Is Uganda Falling Into a Deep Domestic Borrowing Hole?

Ugandan President Yoweri Museveni

Uganda’s central bank has rescheduled Treasury bonds worth more than Ush1 trillion ($269.5 million) that are due to mature this month, raising questions about government cash flow and the country’s borrowing plans in the local debt market.

While maturing Treasury bills and bonds are paid out to investors who hold them in their principal value plus a final interest payment, experts say that central banks enjoy discretion over adjustment of maturity dates for the bonds during times of financial difficulty.

Under the bond rescheduling arrangement, the Bank of Uganda (BoU) has provided new maturity dates covering an extra two-19 years for various Treasury bonds set to expire this month.

Though many people holding bonds are optimistic about the rescheduling, it is not clear if other bond maturities gazetted in 2021 are likely to be subjected to the programme.

“Dear our valued PDS, As you are aware, government is planning a bond switch auction in order to manage the refinancing risk posed by a bond of Ush1,024 billion that matures on January 21, 2021.

“ BOU is therefore contacting you on behalf of Government to: (1) establish how much of your current holdings on the Jan 21,2021 paper you would be willing to convert (2) establish which destination bond(s) would be your preference from these possible ones: 11 percent 13-Apr-23; 14 percent 18 Jan-24; 16.625 percent 27-Aug-26; 17 percent 03-Apr-31; 14.25 percent 22-June-34; 16 percent 14 Nov 2030; 16.25 percent 08 Nov 2035; 17.5 percent 01-Nov-2040 (3) Request you to reach out to your other clients who are holding the source bond for their possible participation in the conversion.

“The conversion will be done at market prices in the first week of January 2021 as per bids of the current holders,” reads part of an e-mail sent by BoU to primary dealer banks last month.

Signs of financial stress affecting Uganda’s Treasury amid the Covid-19 pandemic and the coming elections have been evident in correspondence from the Finance ministry to officers since last year. For example, a memo issued by the Finance ministry in November 2020 cautioned accounting officers about the reduced number of funding priorities considered by the government, which included defence spending, election expenditure and Ministry of Health emergency requirements related to the pandemic, in addition to salaries and wages even with scarce resources.

This development casts doubt on the execution of road and bridge construction projects planned for financial year 2020/21.

Suspended expenditure

Another memo reportedly issued by the Finance ministry last month ordered accounting staff in government ministries, departments and agencies to suspend expenditure for end of year staff parties and purchase of festive season shopping vouchers, among other items.

Some reports also indicate that classified expenditure — an item that caters for secretive spending incurred on sophisticated weapons, intelligence gathering and foreign military missions — has consumed roughly 60 percent of budgeted resources for this financial year so far.

Primary dealer banks refer to licensed lenders that are allowed to participate directly in Treasury bill and bond auctions organised by the BoU for their benefit, or that of other commercial banks or their clients. These banks include Stanbic Bank Uganda, DFCU Bank Ltd, Absa Bank Uganda Ltd, Centenary Bank Uganda Ltd , Bank of Baroda Uganda Ltd and Standard Chartered Bank Uganda Ltd .

A look at a bond conversion report issued by BoU last Wednesday shows the total value of converted Treasury bonds was Ush486.7 billion($131.2 million) with the 11 per cent 13-Apr-2023 repricing window, accounting for the largest share of investor uptake of Ush174.2 billion ($46.9 million) with an accepted yield of 16 percent.

David Sajjabi, BoU’s director for financial markets declined to discuss the matter when contacted by The EastAfrican last week.

Whereas some financial analysts say the bond rescheduling may not affect Uganda’s credit ratings in the short term, there are prospects of a slowdown in the government’s domestic borrowing patterns during the second half of 2020/21 as the Finance ministry comes to terms with consequences of massive borrowing at high interest rates.

Boosting liquidity

“BoU’s latest action is likely to boost liquidity levels by allowing market players room to lock in their previous investments in certain Treasury bonds instead of pumping new money into a Treasury debt auction. This bond switching arrangement is the first of its kind in the domestic debt market over the past 15 years.

“But I do not see any negative consequences for the issuer’s ratings in the aftermath of the bond switching. However, the government is currently facing serious liquidity challenges and this will lead to increased borrowing in the domestic debt market before the end of financial year 2020/21. For example, the government’s recent announcement that it would borrow an extra Ush6 trillion($1.6 billion) in this financial year pushed the yields earned on the one year Treasury bill to around 14 percent, while yields recorded on the two year bond rose to around 16-17 percent,” said Robert Mpuga, head of treasury operations at Bank of Africa Uganda.

“But I also expect the government to cut spending after the election season in order to minimise on its liquidity problems. This will lead to postponement of certain big infrastructure projects and scrapping of non-essential expenses. As a result, government’s domestic borrowing needs will slow down reducing ‘crowding out’ effects experienced by the private sector,” Mr Mpuga added.

Benoni Okwenje, general manager for treasury operations at Centenary Bank Uganda Ltd said, “The value of that bond tranche that matures on January 21, 2021, is too big by market standards and could pose huge pricing and liquidity management risks for BoU in the interbank market.

“This is because the average Treasury bond reissuance size lies in the range of Ush350 billion ($94 million) to Ush380 billion ($102 million) compared with more than Ush1 trillion ($269.5 million) in maturing bonds due to exit BoU’s portfolio this month.”

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