Investor returns grow on increasing govt debt

Equity investors, particularly those involved in trading treasury bills and bonds have seen their returns grow, as government continues to borrow domestically, amid a tight monetary policy. 
In the three months to March, Bank of Uganda mobilised Shs4 trillion through government papers or treasury bills and bonds, which was 10.3 percent higher than the Shs3.7 trillion mobilised in the 2023 fourth quarter.

Thus, a report by Capital Market Authority (CMA) for the three months to March indicates that the increase in domestic borrowing is responsible for a surge in debt issuance, which included a private placement, in which government raised Shs1.2 trillion.
A private placement is when government directly sells bonds to a select group of investors like pension funds, insurance firms , or wealthy individuals, instead of placing a public offer.

Thus, investors have taken advantage of market dynamics to cash in on an increase in government’s domestic borrowing occasioned by a reduction in donor budget support, particularly by World Bank. 
Whereas government had slowed its domestic borrowing, it has slowly returned to the market. 
For instance, in the first and second quarter of 2023, it borrowed Shs3.3 trillion and Shs2.4 trillion, respectively, before borrowing another Shs6.6 trillion in the last half of 2023 and an additional Shs4.048 trillion in the first quarter of 2024.

Of this, State Finance Minister (General Duties) Henry Musasizi, said was to pay Shs2 trillion as a partial payment of Shs4.8 trillion held by government in domestic obligations due to Bank of Uganda, in addition to funding other activities at the Health Ministry, President’s Office and State House.  
   
“You recall that in order to support recovery of the economy from the slowdown brought by Covid-19, government expenditure was expansionary to provide a fiscal stimulus to various sectors of the economy. However, government was not able to fully fund its expenditures, accordingly, BoU met government obligations on domestic debt redemptions,” he said.  
However, the rise in domestic borrowing has gifted investors due to an increase in interest rates across all tenors.  

CMA data indicates that in the first quarter of 2024, average yields on the two, three and five-year bonds rose to 13.2 percent (from 13 percent), 14.9 percent (from 13.8 percent) and 14.6 percent (from 14.5 percent), respectively. 

Additionally, yields on the 10, 15, and 20-year bonds increased to 15.5 percent (from 15 percent), 16.3 percent (from 16 percent), and 16.8 percent (from 15.8 percent), respectively, driven by an “increase in demand for funding by government”. 
Analysts say that whereas the returns are attractive to investors, it is burdensome to government because it increases repayments committed towards domestic debt.  

The Uganda equity markets are also burdened by low participation, which exposes it to high exit rates, thus, yields must appeal to investors.  
Aeko Ongodia, the founder and chief executive officer Xeno, an equity investment company, says “fortunately, at least the debt is shilling denominated. It would be expensive if it was in foreign currency. Our debt sustainability levels have not reached crisis levels  ...  like it has for other countries such as Ghana and Zambia.”
During Covid-19 in 2020, Zambia became the first country in Africa to default on its sovereign debt. Since then, the country has struggled to reach an agreement through lengthy negotiations.

After debt servicing costs skyrocketed, Ghana also defaulted on majority of its foreign debt in December 2022 and also restructured majority of its domestic debt, while at the same time, it needed to strike a deal with private debt holders of approximately $13b. 
However, Uganda has refrained from taking on sovereign bonds because government believes it still has a manageable public debt, thus cannot risk taking debt measures such as the Euro bonds. 
Government has in the last two years sought to implement a conservative fiscal consolidation agenda to mitigate challenges of reduced donor funding. 

“We shall borrow as long as the cost is reasonable, if the cost is high, we shall not borrow and we shall have to live within our means,” Ramathan Ggoobi, the Secretary to the Treasury said in February.
However, government has turned to domestic borrowing as a safe haven and seems to be avoiding risks associated with offshore borrowing, which sometimes experiences drastic increases due to currency appreciations. 
Last month, the Parliament’s Finance Committee warned against the drawback of government borrowing on the domestic market, pointing out how ‘costly’ it is.

In a 2024/25 financial year budget estimate report, the committee noted that “government is increasingly undertaking domestic borrowing that accrues high interest costs, which prompted a consideration for swapping domestic debt in the 2023/24 financial year amounting to Shs1.86 trillion with relatively cheaper external debt of up to Euro 500m.
The committee notes the risk is now significant because Shs6.4 trillion of the Shs8 trillion in interest payments in the 2024/25 financial year is domestic.  

“This will exert pressure on the budget and constrain service delivery. Bank of Uganda estimates that for every Shs100 collected in tax, Shs32 goes to debt repayments,” the committee noted, recommending that “government slows down [domestic] borrowing as the cost of loans is so high and impacts private sector.”

Discipline
Implementing projects
Some analysts say they are not worried about the direction of the country’s financial situation, but are only concerned that government borrows money but delays to deploy it, thus incurring new costs. 
Corti Paul Lakuma, a senior research fellow and head of macroeconomics at Economic Policy Research Centre, notes that “borrowing is one way of financing and shouldn’t be an issue but the discipline part is paramount. I don’t think we are at risk of default. We just need to implement projects that we borrow for so that we avoid the risk of default. Here we shall get returns that will aid government in financing its debt obligations.”