Uganda’s Finance Minister, Syda Bbumba, was quoted on Bloomberg saying that the country would look to use surplus funds generated by oil production to invest in domestic and foreign financial assets.
The country will create a fund where oil receipts will be deposited, and any excess monies that are not required for budgetary purposes will be invested in the markets. These excess funds would be invested locally and potentially in international markets.
Often overlooked, as with the rest of East Africa outside of the regional powerhouse that is Kenya, Uganda is expected to reap the benefits of the significant oil find in the Lake Albert basin, west of the country. Following on from Shell’s abandoned exploration activities in that region 30 years ago due to falling oil prices and political tension, Tullow Oil (and former partner for the two blocks at Lake Albert, Heritage Oil Plc), returned to the basin and found large crude deposits with a confirmed 800 million barrels already discovered, out of an estimated two billion barrels in reserves. Only four other sub-Saharan Africa countries – Nigeria, Angola, Gabon and Sudan – have proven reserves of over two billion barrels.
The potential impact on Uganda’s economy of the discovery (commercial production expected to begin early next year) will be massive. The IMF is of the view that it is too soon to estimate precisely the impact of oil on the economy, as the timing, scope and pace of oil production will be a function of ongoing exploration and technical analyses. However, it does say oil revenues are likely to exceed one third of total government revenues and contribute 8% of GDP, and thus can be expected to alter meaningfully Uganda’s productive, fiscal and financial landscape.
If managed properly (there are already concerns around the awarding of contracts around the discovery) this should see Uganda’s pace of economic growth accelerating, thereby creating a larger middle class and broadening wealth creation. The progression of pension sector reform as well as the deployment of excess oil revenues into the markets should also create greater demand for equities, thereby providing support for a surge in share prices. Definitely one to keep an eye on.
Article written by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.