Uganda's Credit Rating downgrade. Lessons from Kenya Treasury Bonds.

Treasury Bond Investments.

Friends,

Last week, Moody's credit rating agency downgraded Uganda's long-term debt rating from B2 to B3 with a stable outlook. This action comes nearly a year after Moody's similarly downgraded Kenya's long-term debt from B2 with a negative outlook to B3 negative.

The significance of this downgrade for Uganda is that lessons can be seen from Kenya's experience over the past year. Additionally, it prompts a broader examination of Africa's performance and the assessment of Uganda's credit risk, particularly for investors in long-term treasury bonds and those concerned with the broader implications of the downgrade.

When evaluating Uganda's credit rating, it is noteworthy that the country fares relatively well compared to other African nations. Tanzania holds the highest ranking in the region at B1, indicating an investment-grade bond. Rwanda is rated at B2, Kenya at B3, and Uganda also at B3, positioning it above several countries such as Nigeria, Egypt, Ethiopia, Ghana, and Zambia. This provides a baseline for assessing Uganda's long-term credit management and debt sustainability. (See highlighted)

In this article, we will explore the lessons learned from Kenya's experience and consider potential outcomes for Uganda's economy. It is important to note that the challenges Kenya faced in 2023 are not identical to Uganda's current situation. For instance, Kenya was approaching the maturity of its Eurodollar bond within a year, whereas Uganda does not have Eurodollar bonds. Kenya also had significant debt maturing in 2023-2024, which is not the case for Uganda. However, by examining Uganda's current budget, we can discern the government's fiscal intentions.

Uganda has yet to surpass the 50% debt-to-GDP threshold, which is a positive indicator, and there might be a slim hope that this limit will not be breached to avoid exacerbating the already challenging debt situation.

Reflecting on Kenya's experience, prior to Moody's downgrade of its long-term debt rating in May 2023, Kenya's 10-year, 15-year, and 20-year treasury bonds were averaging an interest rate of around 14%. Within a month of the announcement, the rates had surged to 16%, a 200 basis point increase. From June to December 2023, Kenya's interest rates on long-term treasury bonds and short-term treasury bills climbed to an average of 18%, making borrowing more costly for the government but more attractive for investors seeking a premium on government bonds. Investors who entered the bond market between July and December, especially those who locked in long-term rates of around 18% for the next 9 to 10 years, benefited from these higher yields.

Kenya’s long term 10 year Treasury Bond Benchmark.

Kenya has since seen a decline in yield curve interest rates as the country has started to address its fiscal challenges, albeit at the cost of increased taxation to reduce reliance on debt and bolster internal revenue mobilization.

Uganda can draw lessons from Kenya's situation, anticipating that the immediate aftermath of the downgrade may lead to higher interest rates on long-term bonds, which could be advantageous for investors willing to accept the increased risk associated with the country's long-term Treasury Bond debt.

As Uganda approaches the release of its new treasury bond and bill calendar, expected at the end of June or early July, we may witness a rise in interest rates similar to Kenya's experience, The Ugandan government's recent approval of a 70.2 trillion UGX budget, with nearly 31 trillion UGX allocated for debt and borrowing, suggests that the government's borrowing appetite, particularly from domestic markets, will continue to drive up interest rates. This will be a profitable endeavor for those Investors who will be willing to take on the increased risk of Investing in Uganda’s Treasury Bonds.

This will however come at a high cost for private credit borrowers from commercial banks as an increase in interest rates on long term Treasury bonds will automatically see an increase in the cost of borrowing in the commercial space as was the case in Keny where borrowing costs from commercial banks like Equity Bank and KCB Bank soared to nearly 18% in the second half of 2023.

Already Invested Bonds.

For investors holding long-term Ugandan bonds, such as 20-year or 15-year treasury bonds, the coming months may not be opportune time for selling, as the prices of those bonds being held will fall in value due to increased interest rates in the economy. They could also incur losses due to the introduction of new bonds with higher interest rates.

And the alternative view, for those looking to invest in treasury bonds, the increased risk may be offset by the potential for higher yields in the near future and that would mean higher profits for Investors in the Treasury Bonds willing to take on more risk.

Uganda vs Kenya 10 Year Interest rate comparative over the last 2 year period.

From the graph above we notice that we started off 2022 win the Uganda's the 10 yeah treasury bonds having a higher interest rates as we are seeing in the purple graph that is representing the Uganda's interest rates as compared to the Kenya's interest rates which are in red and green for the whole of 2022 Uganda's interest rates averaged around 16 up to 18 as Kenya has maintained its rates to around 14 until jewel June 2023 when the interest rates for Kenya started rising and the overtook the Uganda's interest rates on the treasury bonds in around July and it has been that way since July 2020 three and even when interest rates in Kenya have started falling down from the as high as of 18.5 to now 17.5 they are still higher than the Uganda's interest rates so it's going to be interesting to see how this graph will change in the coming one year especially for those investors in the interest rates in the treasury bond as Uganda’s long term bonds get downgraded in rating

Happy Investing Everyone

Alex Kakande