Finance Ministry Suspends Sovereign Bond

Published on 23rd November 2008

The ministry of finance will not go ahead with plans to issue what would have been East Africa’s first sovereign bond, a top official of the ministry has revealed. “We have suspended that operation. When the need arises, we shall consider it. At what time we shall do that, I don’t know,” said Keith Muhakanizi, the Deputy Secretary to the Treasury, breaking the silence over Uganda’s planned sovereign bond.

The suspension of the sovereign bond - an instrument used to borrow money from developed capital markets of the West - follows doubts by a top donor over Uganda’s ability to service the $1 billion debt it intended to borrow from the strained global financial markets. Government had planned to issue the bond before the end of this year. The International Development Association, the finance arm of the World Bank Group, said recently that the country needed to provide concrete proof of how it would pay back the loan before going ahead to borrow.

“… [there needs to be] clear justification (economic and financial) … with evidence through a debt sustainability analysis that the borrower’s risk of debt distress is largely unaffected by the non-concessional financing,” David Farley, the Vice President DCM Ratings Advisory Global Markets Standard Bank, quotes the IDA in his paper presented at the just concluded African Securities Exchange Association conference.

The ministry of finance had kept a tight seal over the country’s grand plan to issue a sovereign bond, which was supposed to fetch funds to solve the country’s dilapidated infrastructure – the biggest contributor to the high cost of doing business in Uganda. The bond was supposed to be priced in a more stable foreign currency, according to the scanty information available. Standard Bank, the parent company of Stanbic Bank Uganda, had already showed strong interest in preparing a campaign to market the bond to investors in Europe, the United States of America and Asia.

Muhakanizi said he “didn’t know” about IDA’s queries. He said that the ministry suspended the plans to list the bond after cabinet directed it to tap the foreign reserves at the central bank to solve the country’s pressing needs. “The government’s position is that we use our reserves since we have more than enough.”

The shift from issuing the bond to exploiting the country’s foreign reserves, which total about $2.5 Billion, is bound to evoke another debate of its own. Bank of Uganda uses reserves to intervene into the foreign exchange market to ensure the stability of the shilling. Also, the reserves are used to import goods and services in a time of crisis. Using foreign reserves to tackle the country’s other problems puts in jeopardy the central bank’s preparation measures in case a calamity strikes. 

The ministry of finance’s policy to turn to its foreign reserves after the failure to list the sovereign bond is one of the latest moves by the government of Uganda to reduce its dependence on donors to fund the country’s development projects. Donors fund close to 40% of the national budget. The Ministry of Finance has in the past said that donor funds have been unpredictable and are not released on time.

If Uganda issues a sovereign bond, experts, some of whom didn’t know about this latest development, argued at the African Securities Exchange Association conference in Kampala last week, it will raise the profile of the investment climate of the country and attract more investors.

The ministry of finance was expected to present its credit rating of ‘B’ that was recommended by the famous international firm, Fitch, as part of its marketing strategy to lure buyers of the bond. However, the rating of ‘B’ – a measure of the performance of the economy in offering a good return on investment - means that investors willing to invest in the bond should do so with caution. A special report by Fitch released in May noted that “none of the four ‘B’-rated Highly Indebted Poor Countries –Benin, Cameroon, Mozambique and Uganda – are on positive outlook.” 

But the growing debt burden and a weak tax base had created uncertainty over the country’s ability to service the loan. Uganda’s current debt burden, at more than Shs 4 trillion, with foreign debt surpassing Shs 3 trillion, according to official figures, is edging closer to unsustainable levels last seen more than 10 years ago.

A huge debt eats into funds needed to tackle poverty and puts the public under more pressure to pay higher taxes. The cautionary remark, coming from one of Uganda’s biggest sources of cheap credit over the last four decades, is bound to open debate whether plans to issue the sovereign bond was a rushed move. The IDA also requested for further proof on how the money would be invested and the kind of return it would likely earn.

Over the years, investments in infrastructure have courted controversy in the manner in which funds have been used. Investments in the country’s infrastructure have either fallen short of adhering to procurement procedures, thus the country bearing an unfair price, or fallen victim to shoddy work.

The paper, titled Financing the Future, quotes the IDA saying: “There needs to be clear benefits of the financing on accelerating growth, reducing poverty, improving the provision of key infrastructure services. Economic and financial returns to the intended investments need to be strongly demonstrated.”

The call by the IDA for more homework came at a time when Uganda was facing a tight race against time to issue the bond. Kenya and Zambia are in the final stages of pulling off a similar move. The first country to do so, it is argued, stands a good chance of attracting the limited funds in the global capital markets considering the current financial turmoil that has starved investors of cash. Reports from Kenya indicate that the country is planning to postpone plans of issuing the bond this year due to the credit crisis pounding financial markets.

Participants at last week’s conference in Kampala, however, called on Uganda to issue the sovereign bond.

“We recommend that Uganda should proceed with a debut bond offering now…(and) benefit from the current lack of supply of African sovereign credit before other issuers come to the market” noted Farley’s paper. It adds that “Despite more difficult market conditions investor sentiment for Sovereign issues and in particular African credit is strong.”

However, the paper set a lower amount of funds that Uganda can fetch from issuing the sovereign bond. The paper points out that about $3 billion of Uganda’s debt was written off under the Multilateral Debt Relief Initiative, which limits Uganda’s bond to $500 million maximum. This is half the amount the country wanted.

By  Jeff Mbanga.

Jeff Mbanga writes for   The Weekly Observer

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