What next for distressed companies?

Workers go about their work at a factory in Namanve. File photo

What you need to know:

Economists have warned that Uganda’s economy is distressed and needs urgent government intervention. A total of 66 companies and individuals with debts are looking for a cashbail out of Shs1.3 trillion. Mark Keith Muhumuza & Jonathan Adengo scrutinise the bailout plan that requires the use of taxpayer funds and what is likely to happen next

In June 2016, Mr Matia Kasaija, the Finance minister mentioned that some companies had approached the government for some “help.” Their complaint, according to Mr Kasaija, was that they were being pursued by commercial banks and their properties were under threat from bailiffs. The first move by the government was to make a provision of Shs188bn to clear arrears owed to the private sector.

Total arrears owed to the private sector are estimated at over Shs1.3trillion. However, the government had already secretly been meeting the distressed companies to work-out a plan on how to resolve their issues. Their first point of contact was Gen. Salim Saleh, who had offered to help them approach the government. By this time, the public knew almost nothing of what was going on. By May 26, 2016, the companies had reached an agreement with the Prime Minister, Ruhakana Rugunda on measures to boost “distressed local businesses.”

At the start of July 2016, Daily Monitor learnt that there was a list of companies that had made several requests to the government, requesting for a bailout. A week later, Kasaija confirmed to Daily Monitor that there was indeed, but he could not release it. On July 13, 2016, he also revealed there would be a cabinet meeting to find a way forward for the distressed companies. A week later, Daily Monitor was able to access the list of 66 companies from a source within the ministry of Finance.

Al the companies on the list do not want the same thing, some want government guarantees, others want the government to reign in on rampant high interest, clear domestic arrears and then recapitalise Uganda Development Bank. Some have denied ever seeking a bailout that uses taxpayer funds.

Taxpayer bailout
The ministry of Finance and other government technocrats have specifically rejected any position that requires use of taxpayer funds to bailout any of the ailing business. The troubled companies are facing problems of slowed demand that has resulted into less revenue to debts owed to them by commercial banks. The 66 companies and individuals have debts totaling Shs1.3 trillion. The companies have structured their demands to government without mentioning the word bailout. However, one of the proposed measures would require use of taxpayer funds.

“Ministry of Finance, Planning and Economic Development to initiate legislation on a temporary relief policy framework with a defined timeline that will enable Bank of Uganda to offer flexibility under prudential norms to both borrowers and banks as government finalises all the necessary legal framework/setting up of an Asset Reconstruction Company (ARC) to where most of the Non-Performing Loans (NPLs) will be transferred,” reads one of the measures being proposed by the architects of the bailout plan.

An ARC in most cases acquires the NPLs from commercial banks, repackages them and sells them off once they are packaged better. To set up an ARC, it would require some taxpayer cash injection. This would clean-up the bank balance sheets on one hand and reduce the burden of the borrower on the other hand. The principle around NPLs is that they’re measured over a period of 90 days, which some businesses consider a very short time. If the ARC acquires the NPL, it takes a much longer time for the asset be disposed-off, giving the borrower time to recover and pay the debt back.

Notably, the temporary relief that companies are requesting for is opposed by the Uganda Bankers Association (UBA). Already, NPL levels are at almost 7 per cent (about Shs670b) and commercial banks have also been spending to make provisions for bad debts.

“These provisions are expensive in their nature because they limit the flexibility for banks to lend to other borrowers,” says Mr Fabian Kasi, the chairperson UBA.

President Museveni, while speaking to Ministers and Permanent Secretaries at the National Leadership Institute (NALI), Kyankwanzi, revealed the desire for country to set up an Export Guarantee Fund to cushion the risk for exporting companies. To set up such a fund, it has to be through the use of taxpayer funds. According to Investopedia, such a fund provides “loans and insurance to such companies to help remove the risk of uncertainty of exporting to other countries and underwrite political risks and commercial risks of overseas investments, thus encouraging exportation and international trade.”

No systemic risk
The government technocrats from the Ministry of Finance and Bank of Uganda (BoU) who have been opposed to any form of bailout, point to the fact that the economic fundamentals in the country are still sound. In other-words, the distressed companies do not pose a significant risk to the economy at the moment.

“There are cases where you have very strategic private sector businesses. If you’re to bailout companies, they must be strategic businesses. Some people argue that there was a bailout in the United States in 2008 but we must debate in the circumstances they faced,” Dr Louis Kasekende, deputy governor BoU, said during the BoU 50-year anniversary town hall meeting in Mbarara last week on Friday.

“There were systemic risks for the US economy at the time. Where there are likely systemic risks, governments’ come in. If the whole banking system (in Uganda) was threatened, that is systemic, we can intervene,” he adds.

In the instance where the companies might need to be bailed out, if necessary, Mr Kasekende points out the need for having a criteria.
According to BoU, the currency level of NPLs has not put the banking sector at risk of leading to a collapse in the economy.

Revive activity in oil and gas sector
Several companies involved in the oil and gas sector as local service providers have liabilities of about Shs70b. The bankers have come calling. The loans to these companies have been restructured several times, according to several bankers.

“There is no assurance on when the oil sector will be productive again, so when restructuring a loan, where do you start? What year and date do you pick?” a bank executive told Daily Monitor in an off-the-record conversation.

Currently, there is no exploration or production going on in the oil fields in the Abertine Graben. Daily Monitor understands banks are ready to foreclose on the assets of local suppliers because some loans have moved from being non-performing to being bad. In terms of production licences, it is understood that the government will, in August 2016, make a formal announcement after reaching an agreement with Total and Tullow. Additionally, the government will also announce the companies expected to carryout exploration for new oil blocks in the country. Revival of activity in the oil sector, would bring revenue to the local companies, taking away the non-performing loans.

UDB capitalisation not enough
Ugandan commercial banks are often put on the line for failing to provide long-term financing. The banks, however, receive short-term deposits, not enough to meet the long-term financing needs of some businesses. The option for the government has been to recapitalise the Uganda Development Bank (UDB), to provide long-term financing at lower interest rates. The plan is to have UDB recapitalised to a tune of Shs500b by 2018. At the moment, UDB’s assets are less than Shs300b, meaning it can only lend to fewer business.

In fact, the argument from Mr Ashie Mukungu, a former economist at African Development Bank, UDB’s capitalisation should be about Shs1 trillion.

“The long-term development needs of companies in Uganda are increasing. It would make sense if UDB is capitalised to a tune of Shs1 trillion, allowing more companies to borrow from it,” he adds.
To capitalise UDB, it has to be done through use of taxpayer funds. UDB is a business set-up by the government and is funded using money that comes from the government – and approved by Members of Parliament – once the budget is approved. Additionally, UDB is also still trying to build its reputation in order to raise long-term funds from the Islamic Development Bank, African Development Bank and Kuwait Special Fund, among others.