Govt’s rising need for cash excites securities investors

Interest rates on government debt have risen to 16 percent up from 15 percent in July, with investors taking advantage of government’s increased need for cash to finance budget shortages.

Last week, government raised Shs1.1 trillion in the bond market through three securities - one with a maturity of two years, and two others with a maturity of five and 15 years, respectively.

The three have corresponding yields of 15.5 percent, 16 percent, and 16.5 percent, respectively.

Interest rates have been surging, rising by an average of 50 basis points after dipping from 16.5 percent in May to 15.8 percent in July.

Thus the increase in yields has hieghtened the scramble for securities in the bond market, under which Bank of Uganda had sought Shs230b for the two-year bond, Shs330b for the five-year bond, and Shs430b the 15-year bond. However, investors, majority of whom included banks and large financial firms tendered Shs702.9b for the 15-year bond. 

The 15-year bond attracted the most interest by collecting the largest amount, while the five and two-year bonds realised Shs403b and Shs263b, respectively. 

Higher tax revenue and lower spending in July had seen government significantly cut borrowing, with the Finance Ministry borrowing just Shs29.95b, which was lower than the planned Shs975.5b.

But, the borrowing increased in August and September.

In the September auction, government accepted Shs140b more than it had planned, even though the market offered more than Shs1.5 trillion - almost twice the amount it tendered.

However, a large sum of the borrowed money has been used to compensate lenders whose debt was maturing rolled over, something that market experts say has presented government with high refinancing costs.

Rolling over maturing debt means that when government bonds are due for repayment, instead of paying them off, government issues new bonds to raise money needed to pay old ones. Essentially, this is borrowing more to cover past debt.

The Ministry of Finance indicates that government raised Shs1.58 trillion in August, of which Shs527.73b was used to pay maturing debt, while Shs1.05 trillion was allocated for other budget needs.

Government has been cutting back external commercial borrowing due to high refinancing costs.

Instead, it has put focus on domestic borrowing.

Data shows a heavy reliance on the local market, with over Shs5 trillion raised in bonds and treasury bills over the past three months alone.

The aggressive borrowing has resulted in government accepting bids in bond auctions that exceed the amounts originally intended to offer.

“By the end of September, it is estimated that [government would] have borrowed at least Shs6 trillion from the sale of bonds and [treasury] bills in a span of 90 days, with around Shs5.3 trillion already borrowed. This level of borrowing is unprecedented,” wrote Mr Alex Kakande, a financial markets consultant.

This, according to a notice co-authored with economist Enoq Nyorekwa Twinoburyo, is due to underperformance in previous auctions, low tax revenues, anticipated supplementary budgets, challenges in securing external financing and the need to meet large upcoming debt maturities.

This is happening even when Bank of Uganda has tried to lower rates, causing domestic interest rates to be less responsive to changes in policy rates.

For instance, the 15-year bond auctioned last week had an interest of 16.5 percent, up from 15.8 percent in July, which creates problems for the private sector in terms of access to credit.

In their notice, Mr Kakande and Dr Twinoburyo noted that recurring debt rollovers are making the situation worse and present heightened fiscal risks, among which include the growing burden of debt servicing, which diverts resources from critical sectors such as health and education.

Thus, to mitigate this issue, they argue, it is essential to strengthen fiscal consolidation measures and enhance Parliamentary scrutiny over domestic borrowing and debt management.