Community, Diaspora and Immigration
Investing in Financial Markets, a focus on Diaspora bond
Transcript from the 2nd Uganda Convention discussion:
Hon. Maria Kiwanuka, The minister for Finance, Planning and Economic Development was the keynote speaker on the session about financial markets. She said that Diasporans have been sending money home to their families, educate children, and look after parents, to build typically housing for them and their families. Now, she said, was the time to look at the financial markets as a way for the Diaspora to invest their money back home in markets like the Diaspora Bond and the stock market of Uganda and several other instruments.
The government knows that the Diasporans can be a stable source of funds more than any other source of investors because their familiarity with Uganda gives them a better perception of any possible risk. Also, Diasporans are generally less concerned with exchange rate fluctuations because they will invest in Uganda for the long term.
The moderator of the panel was Edwin Charles Senjobe Sentogo. The panel guests were Veronica Kalema from Ned Bank Capital Africa Credit, Derrick Smail of Homestrings, Kenneth Egesa from Bank of Uganda where he heads the statistics department and Philip Obuya, the Executive Director of Operations in the Bank of Uganda.
The moderator mentioned that in August 2012, it was reported that Bob Diamond, the former CEO of Barclays Capital was to introduce complex investment banking products like hedge funds, derivatives and swaps in Uganda. He invited Veronica Kalema, who does a lot of credit rating on the African continent to explain where Uganda’s financial markets stand at the moment and why should the Ugandans in the Diaspora be interested in investing in financial products in Uganda.
Veronica Kalema explained that Uganda’s financial markets are still at the development stage but nevertheless pose a lot of investment opportunities. Uganda developed a domestic Bond market ten years ago, and increasingly, African countries are going in the Euro Bond market and issuing debt bonds which would have been unthinkable 5 years ago.
She said that Zambia recently issued its debut Euro Bond which was oversubscribed by 15% , amounting to basically $12billion worth of investment and she was sure that was also the way Uganda and all the rest of the frontier markets were moving towards.
Mr. Phillip Wabulya, Executive Director Operations Edwin was invited to talk about the Diaspora Bond. He explained first that in 1993, the government had liberalized the economy, when just $50,000 could move the entire market of Uganda and the exchange rate would be up. The trade has changed positively and the capital markets right now demand a Diaspora bond because a lot of Ugandans are looking for other investment avenues and products beside the usual real estate.
Mr Wabulya further said that Uganda has an active secondary market whereby government securities are being traded. In addition, the Minister of Finance is committed to build skills and investment opportunities, and the Bank of Uganda via the UK Convention, aims to raise awareness and to look forward to the implementation of the Diaspora bond in the near future.
Mr Wabulya explained how people in the Diaspora will be able to buy or sell the Diaspora bond after its introduction, and how they will be able to access it from outside Uganda. He cited that from July 2011, Uganda received about $252million of investment in the financial markets in the bonds and treasury bills. He assured investors and Ugandans that it is already happening, that the opportunities are there and other shrewd investors were taking advantage of them, rather than looking at only infrastructure, housing and the like.
Mr Wabulya also said that Uganda Stock exchange (USE) realized that in Uganda, a lot of the financial markets are based in the commercial banks. Bank of Uganda, Uganda Securities Exchange and Capital Markets Authority are currently discussing and exploring the best way to make it work. He said “we have what we call a central depository system that we hope will give access to a lot of investors to invest electronically into the government of Uganda securities and equity market, which will be operative in the next few months.”
Regarding threshold of investment, Mr Wabulya said that currently, foreign investors hold 15% of the government stock of government securities. A foreign investor can invest from as low as UgShs 100,000 without any maximum limit.
Concerning the minimum and maximum investment allowed for the Ugandans in the Diaspora, Mr Wabulya gave the following example: £100 a month totals £1200 a year; during the recent inflation where interest rates were as high as 25%, Ugandans who would have invested 1million UgShs shillings would have earned UgShs 250, 000. He stressed that no other investment right now can offer that amount of money anywhere in the world.
Lastly, Mr Wabulya addressed the worries of fraud, non- compliance of regulations and how to mitigate any risk from mismanagement of funds, which were put forward by some delegates. He revealed that every investor he had visited recently said that the Bank of Uganda pursued a very strong monetary policy that has insulated commercial banks from the problems that could have happened. He explained that banks in Uganda are sufficiently capitalized and have enough liquidity to meet the obligations. He added that BOU has a very strong supervision team headed by Mrs Justine Bagyenda that does not tolerate any flexibility in terms of any breaches in the requirement.
The moderator invited Derek Smail of Homestrings (www.homestrings.com) to make a contribution focusing on investment and getting good return on investment.
Derrick started by saying that the Diaspora, who sent money home with a tune of
more than $768m in 2010, wanted to invest in their own country’s manufacturing, export, etc and that the actual ability to do that was about 17% or 12%, and that much ended up being invested in subsistence only.
To match up these expectations, Homestrings.com was set up as an investment vetted platform which helps investors looking for opportunities, and enables government and private agencies to promote their products like bonds, Diaspora bonds, equity funds, public private partnerships projects and government initiatives.
Hon. Maria Kiwanuka, The minister for Finance, Planning and Economic Development said that the African Development Bank issued a local currency note of Shs125billion on the Ugandan Stock Market in a bid to raise funds for different projects funded by the bank. She was pleased to share that Uganda is only the second country in Africa 9after South Africa) where Africa Development Bank has felt that there was enough credit rating. She said that if Uganda’s credit rating was good enough for ADP, it should be good enough for the Diaspora. The delegates applauded with happiness.
Mr. Phillip Wabulya further commented on how the interest rates are determined in Uganda. He clarified two types of investors: those investing less that 10million Ug Shs ( $4000) who buy at the set price; and those who invest over 10million Ug Shs, who are entitled to bid for a price which later determines the prices. The interest rates really depend on the players in the market at the time, and on the prices they are willing to take for the amounts that are offered in the market.
A delegate asked the panel to define the Diaspora Bond in lay man’s terms. Mr. Wabulya clarified that the Diaspora bond is a bond, or a paper, that people, not living in the country, can invest in, and is normally used to raise funds for infrastructure development. For example, they can raise money for a particular road project, and the people allowed to invest are those not living in Uganda, which defines it as a Diaspora bond. This bond will normally have yearly tenures between 3- 15 years, as it normally is a long time investment.
One delegate wanted to know the mitigation measures taken against faithless bankers that may manipulate the rate only to reward the investor at a lower rate than the actual rate of profit.
Hon. Maria Kiwanuka, The minister for Finance, Planning and Economic Development addressed this concern simply by referring to the Financial Times newspaper, rating Uganda as the best low-risk investment country in East Africa, which should put to rest all doubts and questions on the risk factor.
Phillip Wabulya added to the Minister’s point by saying that Uganda’s credit rating is done by the well-known credit rating agencies Fitch (www.fitchratings.com) and Standard and Poors (www.standardandpoors.com). He pointed out that the ratings Kenya, Tanzania and Zambia received from similar rating agencies quickly showed that there is an advantage of investing in Uganda, compared to those countries.
Derek Smail from Homestrings finally said that Kenya, Nigeria, Ghana and Mozambique have Diaspora bonds, and that what Uganda currently has is a 91 day Treasury bill which is paying 12% on an annual basis. He added that after the Convention, he was going to invest in a 91 day Republic of Uganda treasury bill simply because he understood a little bit more about Uganda, and he thought that Uganda needs it, Uganda deserves it and is safer!
The session was concluded by the Minister of Finance thanking the panelists and the delegates who patiently listened to the vast information shared with them.