By Patrick Kagenda
From October 1 through 16, 2013, the United States federal government entered a shutdown and curtailed most routine operations after Congress failed to enact legislation appropriating funds for fiscal year 2014, or a continuing resolution for the interim authorization of appropriations for fiscal year 2014. Regular government operations resumed October 17 after an interim appropriations bill was signed into law.
The CEO Magazine, sought financial experts’ take on what would have happened to Uganda`s economy if the USA had failed to strike a deal to avert a default over its budget ceiling. At Uganda`s Stanbic bank, Mr. Benon Okwenje, the Fixed Income Manager Global Markets said, “ I think it’s safe to say that everyone expected the USA to cut a deal and sort out the budget ceiling debate.
What was in question was in what form it would take. Irrespective of what happened in the USA, the US Dollar is still the “world’s currency” and is considered a safe haven by most investors. The question that now arises is if not the US Dollar then what other currency?” Okwenje adds that from a general standpoint, a default by the USA would have led to the US Dollar losing value
against most currencies, especially the widely traded ones (G20 etc.).
In Uganda’s situation, “we would see less Dollar inflows on account of USA funded projects which would no longer receive money. Joint exercises with the USA military and things of that nature would also be scrapped. Looking at our currency, it would likely continue to strengthen as a result of the negative Dollar sentiment”. Okwenje further says “Since we are a net-importing country.
Our imports heavily outweigh our exports. As a result of this, we would have seen a reduction in inflation which in my view would benefit the economy more. For example, when we look at energy costs (fuel etc.), a stronger currency will lead to a reduction in pump prices which will eventually filter through to a reduction in other prices”. From a general perspective, “yes our exports will be more affordable but in my view, because we import much more, a stronger currency is more favorable. In addition to this, our exports are probably harder hit by a movement in global commodity prices rather than our exchange rate”.
At Alpha Capital Partners, the Managing Director, Mr.Stephen Kaboyo, a former bank of Uganda Director for Financial Markets said, “A US default would have had negative effects such as constrained credit flow, massive dollar depreciation and edging up of interest rates. In particular currency volatility in frontier markets such as Uganda would intensify, likely causing a retreat in real growth rates”.
Kaboyo adds that, “The US financial market being the deepest and the most liquid in the world, there would be dire consequences for US debt holders and future purchases and bond rates would rise and inversely prices would decline significantly and therefore affecting the value of the reserves of many countries in the world that invest their reserves in the US dollar”.
On the debate on an alternative currency in which Uganda could keep its reserves, Kaboyo says, “The debate of an alternative reserve currency has been ongoing. This will continue to rage on for the time to come. The US dollar will remain at an advantage given the size, liquidity and sophistication of the US financial markets. In my view, there is no viable alternative at the moment. The US dollar will remain as the centre piece of the global financial system for the foreseeable future”.
At the Ministry of Finance, Dr.Fred Muhumuza, the advisor on the budget said, “If the US had defaulted, there would be an impact on Uganda via the wider implications on the global economy, which would be expected to slow down as stock values would go down. There would be less demand and prices would decline”. “Also interest rates on American bonds would increase reflecting the risk on them, which would worsen the American debt but still attract some risk lovers to buy more bonds,” said Muhumuza. He adds: “Fact is the American economy is so big and people would still invest in it knowing the trouble will pass and payments would be resumed (This also addresses the reason why Uganda should continue holding reserves in American currency leave alone investing the reserves in American bonds). The dollar remains the global currency”.
Muhumuza further says, “Another argument is that the bulk of the American debt is held by American savers (individually and through Funds like our NSSF etc.) followed by China and Japan. That would lower the panic in the bond holders as the two big countries would not panic given that the bonds of American debt they hold is a small portion of their total portfolio. The US government would therefore have an option to prioritize payments of small bond holders especially those in America to mitigate the collapse of the domestic economy”.
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