If there was a better way to express the effects of a weak economy in 2015/16, the performance of the National Social Security Fund (NSSF) would make for a good analogy.
In what was a bag of mixed fortunes, NSSF’s investment returns were almost a replica of the weak economies within East Africa. This translated into a 12.3 per cent interest for members on their July 1, 2015 account balances, down from 13 per cent in 2014. The lower returns on some investments saw the after-tax profit of the Fund decline to Shs491b in 2015/16 from Shs641b in 2014/15.
This was reflected in the plunging of the stock markets in the entire East Africa that led to a drop in the value of shares that NSSF held as at end of June 30, 2016. The regional markets were specifically under pressure from investors who had been pulling back to investments in markets such as Uganda because of the decision made in Washington.
In December 2015, economists, bankers and financial analysts watched as the United States Federal Reserve raised interest rates for the first time in a decade. The US Fed raised rates to 0.25per cent, which meant higher low-risk returns for investors who would ideally be looking to buy more shares in East Africa’s companies.
According to Mr Stephen Kaboyo, the managing partner at Alpha Capital Partners, investors were forced to redirect the flow of capital from the frontier and emerging markets because the US was now an attractive market. This decision by the US Fed was reflected in the three East African economies.
“The massive liquidations by Africa-focused funds further exacerbated the effect of market declines as foreign investors were under pressure to meet withdrawals from their funds,” Mr Richard Byarugaba, NSSF’s managing director, told reporters recently.
In Kenya, they had a unique challenge that led funds to pull out and that was a result of the foreign exchange repatriation limitations in Nigeria. Nigeria made the decision to stem the flow of foreign currencies – the US Dollar mostly – out of the country to avoid the depreciation of Naira that was already being battered by low oil prices.
Mr Byarugaba explains that because of the economic turmoil in the Nigerian economy and inability of foreign investors to “withdraw foreign exchange, meant that Kenya became the ‘ATM’ for most foreign investors who wanted to exit frontier markets.”
The stock exchanges in Uganda, Kenya and Tanzania declined by 14.5 per cent, 15 per cent and 9 per cent, respectively.
Shs74b weak Uganda Shilling sinkhole
At the start of the 2015/16 financial year, Uganda was being projected to grow at 5.8 per cent. But by the time this projection was made during the Budget Speech in June 2015, there were already signs that it was an ambitious target. The growth target was then revised to 5 per cent but the economy eventually ended up growing at 4.8 per cent as businesses struggled to produce, import and export more because of high credit costs and low domestic demand.
All this appeared to have been catalysed by a weak shilling that depreciated from about Shs3,000 and by end of June 2016, it was around the Shs3,380 mark. In fact, it was during the 2015/16 that the Uganda Shilling weakened to historical highs against the Dollar. This depreciation was being driven by a mixture of factors including speculation, according to Bank of Uganda (BoU).
Additionally, the political environment in the run-up to the February 2016 elections also had investors worried that once again, the government would be spending like it did in 2011.
Furthermore, Foreign Direct Investment (FDI) is also estimated to have declined by $200m (Shs682.5 billion), depriving the economy of dollars for investment. All the above formed the greater problem for investors like NSSF. The volatile shilling meant that if NSSF were to invest in any Kenya and Tanzania, converting to their currencies would result in a foreign exchange loss. Those losses are valued at Shs74b, according to the NSSF.
“The Uganda shilling was volatile for most of the last financial year, depreciating at a much faster rate than other currencies in the East African region, negatively affecting Ugandan businesses and the economy,” Mr Byarugaba explained.
It should also be noted that the same weak shilling led inflation to rise and the result was BoU tightening its Monetary Policy by raising the Central Bank Rate (CBR). That explains the high-interest rate environment the economy is still facing even after BoU
Fixed income returns flat
Lending to governments has been lucrative for the last two financial years. This is because the rates had been on the high side as the commercial banks – and NSSF – preferred to lend to the government. The government securities were in part responsible for the rise in income at the Fund.
According to NSSF, treasury yields improved across all maturities, rising above the 17 per cent mark compared to last year at 16.7 per cent. This is almost a flat performance on the short-term government paper.
Additionally, NSSF had improved interest income from fixed deposit accounts held in commercial banks. Real estate and dividends also improved but because these were not enough to offset the troubles of the economies and stock markets.