Uganda’s financial markets have become deeper, more sophisticated

By Patrick Kagenda

Bank of Uganda last week issued a Shs 60 billion 10 year bond and will issue another bond of a similar magnitude at the beginning of December. The Independent’s Patrick Kagenda talked to Stephen Kaboyo the director Financial Markets Department at the central bank.

What financial instruments do you have in place today?

Many; we have bonds that range from 2, 3, 5, to 10 years. When we started the bond market, those are the benchmark points that we thought we should have.

Why issue the 10-year bond?

We last issued a 10-year bond in 2004 and it was Shs 10 billion. All along the central bank has been doing 2, 3, and 5 year bonds. But because the market has grown, we need to be looking at consolidation at the longer end of the market.

The 10 year bond that we issued last week was precisely to build up critical mass at the longer end of the term. We needed Shs 60 billion which was taken up by the market. We did Shs 60 billion and we got bids of up to 102 billion. That shows you the market appetite for the 10 year paper. It was very well received by the market at the YTM (yield to maturity) of 14.7%. That shows you that investors are willing to lend government 10 year money at 14.7%. That’s a very good rate to take in terms of developing our bonds market. 14.7% at 10 years pricing in all kinds of things because 10 years is such a long horizon. It also tells you the confidence investors have in the market. It goes back to underpin the whole macroeconomic management aspect.

What explains the growing confidence?

It’s a host of factors. The recent Fitch ratings. Our image out there is good. Investors look at transparency, the integrity of the market, infrastructure, how it works and the greatest of all is the whole aspect of the exit mechanism. If I bring my money into the country I better be sure that if I need to exit, the exit mechanism lets me take my money out.

Recently the PTA bank issued a Shs40 billion bond and its first tranche of Shs 20 billion was poorly subscribed. What magic are you applying to succeed where others are failing?

Corporate Issue and Government Issue are totally different. Even their risk profiles are totally different. Liquidity for both is another issue. An investor would want to make sure that their money can be accessed whenever they want it. However the corporate bond side does not guarantee that while the government bond market does guarantee that there is liquidity through the dealer network over the market to ensure that an investor can exit the market when he wants. The corporate side has to do with the profile of the issuer. Government’s profile is risk free basically. Going forward, we want this market to underpin the corporate side through the reference pricing. That is the whole point for us to consolidate on the longer end, be able to provide meaningful pricing reference for corporate issuers. Timing is another factor. You need to be in the market when you know that the liquidity levels can support what you are going to issue; because by and large the markets on the longer end 5-10 year term investors are going to be the same. The other issue is the liquidity provision embedded in the instrument. When you look at the corporate 7-year paper which does not trade; it is not very attractive for the investors.

What is the explanation for the success of the MTN syndicated US$100 million loan?

That also shows you the depth and sophistication the market is at. The market is becoming sophisticated. The MTN syndicated loan is a mirror image of a corporate medium term loan. It is a mirror image of a corporate note. If it can be done for that type of money and it is available in the local financial system, it can be done on the corporate side as well. That tells you about the potential of what we have in our financial markets. The syndicated loan puts pressure on the corporate side to develop. These are competitors in a way because the syndicated loan is almost structured in the same way; it behaves like the same bond on the other side. It’s the same type of instrument only structured differently. However, three things stand out, potential for this market, the degree of sophistication that has come along and the depth of the market.

Now that you have found high appetite in bonds, are you dropping the issuance of Treasury Bills?

We have a debt strategy, which clearly states how much of bonds we can have in our portfolio, and how much TB`s we can have in the portfolio. In terms of the mix, we do a 60- 40 mix (60 bonds and 40 TB`s). Currently our total stock in terms of ratio we are 64% bonds and 36% TB`s.

What impact does your borrowing have on the day to day running of the economy?

If you borrow for long, the overriding objective is inflation and price stability. We do these instruments to be able to take out inflationary funds. Basically in terms of economic activity, you are achieving the objective of price stability by being able to mop out the excess funds for a longer period.