BusyMarkets Kampala #004: Govt sweet tooth for domestic borrowing

The Ugandan shilling was slightly stronger due to limited demand for dollars from importers and interbank market. In addition, owing the commencement of oil exploration in Western Uganda at the Kingfisher oil well, the outlook is for a stronger shilling in the long run.

I predict that dollar will cost Ugx 3400 by half year. With energy prices slightly subduing in Uganda It’s likely that inflation will unlock single digits sooner than later. Uganda’s central bank on Wednesday asked investors holding Treasury bonds due to mature in April to apply to convert their holdings into longer tenures to come due between May 2025 and August 2042.

Rising public debt takes stronghold

According to a report by Reuters news agency, Bank of Uganda (BoU) did not give reasons for the bond switching in which investors are free to choose whether to participate or not. Uganda has been struggling with a rising public debt pile. In December, the bank said the surging costs of servicing public debt were putting undue pressure on public finances.

BoU said investors holding the bonds maturing in April, which have a coupon rate of 11% can now apply to convert their holdings to the various longer-dated tenures with coupon rates ranging between 14% to 18.5%. The new tenure options that investors can switch to include three-year, five-year, ten-year, fifteen-year and twenty-year bonds, the bank said in a statement. Auctions for the bond switch will be held on Feb. 6 and Feb. 8, according to BoU.

Revised priorities in new budget allocation

There was a Treasury bill auction on the 1^st of Feb 2023 and interest rates were largely unchanged as predicted. As earlier said, there is still inflation to curb and there is still appetite from government for domestic debt than international or IMF debt. Parliament, on 31^st Jan 2023 approved a draft budget of Shs 49.9 trillion for the financial year 2023/24.

Of the 49.9 trillion national budget, shs 28.8 trillion is expected to come from domestic revenue and the remaining 21.1 trillion from borrowing. Whereas the 2023/24 national budget has increased by sh 1.8 trillion from 48.1 for 2022/23, the funds available for discretionary expenditures (which can be allocated) have reduced by 2.5 trillion due to for interest and debt payment, which has risen to sh 19 trillion from 16 trillion in 2022/2023.

The budget committee raised concerns that in the draft budget the projected allocation towards programs that contribute to enhancing value addition in key growth opportunities is only 5.6% of the total budget and only 4.7% of the total projected budget is allocated to programs that contribute directly to strengthening of the capacity of the private sector. I think there is still very many opportunities for private investors in the value addition plants.

Here are the prevailing interest rates as at close of business of 1^st Feb 2023.

EABL share price up

Going on to shares and Equities. The Board of Directors of East African Breweries Limited has recommended an interim dividend of Kshs 3.75 per share subject to withholding tax, to be paid on or about 28th April 2023 to shareholders registered at the close of business on 16th February 2023. EABL is both listed on the Uganda and Nairobi Stock exchanges.

The share price gone went ahead to appreciate throughout the month of January 2023 in the East African region. Investors gained trust in the company after the PLC announced a net profit of Kshs 8.7billion, a modest growth in comparison to the previous year’s profit.

My prediction is that the EABL will do well this year. Equity Bank PLC and Jubilee Holdings Limited have also continued to post gains month on month. I will put my focus on studying these stocks and come with a solid prediction on my next insight.

Seth Nuwagaba is an investment banker at one of the biggest banks in East Africa.