Chance for Ugandans to invest abroad

Why this good news risks being misunderstood as bad news by foreign investors

COMMENT | Joseph Were | On February 01, The Independent news magazine’s online edition reported on Standard Chartered Bank Uganda’s launch of an offshore Mutual Funds product. As the Standard Chartered Bank CEO Sanjay Rughani said at the launch, the proposition means the bank’s clients will get an opportunity to buy shares or stocks in or simply lend money in bonds to hundreds leading companies in the U.S., Europe, UK, Asia and other places in an endless list of sectors like healthcare, technology, real estate and Environmental, Social and Governance (ESG) investments also called green investments. As the CEO said at the launch, this proposition is a first of its kind in Uganda.

Since the launch, there appears to have been an unmistakable silence outside of the capital markets inner circle. This is unusual for Uganda’s financial sector players. They are inclined to celebrate milestones, both creditable and uncashable and there must have been expectation of bells pealing.

Three reasons could be advanced for the silence around the exciting announcement by Standard Chartered Bank: first, the unfavourable legacy of the word “offshore” among Ugandans on the street; two, the limited appreciation of the opportunities the Offshore Mutual Fund presents, and three, apprehension that enabling Ugandans to easily invest abroad could widen the gates of capital flight.

Since offshore means outside of a country where one resides, for those unfamiliar with financial markets, offshore investments implies taking money outside of the economy. They do not care that using the services of a bank outside of one’s home country is not illegal in Uganda. Or that investing in an offshore fund should be seen as a business decision and not a political one or a statement about the local economy. In fact, they do not see offshore investment as the pursuit of opportunity. They see it as search for a secret stash for ill-gotten resources. Unfortunately, the history of offshore accounts, including revelations in the Panama Papers scandal, which named individuals in the country, fuels such thinking.

The Standard Chartered Bank offshore Mutual Funds product is good news because Bank of Uganda (BoU) has been singlehandedly engaged in a tweak and twist of strategies to interest Ugandans in the retail activities of financial markets, local and foreign. It has been pushing to get Ugandans to participate in trading in government securities since 2005 when it launched the Primary Dealer PD) System on the local markets. At the time it was assumed that fine-tuning the PD system would grow the financial market by triggering excitement in the secondary market, also called stock exchange or capital market in the long term. Currently, up to eight commercial banks participate as guarantors of subscriptions of primary auctions and other roles. But their performance and that of the financial markets has remained lackadaisical.

On the global markets, BoU’s latest preoccupation has been the push for the reporting of the Uganda Securities Exchange (USE) trades and Uganda Government Bonds on Bloomberg platforms, the African Financial Markets Initiative (AFMI) Bloomberg Bond Index (ABABI), and the FTSE Frontier Emerging Markets Government Bond Index (FRNTEMGBI) Series launched in 2021. The latter push is to interest global portfolio managers in Uganda’s fixed-rate local currency government bonds.

The major question is why Standard Chartered Bank is offering this product at this time. Why would a Ugandan want to invest offshore at this time? This question leads to a closer scrutiny of the investment opportunities available locally in the short and long term and their risk analysis. Do the investors seeking offshore opportunities sense increased local risk?

According to the Uganda Investment Authority, the country offers many investment opportunities in infrastructure, tourism, import substitution manufacturing, agriculture value addition, and energy, oil and other extractives. These favour long term equity investors and have since the COVID-19 outbreak suffered from a drop in Foreign Direct Investment (FDI).

Until now, pool investment opportunities for individuals seeking low, affordable, and flexible products have had to choose between a few unit trusts managed by insurance companies and collaborating banks. The Standard Chartered Bank Offshore Mutual Fund is a welcome addition.

Investment in the Offshore Mutual Fund should open up opportunities for growth of Ugandan entrepreneurs through reduced cost of capital and trade expansion.

There are reasons why some countries, such as the U.S., do not allow their citizens or residents to invest in offshore funds. Still, many U.S. entities and individuals have interests offshore where they pay little or no tax.

Tax avoidance (or even evasion) is one reason for the rich to seek offshore investments. Others might seek to launder illegally acquired resources.

There is also always a risk while investing. However mutual funds reduce it by providing an efficient way to diversify one’s portfolio. This is done without having to select individual companies to invest in since one invests in a pool with other investors. It means you do not invest a lot in one stock or bond. It also means that you can invest in many companies and, statistically speaking, they all cannot fail.

In the case of the Standard Chartered Bank Offshore Mutual Fund, it is an offer from a reputable institution which has top-class financial assets management.

Offshore investment opportunities could also lead to increased capital outflows which, according to the United Nations Conference on Trade and Development (UNCTAD), promotes the interests of developing countries in world trade, exceed annual inflows of development assistance and foreign direct investment received by African countries. It says cumulative private wealth held offshore stood at $2.4 trillion by 2018 and represents more than three times the stock of debt owed by the continent in that year. Capital flight figures for Uganda are not available.

The Foreign Exchange Act 2004 which governs the transfer of funds out Uganda does not impose any exchange control requirements and/or restrictions on movement of funds out of the country. Therefore, the entry of the Standard Chartered Bank Offshore Mutual Fund will potentially not have a major impact on foreign investors in Uganda wishing to take profits out.

But the implication of the Standard Chartered Bank Offshore Mutual Fund for locals seeking to invest overseas could prove to be significant. If that happens, Foreign Direct Investment could also be impacted as investors sense a dead canary. That is the bad news in the good news.