The Governmenthas been urged to prioritize the use of debt capital markets as a way offinancing the real economy. The call comes at a time when Government and theprivate sector are grappling with high bank interest rates which have led tothe reduction of uptake in bank loans. It is also evident that just like inmany other economies, bank financing continues to be dominant, crowding outother forms of financing such as private and public equity, as well as debtcapital markets.
Early this month,the International Finance Corporation (IFC) together with the Financial MarketsDevelopment Committee (FMDC) under Bank of Uganda and Capital Markets Authority(CMA) hosted the inaugural debt capital markets workshop in Kampala to discuss challengesand share international best practices for the development of Uganda’sfinancial markets sector.
Capital marketsare a part of the overall financial markets ecosystem which offer both debt andequity financing options for private businesses and Governments. Debt capital marketsare a segment where corporations or Governments can issue debt securities toraise financing for growth, infrastructure development among others. The WorldBank estimates that Africa’s financing needs stand at about USD 93 Billion, ofwhich only half of that is available. Therefore, developing domestic financingsources is a critical issue that needs to be addressed by all stakeholders.
Speaking at theopening of the workshop, Finance Minister, Hon. Matia Kasaija commendedstakeholders for their efforts towards developing Uganda’s capital markets,adding that Government has taken various measures to also improve theGovernment securities market.
“The Bank ofUganda and my team, under the Directorate of Debt and Cash Policy have workedhard to develop the government securities market. As such a governmentbenchmark yield curve has been created through the benchmark issuance programand government securities can now be traded on Bloomberg and Reuters on secondarymarket trading platforms”, Hon. Kasaija said.
The Minister saidthat the high cost of borrowing and the lack of access to finance has beenholding back the development of Uganda. He noted that there are three majorbottlenecks to the growth of Uganda’s economy, namely, the cost of transport;access to electricity for industrialization and; the cost of money.
“Time and againHis Excellency the President of Uganda has mentioned the need for low costfinancing options together with the drive for transport infrastructure andelectricity supply. As an alternative source of long-term capital, the capitalmarkets can help to address some of the challenges faced by Uganda’s economytoday”, the minister added.
“However, toposition the capital markets as an alternative source of capital, there is aneed to raise awareness among the government and private sector, and put inplace the building blocks to grow the market. The Debt Capital Markets Workshopis a step in the right direction and I commend IFC for supporting thisinitiative.”
The ministeradded that Government through CMA is currently implementing Uganda’s ten-yearCapital 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 actas an advisory center to help companies get investment-ready to be able toaccess market-based financing.
Hon. Kasaijachallenged stakeholders at the workshop to come up with actionable solutions todevelop 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 strongcapital markets are an important driver of economic growth because businessescan tap into those markets as a source of long-term local- currency finance,and equally, Governments can access the markets to finance infrastructure andprovision of public services. He noted that the possibilities afforded by localcurrency financing are transformational and could allow companies to focus ontheir core business rather than worry about how forex fluctuations could impacttheir bottom line.
“IFC views localcurrency financing as part of sustainable private sector development and we arecommitted to expanding access to local currency for local entrepreneurs throughcapital market innovation”, Mr. Gandolfo said.
“In 2009, IFC’slocal currency commitment stood at USD 800 Million. Ten years later, totallocal currency commitments represent more than a third of the total long-termfinancing commitments. This is a tremendous achievement, despite the fact thatthere is still more work to be done as our clients demand more and more localcurrency financing”
Gandolfo revealedthat IFC has launched a Pan-African bond program which allows them to issuebonds in eleven countries in Sub-Saharan Africa, adding that they would bedelighted to add Uganda to this list.
“Deep capitalmarkets are essential for a thriving private sector that creates jobs andenables economies to achieve their full potential; they are not a luxury; theyare a necessity”, he said.
Bank of UgandaGovernor, Prof. Emmanuel Tumusiime said that whereas a lot has been done toensure diversified sources of financing, the structure ofUganda’s financial system remains shallow andcostly.
“Commercial Bankscontinue to dominate, the financial sector, holding about 70% of the financialsector assets. Moreover, firms mainly depend on bank finance. Very few of thelarger firms are listed on the stock exchange where they could get additionalfunding through the issuance of shares”, Mutebile said.
“Furthermore,most banks are still small and have low growth. The small banks mainly financehouseholds and SMEs that tend to have unreliable credit histories, which forcesbanks to incur higher costs in monitoring. The combination of small lenderswith high operating costs and a reliance on interest income from loans on onehand, and the borrowers being mainly households and SMEs on the other, resultsin high lending rates.”
As a way ofaddressing the gaps that have been identified, the Governor noted that aFinancial Markets Development Committee which comprises of captains of thevarious financial sector clusters had been established to propose feasiblealternatives and ensure implementation of reforms in order to position Uganda’sfinancial sector as the engine for economic growth.
CMA’s CEO, KeithKalyegira said that this workshop was very timely, bringing togetherstakeholders to galvanize support for reform proposals which are atintermediate stages of development.
“We are keen tosee an increase in secondary market trading of Government securities because ofthe importance this will have on the growth of the unit trust schemes operatingin this market, and domestic & foreign institutional investors. Increasedtrading in Government securities increases participation in bonds with a longtenure, which is expected to reduce Government’s cost of borrowing.Subsequently, this should lead to increased issuance of corporate bonds by businessenterprises which require long term patient capital” Kalyegira said.