For the second year running Uganda has clinched the fourth spot in the continental financial markets index conducted by the Absa Group Limited in association with the Official Monetary and Financial Institutions Forum [OMFIF].
This year the index covered 28 countries with two new entrants in Cabo Verde and Tunisia following the addition of Zimbabwe, Madagascar and the Democratic Republic of Congo [DRC] in 2022. The annual report produced by the index is premised on market depth, market transparency, tax and regulatory environment, access to foreign exchange, capacity of local investors, macroeconomic environment/ transparency, and legal standards and enforceability.
In spite of a fall in foreign exchange reserves, a poor performance in the capacity of local investors and the lack of market depth in the equities and bond market; Uganda outperformed its neighbours with bigger economies: Kenya, Tanzania, and Ethiopia, and was only topped by South Africa, Mauritius and Nigeria in the continental ranking index.
With the index's categories ranked out of a total score of 100, Uganda bagged the following scores in the benchmarked six categories: macroeconomic environment and transparency [86/100], legal standards and enforceability [85/100], market transparency, tax and regulatory environment [79/100], access to foreign exchange [67/100], market depth [46/100] and capacity of local investors [14/100].
Uganda's subpar performance in market depth and capacity of local investors sticks out like a sore thumb. The document details market depth as the size and liquidity of domestic equity and bond markets along with the diversity of listed assets. The Pearl of Africa's low score in market depth speaks to a below average stock market, accompanied with little activity in the domestic bond market.
This was attributed to a challenging global economic environment rampant with inflation, rising interest rates in advanced economies and geopolitical tensions that had a ripple effect on financial markets in Africa. The document further captured a drop in stock market capitalization as a percentage of GDP in Uganda between June 2022, and June 2023.
Regarding the capacity of local investors, the index evaluates the potential for institutional investors to drive capital market growth based on the size of pension fund markets both in per capita terms and relative listed securities. On both parameters, Uganda performed poorly as pension fund assets per capita fell to below 0 [negatives], on top of there being no change in pension fund size, and pension fund assets domestically.
Another area Uganda came short was in foreign exchange reserves. The country experienced a fall in forex reserves from 4.2 months in import cover in 2021 to about 3.7 months of import cover in 2022. This was attributed to rising interest rates in advanced economies and a flight to safety amid the Russia-Ukraine war which led to capital outflows for much of Africa.
In like manner, Uganda wasn't able to duplicate the success of her neighbours -- Kenya, Tanzania and DRC in improving its credit score, a fete the Great lakes nations achieved because of higher international corporate ratings. On the bright side, Uganda [along with Botswana] led the pack in macroeconomic environment and transparency. This is because of Uganda's transparent fiscal and monetary policy decisions as well as timely data releases for key macroeconomic variables.
Also, inflation in Uganda dropped from double-digit territory in 2022 to below 5 percent which is within Bank of Uganda's target. The central bank pins this decrease in inflation on lower food and fuel inflation and recent policy tightening. It is worth noting that between the years 2017 and 2022, Uganda has experienced a compound annual GDP growth rate of 4.5 percent; and this is expected to rise to 6.5 percent between 2022 and 2027.
The report applauds Uganda's efforts at investor education to improve financial literacy by remarking: "In Uganda an investor education programme was implemented to enhance knowledge and understanding of capital markets products and services among individuals and communities".
This is done to encourage savings to create awareness about capital markets, and to drive market activity through collective investment schemes. Uganda maintained exclusivity by being one of the seven economies in the index to have adopted a netting legislation. This it accomplished by passing the Financial Institutions Regulations 2023 bill in April. With netting legislation in place, an investor will be able to settle a loss in one financial instrument with another that has got gains.
For example, if an investor has a debt in one security, they can offset it with the security that has gains. Also, it'll make payments to creditors more assured in case of defaults. The Absa group report makes mention of the steps Uganda is taking to develop guidelines to issue financial securities which will be used to bankroll environmental projects known as green and sustainable assets.
On how best Uganda can solve her problems of the lack of market depth, depleting foreign exchange reserves, and shrinking pension fund assets and size; founder of Uganda Securities Exchange and former chairman of East Africa's largest pension fund -- Uganda National Social Security Fund; Mr. Geoffrey Onegi Obel offered the following answers: "Financial sector depth does not happen by accident. It is a direct function of monetary and fiscal Policy. We have been pushing for a Uganda Bond Market Development Program for decades [and still are]; however, we cannot succeed in the policy vacuum which currently prevails in favour of a cash economy".
Concerning the depth of the equities market he replied, "The equities market cannot also grow and develop without a strong bond market as its foundation - especially for benchmark pricing".
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When making the case for how to grow pension funds in size and assets the former pension fund chief had this to say, "We have to abandon the failed poverty alleviation school of thought that Ugandans/ Africans cannot save".
He continued to explain that an integrated economy wide domestic savings policy/program would go a long way in boosting the size and types of lifetime savings programs. In his own words, "We have also been pushing for this for decades".
In regard to diminishing foreign exchange reserves Mr. Onegi Obel acknowledged that "For the size of our economy and natural resource endowment, our forex reserves are small". "Indeed, we would be in trouble if it were not for Ugandan diaspora remittances. These remittances can even triple over a short timeline with a policy framework as in other countries".
To counter a declining foreign exchange. reserve, Mr. Onegi Obel recommends that "we [Uganda] style up and produce world class goods and services in order to grow our foreign reserves".
He notes that by making simple strides like joining the ranks of the cleanest countries in the world, "Our tourism and related revenues would double or even triple". This alone would bring in more foreign exchange and, in the process, replenish our forex reserves.
