BANKING INDUSTRY NOT OUT OF THE COVID WOODS

While banks in 2021 saw improvements – double digit growth in income and profits there was still some hesitancy to jump right back into business, as we saw the tail end of the Covid pandemic, according to an analysis of their annual results.

Total operating income was up 14 percent to about sh4.5trillion from sh3.9trillion in 2020 and industry profits were up 43.5 percent to sh1trillion from sh706billion during the same period. The bigger percent of these gains, about seven in every ten shillings of these, attributable to the top five banks by assets.

The five biggest banks by assets are Stanbic, Centenary, ABSA, Stanchart and DFCU in that order.

Interestingly the smaller banks while they saw their holdings in the risk free government securities jump eight percent, growth in their loan portfolios surpassed this rising 12 percent.

"The bigger banks the above suggests were more hesitant to get back into the game at the first sign of improvements in the economy, which came with the partial lifting of the lock down in June 2021. The figures showed that these banks easing out of government securities was only just matched by increases in their lending portfolios as a group....

This suggests that with full reopening of the economy earlier this year banks will be straining at the bit to lend to the more lucrative but riskier private sector.

Be that as it may the major challenge for the industry is he high cost of doing business. Most of the industry’s income, 73 percent was eaten up by costs, but again this average masked the huge disparities between the best and the rest, with the best on giving up 37 percent of their income and the worst spending 147 percent of what they earned, meaning they were loss making and had to dip into their shareholders’ pockets to cover the hole.

Interestingly embedded in this is the cost of funds for banks. While the industry average is three percent, measured by how much interest they pay on deposits, one bank’s source of funds is below one percent. The instituion with the priciest funds is 18.1 percent.

This is one figure and the disparities suggested therein, has major implications for bringing lending rates down.

A few weeks ago the Uganda Bankers Association (UBA) had a meeting to hear a report on how to lower their cost of doing business as a way to eventually lower lending rates to the public.

"While government increased borrowing has major implications for lending rates – why lend to risking businesses when government is borrowing at double digit rates? The bankers recognize their own high costs of doing business is not helping the situation....

While in the last two or so years the introduction of agency banking, mobile banking and ebanking have helped lower costs but these savings again have been hogged by the bigger banks. That being said more can be done by the bigger banks and the industry as a whole if there was more collaboration in infrastructure sharing – data centers, ATMs and the movement of cash around.

With the mobile money snapping at their heels – MTN and Airtel’s mobile money companies reported between themselves deposits of sh1.5trillion, which would have made them the seventh largest bank by deposits, there is a sense that collaboration rather than the current everyone-for-himself-and-the-devil- take-the-hindmost will account for the smallest bank but also weaken the industry’s ability to fend off the mobile money companies.

As mentioned earlier government borrowing continues to hold up lending rates but also are some regulatory requirements, like the insistence that every bank have its own infrastructure, means there is only so much the banks can do to bring down lending rates.

"It goes without saying that the health of the banking sector is critical to the smooth running of the economy. Its increasing profitability suggests there is plenty enough to go around....

The mobile money sector has stepped in to do what banks couldn’t do with their huge cost bases, which is to increase financial inclusion by reaching us where we are whenever we want.

The future of banking may very well be that they cede the personal banking space to the mobile money companies and the fintechs and provide the upstarts with the wholesale banking services that they need.

The Bank of Uganda has already signaled that it makes little sense to persist with the dated brick and mortar model of opening branches to reach customers. But with the pervasiveness of the mobile phones now, there is more than 60 percent mobile phone coverage, even when accounting for people with multiple accounts, the agency bankers are just place holders for an eventual total digitization of the financial sector.

Arguably Covid hastened this progression.

It is possible therefore that by the time the banking industry is ready to get back fully on their feet they will come up to the realization that the industry has moved along and some very hard questions will need answering.

TO SAVE THE ENVIRONMENT EACOP MUST GO ON

I had a déjà vu moment last week seeing some breathless young lady accost French President Emmanuel Macron entreating him to stop the development of the East African Crude Oil Pipeline (EACOP).

The EACOP is the 1400 km pipeline that will evacuate Ugandan oil from western Uganda to the Tanzanian port city of Tanga.

The earnest young lady explained that the pipeline (As if Macron does not know) that the pipeline would encourage the use of fossil fuels which are major driver behind climate change, whose effects are manifest in droughts, floods and even the increased frequency of sand storms the middle east is suffering currently.

It took me back nearly 20 years when all sorts of activists jumped out of the woodwork to protest the development of the 250 MW Bujagali dam. Led by the local agents of an NGO called the International Rivers Network.

The anti-Bujagali lobby argued at the time that damming the river would displace hundreds and destroy the scenic beauty of the area.

"So that time they could not hide behind climate change, especially since hydroelectricpower is one of the most ecofriendly energy sources, they argued for scenic beauty...

One local activist was quoted as saying at the time, "The real issue in Uganda is not electricity but poverty. Currently the majority of Ugandans have no money for electricity, for they are below the poverty line. Production of more electricity will not reduce use of fuelwood and charcoal until deliberate programs are evolved to reduce poverty and the cost of power."

Since Bujagali came on line in 2012 – the world has not collapsed around our ears, but in fact, more than a million households have been hooked up to the grid. Those are a thousand families who left to find their own devices without electricity, would have used kerosene lamps or diesel generators for their lighting at night or used more charcoal in their kitchens and would have been less productive.

Access to power is just below 50 percent today but this is a far cry to the just over five percent of the population who had access to power before Bujagali came online.

It would be interesting to see how much more economic activity has resulted from this development and further still how many people were lifted out of poverty or at least saw their incomes increase as a consequence.

I want to bet that the Bujagali activists now live in houses – they probably built with their paychecks from the campaign, powered by the dam fought so vehemently.

"The anti-Bujagali activists were dead wrong then as the anti-EACOP campaigners are today....

In fact, to stop these developments will be to damage further the very environment they claim to be seeking to protect.

Because it is true that in our part of the world the biggest cause of environmental degradation, is not the fat cats who are reclaiming wetlands for construction, but the poor who have decimated 90 percent of our forest cover in search of new farmland and firewood for their survival.

The history of poverty eradication is quite clear. Countries interested in doing so, exploit their natural endowments to create economic activity, which leads to a rise in incomes across the board and therefore reduction in poverty. In some countries they have done it so well they have surplus resources to bankroll a welfare state, where everyone is entitled to an income in or out of a job. This did not happen by wishful thinking.

"Because we do not have the luxury of enslaving people or colonizing other countries to push economic growth, we have to employ what we have, that is our natural resources and our people. Our confusion about how to do this – due partly to the handsome paychecks from foreign environmental lobbyists, means we are not even doing a good job on this front.

That being said the exploitation of these resources can be done in a way that does not cause irreparable damage to our environment. As it stands now voluminous environmental impact assessments have been carried on the project and provisions have been put in place to mitigate against the damage to the environment to the extent possible. This is not the Niger delta.

If we are truly sincere about conserving the environment we should be poring over these reports to ensure every possible measure was taken to conserve the environment.

The increased revenues to government and to the private citizens involved in the industry, have the potential to improve the provision of public goods and social services that will give more and more people a chance to climb out of poverty.

You do not fight poverty by dishing out money at street corners but by empowering people through better education and health to take advantage of and to create new economic activity.

So if to banish poverty takes the exploitation of our natural endowments and some do-gooder, clearly who knows better than us what is best for us, is fighting this time tested progression, you have to wonder what their intentions are.

"To be charitable to them I would say they are ignorant parotters of slogans on an issue they have no clue about (African poverty), he more cynical view would be that, it is in their interest to remain in our state of under development so our living standards do not rise to their level, because they would have to better share the globe’s resources...

The latter is the conspiracy theory I choose to favour.

 

SRI LANKA, A CAUTIONARY TALE FOR UGANDA

A week or two ago I was shocked to find that diesel was selling at a higher price than petrol at the pump. This reversal I have never witnessed in all my years of driving.

That diesel is more expensive than petrol is cause for worry, as all our major transporters run on diesel. The knock on effect on prices is probably just beginning.

I have seen debate around the subject. A suggestion that is coming through is that government reduce or eliminate taxes on fuel all together, as a way to bring prices down. There are many reasons why this logic shouldn’t pass go but the best thing is to look to Sri Lanka to see what happens when governments bow to populism and forget basic economics.

"Following the elections in 2019 the Sri Lankan government set itself up for the current crisis by stopping the use of fertilizer, probably playing to the environmental gallery, instituted major tax cuts, which included the abolishment of Pay As You Earn (PAYE) and when the error of their ways became apparent went on a money printing spree and as a day follows night, inflation is now around 40 percent, digging them further into the hole they had already dug for themselves....

You can imagine the jubiliation in the streets of Colombo, as there would be in Kampala, at the announcement that government had abolished PAYE! The short lived cheap popularity has led to the collapse of the government, whose collapse was accompanied by the most riveting footage of angry protestors last week, rolling ministers’ cars into the river.

The repercussions of the ferterliser ban led to low food production, which has not helped the inflation situation. It also means the exports of their main crop, tea, have fallen off the cliff, leading to a collapse in foreign exchange reserves. This situation was so bad that last week the government announced on Wednesday they had only one day of fuel left, this despite the fact there was an oil tanker off the coast ready to offload its load but Colombo had no money.

What Ugandan populists ignore in calling for tax cuts, is that tax cuts will have to be matched by expenditure cuts. Already painful expenditure cuts are being effected as the economy tries to get back on its feet, to cut taxes further would cause more harm than good. And in fact like in Sri Lanka can lead to the collapse of the government, as frustrated Ugandans look to focus their anger. It would be foolhardy to believe what is happening in Sri Lanka cannot happen here. Which raises the question about the motives of these arm chair economists!

Thankfully the Ugandan government seems steadfast in its resolve to not to succumb to populism.

This is particularly important because the rising prices we are experiencing now are not as a result of runaway government spending but due to external factors, most especially the rising world oil prices and supply chain problems triggered by the two year Covid lockdown.

That means that the factors driving price increases are not in government’s control as it would be if the price rises were because of increased government spending...

If that were the case the quick fix would be for government to cut back on spending and for Bank of Uganda to put the brakes on banking lending. In this case those two remedies would send the economy into recession and more problems than we want.

It would be nice if government could give us some relief, maybe dish out a few shillings all around, that would only be digging our graves further but thankfully strapped for cash Kampala cannot afford that luxury.

There is pain all around, a liter of petrol barely gets us around, our waistlines are in danger as food prices soar and even – horror of horrors, we are getting less beer for our shilling.

The one thing government should, no, must do, is to continue to be disciplined its expenditure so as not to fan the flames of an already bad situation. It is called tough love.

If this can be maintained we will look back one day – a year or two from now and thank god we made the necessary, but hard decisions to stay the course of fiscal discipline.

That being said it’s a good time to take a long hard look at what we are spending cut out the excess, maintain the productive expenses – those that produce income. Because even this will pass.

 

CREATING JOBS, MUST BE JOB ONE

It was reported last week that two Ugandan ladies died in Abu Dhabi and in India. In the former’s case a real time video of her jumping to her death from the fifth floor of an apartment block did the rounds on social media. In the second case, while it was at first reported as a suicide, on closer scrutiny a more sinister reason was suggested.

Most people would rather work at home than abroad. The comfort of family and familiar environment compensate for higher pay abroad. So often when people go to work abroad its normally because circumstances have forced their hand. War, disaster, economic hardship, political and other persecutions could be the cause.

"Most of the Ugandan youth fleeing abroad do so in search of greener pastures and less for other reasons. They are voting with their feet, this economy is not able to sustain them in the way that they would want....

So we have seen hundreds of youth file out of the country every month to work in the middle east which has taken over from Europe and the US as the preferred destination for our immigrant workers.

So how come we cannot make enough jobs for our youth?

The private sector is the major driver of job creation. Its inability to create jobs means either that there is not enough economy activity to warrant its expansion and therefore greater job creation or they are automating processes therefore needing fewer workers as they expand.

There has been criticism of our economic growth over the last three decades, that while on paper it has been laudable – averaging about six percent a year, it has not come with the commensurate job creation.  This is particularly disturbing especially since our population doubles every 25 years and if we think we have problems it can only get worse before it gets better.

Every first Friday of the month, the US’ bureau of labour statistics reports the Non-Farm Payroll (NFP), as the name suggests the number of jobs created outside the agriculture. This is a major indicator of the health of the economy and its future prospects and is awaited with bated breath as it can affect the dollar price or whether the Federal Reserve increases or lowers its interest rate.

It is a recognition that whatever happens in the economy is about people. Numbers are good but they are useless if they do not translate into the improvement of people’s lives.

They say too, that what you focus on expands. BY choosing to focus on job creation as they do, it ensures that the policy makers ensure that any improvements in the macroeconomy are transmitted to the man on the street. You may question the success the US bureaucrats have had on this but at least they try.

In Uganda, like in the US, we have monthly reports on inflation, the state of the economy and every quarter we have other reports on the state of the economy, but we do not have a report dedicated to job creation, even annually. So if we are going to create jobs in this country this would be a good place to start...

We complain about our education system and how it is focused on rote learning and not skill development, but we forget that all job holders today have gone through that same system. While skills development needs more work, my thinking is we go to school to learn how to learn, especially in this age when knowledge becomes obsolete no sooner have you put your text book down.

Skills development is being pushed with the hope that future school goers can make their own jobs, but is possible that one can learn a skill and fail to create a job on a sustainable basis.

 A major oversight of many of this skill development programs is that they do not teach accounting or financial literacy, which would help these graduates monetise their skill.

An engineering graduate many years ago – things may have changed, once confessed that he knew everything there was to know about engineering but nothing about how to run an engineering firm. His firm lurched from job to job mainly on the strength of his salary, without that subsidy the clocking would be ticking towards the firm’s doom.

Government can go a step further and integrate financial literacy in the school curriculum as early as in primary school. 

"We are poor as a country not because we do not have resources but because we have failed to aggregate our resources, be they land, capital or labour, into meaningful wholes. Hardwiring financial literacy in our children early through a formal process may very well be a game changer...

That being said it maybe in the youth’s best interest to take advantage of the skilling projects being offered in the country before they head for the exit, so that at least when they go abroad they can be more valuable workers. As it is now many of the technical colleges around the country are struggling to enroll students.

WHY ELON MUSK WILL NOT COME TO UGANDA

Last week Elon Musk confirmed his intention to buy social media app, Twitter. He is willing to commit about $43b (sh158trillion) to do the deal.

To put this in perspective, the GDP of Uganda is about $30b.

"Musk who is the richest man on the planet, was born in South Africa but has lived in the US since he went to university there. I saw him referred to last week, as the richest “African American”, which made me do a double take, but the logic is sound...

Musk in November last year was declared the richest man in the world with a net worth of $300b, the bulk of his fortune due largely to his 17 percent stake in electric car maker, Tesla.

This story got me to thinking, “What would it take to get Elon Musk to invest in Uganda?” Not because I have any particular liking for the man, but one because he has his roots in Africa and because if we could coopt his mobilization skills we might be better off for his presence here.

I soon had to disabuse myself of the illusion. This is why, in order of increasing importance (maybe).

1.       Who will he partner with

While governments like to believe they are the main drivers of investment in a country the truth is businessmen look to their fellow businessmen on advice on whether to invest or not in a certain locality.

While governments like to push the high returns of investment one can make in a country, the businessman is more interested in the risk to the loss of his capital. Is the politics stable? Is the legal environment predictable? Can I get financing in country? Or if I source it outside the country how easy is it to repatriate, not only to pay shareholders but my financiers as well?

Given the size of Musk it may take a billion-dollar opportunity to just whet his appetite, the problem is there is only one enterprise of that size in this economy, so he does not have much of a reference point.

And often times while such investors can go it alone they will be comforted if some local businessman can have a sizeable stake in the enterprise, to spread his risk.  Businsessmen understand the power of numbers. There needs to be enough company in a country for the inevitable run ins with the government. If you are alone however big you are, you can be isolated and frustrated.

 

2.       Why Should he care

Related to the first point it is local entrepreneurs that are willing to forgo massive returns elsewhere to invest at home. They have an emotional attachment. So a local investor will brave inadequate transport networks, intermittent power and corruption to invest at home. Musk has no emotional attachment to Uganda so that is that.  He has just broken up with his latest girlfriend, so who knows?

 

3.       We seem to have serious governance issues

In recent weeks the headlines have been captured by the questionable deal done by one Vinci Coffee Company Ltd (VCCL) and the effect it’s going to have on the coffee industry. The government has signed off on the deal but the noise being made around the deal might mean its dead on arrival.

Opposition to investment plans by local communities is not unique to Uganda, but if even the government is split on a deal (collective responsibility be damned) potential billionaire investors will wonder what will happen when they get the concessions they need to make the investment viable get shot down by the chattering masses.

People like Musk don’t accumulate the billions they have by being casual about the odd dollar or so, they get to where they are by watching every penny.

4.       Where is Uganda?

I left this for last although in Musk’s calculations it will be at the top of the list. For a man with a net worth ten times the size of the Uganda economy. As pointed out above, for an investment to make sense for him it will most definitely have to be a billion dollars and even then it would be a stretch.

A billion-dollar investment even with an unrealistically generous 50 percent return on investment would amount to less than 0.2 percent return on his total portfoilio. Uganda would have to bend over backward – maybe give him all of Lake Victoria for him to even go beyond the cover page of such a proposal.

But maybe all may not be lost. Its possible that Musk is invested in some venture capital or hedge funds so that is how we might get a bit of his money to our shores.

But who cares anyway whether Elon Musk invest in Uganda or not? The point is the same criteria he will be looking to tick off are the criteria investor local or foreign would be looking at. How do we stack up? Not very well given the cowboys we are attracting to our shores.