The Government has been urged to prioritize the use of debt capital markets as a way of financing the real economy. The call comes at a time when Government and the private sector are grappling with high bank interest rates which have led to the reduction of uptake in bank loans. It is also evident that just like in many other economies, bank financing continues to be dominant, crowding out other forms of financing such as private and public equity, as well as debt capital markets.
Early this month,the International Finance Corporation (IFC) together with the Financial Markets Development Committee (FMDC) under Bank of Uganda and Capital Markets Authority(CMA) hosted the inaugural debt capital markets workshop in Kampala to discuss challenges and share international best practices for the development of Uganda’s financial markets sector.
Capital markets are a part of the overall financial markets ecosystem which offer both debt and equity financing options for private businesses and Governments. Debt capital markets are a segment where corporations or Governments can issue debt securities to raise financing for growth, infrastructure development among others. The World Bank estimates that Africa’s financing needs stand at about USD 93 Billion, of which only half of that is available. Therefore, developing domestic financing sources is a critical issue that needs to be addressed by all stakeholders.
Speaking at the opening of the workshop, Finance Minister, Hon. Matia Kasaija commended stakeholders for their efforts towards developing Uganda’s capital markets,adding that Government has taken various measures to also improve the Government securities market.
“The Bank of Uganda and my team, under the Directorate of Debt and Cash Policy have worked hard to develop the government securities market. As such a government benchmark yield curve has been created through the benchmark issuance programme and government securities can now be traded on Bloomberg and Reuters on secondary market trading platforms”, Hon. Kasaija said.
The Minister said that the high cost of borrowing and the lack of access to finance has been holding back the development of Uganda. He noted that there are three major bottlenecks to the growth of Uganda’s economy, namely, the cost of transport;access to electricity for industrialization and; the cost of money.
“Time and again His Excellency the President of Uganda has mentioned the need for low cost financing options together with the drive for transport infrastructure and electricity supply. As an alternative source of long-term capital, the capital markets can help to address some of the challenges faced by Uganda’s economy today”, the minister added.
“However, to position the capital markets as an alternative source of capital, there is a need to raise awareness among the government and private sector, and put in place the building blocks to grow the market. The Debt Capital Markets Workshop is a step in the right direction and I commend IFC for supporting this initiative.”
The minister added that Government through CMA is currently implementing Uganda’s ten-year Capital Markets Development Master Plan which was launched by the President in2017 and as part of this, CMA is developing a deal flow facility which will act as an advisory center to help companies get investment-ready to be able to access market-based financing.
Hon. Kasaija challenged stakeholders at the workshop to come up with actionable solutions to develop Uganda’s domestic debt markets and the capital markets in general.
In his remarks,the IFC Vice President and Treasurer, Mr. John Gandolfo observed that strong capital markets are an important driver of economic growth because businesses can tap into those markets as a source of long-term local- currency finance,and equally, Governments can access the markets to finance infrastructure and provision of public services. He noted that the possibilities afforded by local currency financing are transformational and could allow companies to focus on their core business rather than worry about how forex fluctuations could impact their bottom line.
“IFC views local currency financing as part of sustainable private sector development and we are committed to expanding access to local currency for local entrepreneurs through capital market innovation”, Mr. Gandolfo said.
“In 2009, IFC’s local currency commitment stood at USD 800 Million. Ten years later, total local currency commitments represent more than a third of the total long-term financing commitments. This is a tremendous achievement, despite the fact that there is still more work to be done as our clients demand more and more local currency financing.”
Gandolfo revealed that IFC has launched a Pan-African bond program which allows them to issue bonds in eleven countries in Sub-Saharan Africa, adding that they would be delighted to add Uganda to this list.
“Deep capital markets are essential for a thriving private sector that creates jobs and enables economies to achieve their full potential; they are not a luxury; they are a necessity”, he said.
Bank of Uganda Governor, Prof. Emmanuel Tumusiime said that whereas a lot has been done to ensure diversified sources of financing, the structure of Uganda’s financial system remains shallow and costly.
“Commercial Banks continue to dominate, the financial sector, holding about 70% of the financial sector assets. Moreover, firms mainly depend on bank finance. Very few of the larger firms are listed on the stock exchange where they could get additional funding through the issuance of shares”, Mutebile said.
“Furthermore,most banks are still small and have low growth. The small banks mainly finance households and SMEs that tend to have unreliable credit histories, which forces banks to incur higher costs in monitoring. The combination of small lenders with high operating costs and a reliance on interest income from loans on one hand, and the borrowers being mainly households and SMEs on the other, results in high lending rates.”
As a way of addressing the gaps that have been identified, the Governor noted that a Financial Markets Development Committee which comprises of captains of the various financial sector clusters had been established to propose feasible alternatives and ensure implementation of reforms in order to position Uganda’s financial sector as the engine for economic growth.
CMA’s CEO, Keith Kalyegira said that this workshop was very timely, bringing together stakeholders to galvanize support for reform proposals which are at intermediate stages of development.
“We are keen to see an increase in secondary market trading of Government securities because of the importance this will have on the growth of the unit trust schemes operating in this market, and domestic & foreign institutional investors. Increased trading in Government securities increases participation in bonds with a long tenure, which is expected to reduce Government’s cost of borrowing.Subsequently, this should lead to increased issuance of corporate bonds by business enterprises which require long term patient capital”, Kalyegira said.