Thanks Alex, and the investor for willing to share your story.
While this all looks great, there is a significant angle for a diaspora who earns in dollars/pounds/euros like your client investing in UGX unstable currencies like ours.
Let me share a brief story as a Ugandan diaspora
In 2016, while based in Nigeria a fellow expat colleague invested his $100,000 in Nigerian 10 year treasury bonds at 15%. The exchange rate back then was 1$=280 Naira
Unfortunately, since 2018, the naira has steadily lost value that it is now 1$=980 Naira barely 7 years down the road.
So, while he gets the Naira, it is rather worthless that he can't even get his $100,000 equivalent back again at the current rates. The same can be said of the Ghanaian Cedi, Angolan Kwanza etc
The current political & econommic climate in our country unfortunately makes it prone to a similar situation as above though we are currently doing much better than others in the region.
From my perspective, if i have huge stash of hard currency (USD/GBP/EUR), and willing to forget it for >10 years, with very minimal stress, i would seriously consider foreign currency investment options. A 5% on USD compounded over 10 yrs in a market like ours will yield far higher returns in 2032 compared the yield in USD terms from a 10% on UGX compounded over the same period. Geoffrey
This is very true Geoffrey. Now there are different ways to look at this, if a Diaspora person must invest in Uganda, they will end up investing in UGX, no other way around it, but if they are to take money out, then investing out of UG might be the best way forward. Now this might work best for those who know in the end they need some assets back home, TBs are the best. not even land or business can protect you from currency devaluation.
But the Ugandan market actually has FX options as well. Recently UAP unit trusts launched at USD option at 5%.
on currency devaluation affecting land or property, it itsn't to the same level as cash. When currency losses value, property prices adjust to reflect that.
An apartment in Bugolobi flats that went for 100m 10 yrs ago is now worth 400m despite its sorry state.
Thanks Alex. Qn for clarity for us: How did they buy a bond of 250m on the primary market, when the max u can get is 200m in non competitive rates as a person? I thought then u need to factor in that 50m was probably bought on the secondary market (if indeed in the same week), or on the re-opening, 3 months later. Either of these would mean a reduced rate bse that same bond was selling at a premium later on re-opening, and even high in the secondary market. Meanwhile are you factoring in the bond WHT?
1. I find the value of RE of 1bn to be overly optimistic. A house of 250M now will have depreciated, requiring significant refurbishment. Only the cost of land will be significant.
2. 1bn was added to the final amt for RE after 15yrs whereas the initial cost of the Bond (250m) was not added to the 2.7Bn.
3. I get a different figure (36mx12%×90% = 3.88m) than the 4.14m for the compounded investment at 12%.
I think it is an incorrect analysis if you don't reinvest the returns from the property as you have done with the bond. The investor would have a better picture if you did this. In addition, your calculations would show that at a reinvestment rate of 12% of the net property income (which can also be put in bonds), the two investments aren't as far apart as you have analysed. My two cents.
I think for anyone considering treasury bonds needs to think about the coming change in government and its implications ( same for NSSF). A 1986 devaluation can easily happen or worse. In the next 10-15 years, naturally the current president will not be incharge and have to hand over power (he will be 90-94 years). No one knows how this transition will go, cos we have never been in this situation before.
Hi Alex, your article is insightful, yet it seems overly optimistic. High interest rates reflect the government's significant borrowing and risk, and there's a real possibility of default or currency devaluation, as seen in Kenya, Ghana, and Argentina.
Moreover, the assumption of a constant 17% return over 20 years overlooks these economic volatilities and your coupon value dropping over the years. Real estate is often preferred for its inflation resilience, but the real value of the projected 2.7bn, considering inflation and devaluation, is questionable if we don't account. Yes you have pointed out the opportunity but It's crucial to explore the relative risks of real estate versus Treasury bills and bonds, especially when banks favor real estate as collateral, indicating a skepticism towards the stability of T-Bills and Unit Trusts as assets.
Thanks Alex. "(The assumption made here is that coupon rates might still be this high in the long term, otherwise she would have to buy this particular bond on the secondary market to guarantee her the 16% annual return." - But even when you buy the same bond, it will not be at 16% effective (whatever the term- I am a lay man). You will be buying it at a premium, thus reducing the real yield. right? I think its best to keep it conservative at a net return of about 10%. But bonds make sense any day, and one can move their coupons after about 5 yrs to RE.
What is your view on the current interest expense burden that the Ugandan treasury is under and how does this affect its ability to pay back the loan your client has given it, without a sharp devaluation in the currency ?
Thanks Alex, and the investor for willing to share your story.
While this all looks great, there is a significant angle for a diaspora who earns in dollars/pounds/euros like your client investing in UGX unstable currencies like ours.
Let me share a brief story as a Ugandan diaspora
In 2016, while based in Nigeria a fellow expat colleague invested his $100,000 in Nigerian 10 year treasury bonds at 15%. The exchange rate back then was 1$=280 Naira
Unfortunately, since 2018, the naira has steadily lost value that it is now 1$=980 Naira barely 7 years down the road.
So, while he gets the Naira, it is rather worthless that he can't even get his $100,000 equivalent back again at the current rates. The same can be said of the Ghanaian Cedi, Angolan Kwanza etc
The current political & econommic climate in our country unfortunately makes it prone to a similar situation as above though we are currently doing much better than others in the region.
From my perspective, if i have huge stash of hard currency (USD/GBP/EUR), and willing to forget it for >10 years, with very minimal stress, i would seriously consider foreign currency investment options. A 5% on USD compounded over 10 yrs in a market like ours will yield far higher returns in 2032 compared the yield in USD terms from a 10% on UGX compounded over the same period. Geoffrey
This is very true Geoffrey. Now there are different ways to look at this, if a Diaspora person must invest in Uganda, they will end up investing in UGX, no other way around it, but if they are to take money out, then investing out of UG might be the best way forward. Now this might work best for those who know in the end they need some assets back home, TBs are the best. not even land or business can protect you from currency devaluation.
But the Ugandan market actually has FX options as well. Recently UAP unit trusts launched at USD option at 5%.
on currency devaluation affecting land or property, it itsn't to the same level as cash. When currency losses value, property prices adjust to reflect that.
An apartment in Bugolobi flats that went for 100m 10 yrs ago is now worth 400m despite its sorry state.
Thanks Alex. Qn for clarity for us: How did they buy a bond of 250m on the primary market, when the max u can get is 200m in non competitive rates as a person? I thought then u need to factor in that 50m was probably bought on the secondary market (if indeed in the same week), or on the re-opening, 3 months later. Either of these would mean a reduced rate bse that same bond was selling at a premium later on re-opening, and even high in the secondary market. Meanwhile are you factoring in the bond WHT?
Thank you Simon.
Great work Alex.
1. I find the value of RE of 1bn to be overly optimistic. A house of 250M now will have depreciated, requiring significant refurbishment. Only the cost of land will be significant.
2. 1bn was added to the final amt for RE after 15yrs whereas the initial cost of the Bond (250m) was not added to the 2.7Bn.
3. I get a different figure (36mx12%×90% = 3.88m) than the 4.14m for the compounded investment at 12%.
Nickson
Thank you Nickson.
Is he not reinvesting the monthly rent? This is not compounded in your computation.
I think it is an incorrect analysis if you don't reinvest the returns from the property as you have done with the bond. The investor would have a better picture if you did this. In addition, your calculations would show that at a reinvestment rate of 12% of the net property income (which can also be put in bonds), the two investments aren't as far apart as you have analysed. My two cents.
I think for anyone considering treasury bonds needs to think about the coming change in government and its implications ( same for NSSF). A 1986 devaluation can easily happen or worse. In the next 10-15 years, naturally the current president will not be incharge and have to hand over power (he will be 90-94 years). No one knows how this transition will go, cos we have never been in this situation before.
Hi Alex, your article is insightful, yet it seems overly optimistic. High interest rates reflect the government's significant borrowing and risk, and there's a real possibility of default or currency devaluation, as seen in Kenya, Ghana, and Argentina.
Moreover, the assumption of a constant 17% return over 20 years overlooks these economic volatilities and your coupon value dropping over the years. Real estate is often preferred for its inflation resilience, but the real value of the projected 2.7bn, considering inflation and devaluation, is questionable if we don't account. Yes you have pointed out the opportunity but It's crucial to explore the relative risks of real estate versus Treasury bills and bonds, especially when banks favor real estate as collateral, indicating a skepticism towards the stability of T-Bills and Unit Trusts as assets.
Thanks Alex. "(The assumption made here is that coupon rates might still be this high in the long term, otherwise she would have to buy this particular bond on the secondary market to guarantee her the 16% annual return." - But even when you buy the same bond, it will not be at 16% effective (whatever the term- I am a lay man). You will be buying it at a premium, thus reducing the real yield. right? I think its best to keep it conservative at a net return of about 10%. But bonds make sense any day, and one can move their coupons after about 5 yrs to RE.
What is your view on the current interest expense burden that the Ugandan treasury is under and how does this affect its ability to pay back the loan your client has given it, without a sharp devaluation in the currency ?
What is the starting capital to buy the treasury bond
100k
For Treasury Bond its 1 Million and Treasury bills its 100K.