Ugandan bonds can bounce back from World Bank funding setback
A surge in yields on Uganda’s local-currency debt spurred by the World Bank’s decision to halt new loans in protest at new anti-LGBTQ laws may reverse as global sentiment improves and the government unveils new sources of financing, according to Absa Bank Ltd.
The yield on Ugandan-shilling bonds maturing in 2033 has spiked by more than 100 basis points since the multilateral lender suspended its financing for the country earlier this month. The move sparked concern about budget shortfalls with the government currently relying on external loans from lenders including the International Monetary Fund and World Bank to help underpin its 2023-2024 spending plan.
Uganda’s response will probably be to rejig its funding strategy to include more external loans, with authorities already signaling they may seek to raise funding from countries including China, said Nikolaus Geromont, the Johannesburg-based Sub-Saharan Africa currency and rates analyst at Absa, in a note to clients. They may also opt to lower official spending targets.
“The government is also reported to be in talks to secure a syndicated loan from global banks,” he wrote in a research note. “As a last resort, the Treasury may consider issuing a maiden Eurobond.”
Meanwhile, local investors could demand lower rates of return from government bonds as the central bank cuts interest rates and inflation eases further, Geromont said.
Uganda Cuts Rates, Vows to Act if World Bank LGBTQ Move Hits FX
Foreign investors, who own 8% of Ugandan bonds, could also show renewed interest in the debt as global central banks reach the end of their hiking cycles and risk sentiment improves. Absa sees the 10-year yield dropping to 15.2% by the end of this quarter and 15% by the end of the year.
The World Bank’s decision to halt new funding to Uganda came three months after President Yoweri Museveni signed legislation that includes life imprisonment for sexual acts and the death penalty for “aggravated homosexuality,” defined in part as engaging in sex if one is HIV-positive.
The Ugandan shilling is on track for a 2.5% decline versus the dollar this month, it’s biggest loss since July last year.
