Uganda's Economic Outlook: Bond Auctions and the Shrinking Budget.
October 3, 2024
Ninety-one days into the new financial year, the Government of Uganda has already borrowed close to UGX 7 trillion through treasury bonds and bills, which amounts to 40% of the total borrowed in the entire previous financial year of 2023-2024—and it's only the beginning.
Yet, for any concerned citizen, the situation is not entirely bleak. Last week, the Permanent Secretary to the Treasury (PSST) of the Ministry of Finance, while addressing Parliament, noted that the Government has scaled back its ambitious budget for FY 2024 from UGX 72 trillion to approximately UGX 57 trillion. This significant reduction is expected to primarily impact the ambitious domestic borrowing plans.
A week later, the Government has managed to raise over UGX 640 billion in a Treasury bonds auction, bringing the total to around UGX 7 trillion within a span of three full months.
Notably, this is the lowest bond auction since the beginning of the financial year 2024, with the September auction leading to the Government raising over UGX 1.13 trillion on September 4, 2024.
However, what is particularly intriguing about this auction is the excessive amount of money that the Government left on the table. While only UGX 640 billion was raised, there were bids close to UGX 1.7 trillion, with the Government accepting only UGX 640 billion—a bid-to-cover ratio of 2.6.
If this latest auction is indicative of future trends, with the current liquidity in the country and the Government's budget being slashed by nearly UGX 15 trillion, there is an expectation that interest rates may decline in the coming months.
This is due to the demand for financial assets significantly outstripping the supply—if no unexpected events occur, or if the Bank of Uganda also reduces the Central Bank Rate (CBR) in the near future. Consequently, investors have a reason to secure investment deals promptly before yields begin to fall.
Investors, particularly non-competitive ones, have cause for optimism, given that the yield on the 10-year bond has surpassed 16%, with the recent yield reaching around 16.25% at the cut-off level.
For a 20-year bond, the yield is approximately 16.875% in the primary market—a rate last seen five months ago. However, this does not necessarily indicate that rates will remain high and competitive as seen in this auction, considering the Government's current budgetary direction.
Beyond these developments, I am absolutely delighted for the many first-time investors who are entering the capital markets with the mindset of investing UGX 1 million at a time.
You are spot on. While the bond market has been a channel of first choice for a very long time compared to Unit trust, Real estate's, and Land, bond yield performance will likely continue to decline in the near future not so from a better monetary policy but rather as government starts to touch some oil fund. The steady inflow of oil fund (hopefully the mafias do not pocket much of it, pun intended!) will likely reduce government appetitte for borrowing as it stabilizes it revenues.
With the above, one would be tempted to relook towards the shares market. However, there is very scanty information from both the CMA and other analysts on how this market is performing. A number of companies hardly publish their info. Could you shed more light on how the different companies in Uganda have performed in the last 5 years?
There is plenty & enough information about share/stock market.