Donors, have always been a crucial component of Uganda’s budget supporting up to 25 percent directly to the Ugandan national resource envelope in 2012/2013 financial year. However, riled by deep rooted corruption in government circles, donors have indicated they are pulling back up to 93 per cent of their contributions, leaving government to walk the tight rope ahead.
Caught by surprise and against an ever rising domestic arrears, ministry of finance, swiftly moved and instructed Bank of Uganda to issue Ushs 200 billion bonds [3 & 5year of Ushs100billion each] for the “government to spend on roads,” according to Dr. Adam Mugume, BoU’s Executive Director Research. This move, was “un-scheduled” and way out of BoU’s more less predictable 5 treasury bills and 2 bonds auctions. Even though unscheduled, the bonds received overwhelming response- up to Ushs500billion in bids, emphasising the undying investor appetite for government paper.
This is probably the first time government is deviating from its bonds/bills for monetary policy stance, that has over the years met stiff expert criticism, questioning why government continues to borrow from external lenders to finance critical government projects, when they could look internally and borrow locally thus achieving a double gain eliminating the excess money in supply, but also financing the huge infrastructure gap. Uganda is not the only country in the region that is waking up to smell the coffee.
Kenya for example between September 2011 and February 2012, sold Kshs 37.2 billion (US$437.3 million or Ushs 1.14 trillion) of 12 year infrastructure bonds. The Kenyan government in August 2012 opened a tender for the design and construction of the first three berths at the all new Lamu port, to be financed by the annual sale of Kshs13 billion (Ushs 398.1 billion or US$152.8 million) of infrastructure bonds over five years.
The Lamu port is part of a $25 billion ambitious plan by Kenya to construct a second port, a crude pipeline and roads that will cement Kenya’s position as the region’s undisputed shipping and international trade logistics hub. Kenya is also in September 2013 expected to debut a US$1billion Eurobond, whose proceeds it will use to retire a $600 million syndicated loan taken out last year from Citigroup Inc, Standard Bank Group Ltd and Standard Chartered Plc.
Neighbouring Rwanda, in a bid to plug gaps created by dwindling donor aid in April 2013, issued a first Eurobond of US$400m which was oversubscribed. Rwanda will use $200 million to repay loans on the Kigali Convention Centre and a development plan for RwandAir, the national carrier, according to a copy of a prospectus obtained by Bloomberg News. Another $150 million will be spent completing the center and $50 million on a hydropower plant, according to the prospectus.
The East African country joins other sub-Saharan African nations including Nigeria, Zambia, Ghana, Gabon, Senegal and Namibia in selling international debt. Nigeria first issued $500m in bonds in 2011 and is now preparing another $1 billion of Eurobonds to finance power projects after meetings with international investors in June.
Desperate situation?
Unlike in other countries where the moves have been structured and planned for, the move by Uganda appears hurried and desperate. Both Dr Mugume and Finance ministry’s new Permanent Secretary, Keith Muhakanizi, have indicated there are plans to issue a Eurobond in 2014 even though details about the size and tenor are yet to be announced. Stephen Kaboyo, Managing Director, Alpha Capital Partners, notes that for Uganda to just rush and issue an unscheduled bond, is just an indicator of a desperate government; that “it sends the wrong signals to the market.”
For instance, it drove up the interest rate on treasuries bonds. He suggests that the government ought to stick to calendar bond issuances. Desertion by donors, has left the country in a hopeless situation. Whereas for example, government has indicated they need to increase spending from Ushs 11.7 trillion in FY2012/13 to Ushs12 trillion in 2013/14, with donors pulling back, government will not only need to raise the Ushs300 billion needed to meet the increased planned expenditure, but will also need to devise a different game to plug an estimated Ushs2.5 trillion gap left by the donors.
Already government has indicated that they plan to raise taxes so as to pull in an estimated Ushs 383.5 billion. These will include a Ushs50 increase in excise duty on petrol, expected to raise Ushs72.7billion, a one per cent increment in levy on income from telecom firms, projected to raise Ushs8.4billion, levies on international calls will bring in Ushs40 billion, a levy on mobile money transactions is expected to fetch Ushs48.2 billion while government fees from the Uganda Registration Service Bureau is expected to raise Ushs15billion.
There will also be a Ushs200,000 increase in motor vehicle registration, expected to raise Ushs7.2billion. Despite an uproar on the issue last year, the Finance minister has indicated, she will reinstate VAT on the supply of water for domestic use, expected to fetch Ushs 8 billion while improvements in tax collection by URA as well as general economic growth across the board, should bring in an additional Ushs159.5 billion.
But as it is, this is just a drop in the pond especially if the donors stick to their guns. This leaves government with 2 options: take corruption head on or start a wild chase for domestic and external loans, which could exacerbate our debt situation, which according to some analysts is bordering on unsustainable. However, economist and advisor to the finance minister, Dr. Fred Muhumuza says “we are cautiously making progress issuing a fiscal bond.” He adds, “We want to avoid crowding the market with bonds that commercial banks would take on, hence shutting out the private sector. There is also still a debt burden we have in terms of interest payments on previous bond issuances.”
But what Dr.Muhumuza considers to be a far greater challenge is the absence of projects to absorb the money once it is raised through bonds yet “you’d have interest payments to make”. “Ugandan government projects tend to delay for reasons beyond financing. Just because other countries are borrowing from the international market,” Dr Muhumuza says, “you don’t just borrow yet projects are not ready for development.”
The bond market always attracts investors locally and internationally. Locally, NSSF’s Richard Byarugaba is always looking for where to invest the trillions he is sitting on. Once bonds are issued, NSSF is always there to buy, but it can only get a minute fraction. The commercial banks also love the government paper considering they are low risk unlike the risky private sector.
Historically, most of Uganda’s bonds, have been oversubscribed because of the mouthwatering interest rates currently at 11.81percent and expected to reach 13.95percent in 2023, if the yield curve issued by BoU is anything to go by. Uganda’s credit rating according to both Standard & Poor and Fitch is considered stable at B+ and B respectively. Uganda’s rating matches that of Africa’s second largest economy, Nigeria, and East Africa’s largest, Kenya.
Additionally, Dr Mugume is quick to point out that Uganda still has the ability to pay considering they had maturities of Ushs800billion by the time they auctioned Ushs200billion in the unscheduled bond. With these maturities, some investors were already lining up to plough their money back into the government papers. Experts say that with Uganda’s bonds ranging from 2 year to 10 years, this is not long term enough to finance infrastructure or even deepen the financial markets.
There has been talk of introducing a 15 year and 30 year bond, but to date nothing tangible is yet to come through from both the finance ministry and BoU. Kelvin Kiyingi, Assistant Director Communications at BoU, says “Discussions are ongoing between the BoU and the Ministry of Finance.” Sam Omukoko, another bond expert in East Africa and MD for the Nairobi based Metropole Corporation Limited, at a recent Asset Backed Securities also pointed out that “government should take the lead to issue long term bonds and generate a yield curve used to determine interest rates.”
With government taking lead in issuing long term bonds, thus setting the benchmark yield curve, the private sector would take cues, thus gaining access to much cheaper credit. For example the current yield curve of 11.81 percent for the 10 year bond is more than half of the current average 24.17 percent interest on commercial bank credit.
As Uganda adjusts to the realities of reduced budget support by donors, the bond market is definitely an option. The government though has had the benefit of hindsight to structure bonds meant to finance various infrastructure projects. In as much as Dr Mugume says “we should not expect them [unscheduled bonds] regularly,” unless the negotiations to have scheduled project based bonds also are concluded, then this situation might come back, again and again.