in place.

The resolution also imposed a moratorium on all new oil licenses. Last year Tullow agreed to sell stakes in its Ugandan assets to Chinese group CNOOC and French oil company Total for $2.9 billion.

The company has been awaiting final government approval for the partnership, which is expected to unlock a $10 billion investment developing the oil sector into production phase.

"If demand for the dollar persists we might see the local currency cross the 2,900 levels today," said a market note from Stanbic Bank Uganda.

The Uganda shilling has dropped through a series of record lows this year, hurt by soaring inflationary pressures, high demand, speculative trading and euro zone debt and fiscal woes that have made investors wary of risk.

"We've been waiting for that Tullow money for a very long time and now we have this new delay, it obviously offers a very negative outlook and the current fundamentals are unhelpful," said Lucas Ocheing, head of treasury at Orient Bank.

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