Uganda's economic growth slowed to 3.4% year on year in the third quarter of 2013, according to official statistics.
IHS Global Insight perspective | |
Significance | The third-quarter 2013 GDP report for Uganda showed a slowing of economic growth compared with the first half of last year when the economy expanded by 5.6%. |
Implications | The sharper-than-expected slowdown, due to a contraction in the volatile agricultural sector, is likely to lead to IHS making a marginal reduction to our 5.9% GDP growth estimate for 2013 as a whole. |
Outlook | IHS is forecasting the Ugandan economy to accelerate to 6.4% GDP growth in 2014, as investment spending gathers pace. |
The Ugandan economy grew by 3.4% year on year (y/y) in the third quarter of 2013, which represents a relatively sharp deceleration following a 5.6% expansion in the first half of the year, according to data released by the Uganda Bureau of Statistics (UBoS) on 30 December. While the data will be subject to probable substantial revisions, the sharper-than-expected slowdown is likely to prompt IHS Global Insight to marginally lower our 5.9% estimate for Ugandan GDP growth in 2013, after having raised it on the back of the strong data in the first half of the year.
|
The breakdown of the GDP data released by UBoS showed that the slowdown in economic growth was largely due to the highly cyclical agricultural sector, due to unreliable rainfall during the first crop season of the year. Food crops production contracted by 7.5% y/y while cash crops, dominated by coffee production, continued to expand at a double-digit rate. However, this 12.3% y/y growth rate in the third quarter of 2013 was increased by base effects from the contraction in cash crop production in the second half of 2012. Nonetheless, the overall growth rate in the primary sector, which also includes livestock, forestry, and fishing, shifted back to red figures (-2.5% y/y), after having gone from -0.5% in the third quarter of 2012 and -1.6% the fourth quarter of 2012 to 4.5% and 3.8% in the first quarter and second quarter of 2013, respectively.
Both the industrial and service sector contributed to the slowdown in economic growth. The industrial sector slowed from 4.5% and 5.0% in the first quarter and second quarter of 2013, respectively, to 4.3% in the third quarter, led by construction-sector growth dropping from 5.3% and 4.9% to 3.2%, in the corresponding periods. Service-sector growth slowed from 6.2% and 6.0% in the first quarter and second quarter of 2013, respectively, to 2.8% in the third quarter. The slowdown was in large part due to growth in post and telecommunications slowing from an average of 23.2% and 18.5% in 2012 and the first half of 2013, respectively, to 2.3% in the third quarter of 2013 as the effect on output from last year's price war wore out. In addition, the hotels and restaurant, public administration, and other business services sub-sectors all dropped into negative growth rates, reducing their contribution to headline GDP growth from 0.8 percentage point (pp) in the second quarter of 2013 to -0.1 pp in the third quarter.
Outlook and implications
The GDP data released by UBoS should be interpreted with some caution due to the likelihood of future revisions. Nonetheless, the GDP data for the third quarter of 2013 showed a sharper-than-expected slowdown following the strong performance in the first half of the year. This was largely due to the agricultural sector, which was affected by unfavourable weather. However, we continue to connect the slowdown in the construction sector in 2013 with the difficulty in moving ahead with the 600-MW Karuma hydropower project, which is set to become Uganda's flagship infrastructure project following the commissioning of the 250-MW Bujagali dam in mid-2012, and other infrastructure schemes. As a consequence, the commencement of work on the Karuma project in September 2013 and the expected beginning of construction on the 188-MW Isimba plant in January should give momentum to economic growth in the fourth quarter of 2013 and 2014. A reduction in commercial bank lending rates should also support investment expenditure in the private sector, although increased government borrowing due to the suspension of external budget support has put a floor under interest rates in recent months.
On the service-sector side, we expect the contribution from the transport sector to continue to be weighed down by a reduced contribution from the post and telecommunications sub-sector, which grew by a breathtaking 26.0% y/y on average in the four quarters of 2012 as lower telecom rates underpinned a sharp growth in airtime. We expect this structural slowdown to be partly offset in 2014 and 2015 by increased activity in road and rail transport, which grew by a paltry 0.6% in 2012, according to UBoS. Other parts of the service sector, which in total accounts for more than half of the overall economy, are likely to continue to suffer in the near term from the continuation of a forced tightening of fiscal policy, in spite of the improved execution of the budget in the third quarter. As a consequence, the impact on government consumption from the suspension of budget support by key development partners is likely to be mitigated by an improvement in gross fixed capital formation. We expect this effect to gather in strength in 2014 as key investment projects, such as the Karuma and Isimba plants, begin to have an impact. IHS is forecasting Uganda's real GDP growth will continue to accelerate to 6.4% next year. Downside risks mainly emanate from renewed delays in investment commitments, a longer-than-expected extension of budget support suspensions, and a cyclical downturn in the agricultural sector.