Medium Term Debt Management Strategy (MTDS)

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REPUBLIC OF UGANDA

Medium Term Debt

Management Strategy

(MTDS)

April 2015

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MediumTermDebtManagementStrategy2015 Page1

MediumTermDebtManagementStrategy

(MTDS)

2015/16–2019/20

April2015

REPUBLIC OF UGANDA April 2015

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AproductoftheDirectorateofDebtandCashManagement

MINISTRYOFFINANCE,PLANNINGANDECONOMICDEVELOPMENT

Enquiriesconcerningthepublicationshouldbeaddressedto: TheDirector

DirectorateofDebt&CashManagement

TreasuryBuilding

MinistryofFinance,Planning&EconomicDevelopment

P.O.Box8147,Kampala,Uganda

Tel:+256–414–707110

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FOREWORD

TheUgandaVision2040aspirestotransformUgandaintoamodernandprosperoussociety

within30yearsthroughprovisionofadequateinfrastructure,developmentofagriculture,

humanresourceandservicessectors,enlargementofmarkets,strengtheningoftheprivate

sectorandthroughindustrialization.

ImplementationoftheUganda2040Visionwillrequiresubstantialresourcesthatwillpartly

be garnered throughdomestic andinternational borrowing. To ensurethatour debt

remainssustainable,suchborrowinghastobecarriedoutthroughaproperlyformulated

MediumTermDebtStrategy(MTDS).

The2015/16Ͳ2019/20MTDSprovidesafinancingframeworktomeetthemediumterm

fiscalfinancingrequirementthatwouldminimisedebtservicingbudgetarycostsandthe

risksexposuretogovernmentwhileatthesametimeendeavouringtomaintainourdebt

sustainable. ThisMTDS has been prepared by the Ministry of Finance, Planningand

EconomicDevelopmentanditillustratesgovernment’scostandrisktradeͲoffsassociated

withdifferentfinancingoptionsandtheriskexposureembeddedinthecurrentdebt

portfolio.Itisacoherentframeworkwhichdeterminestheappropriatefinancingmixof

concessional,semiconcessionalandnonͲconcessionaldebtnecessarytofinanceplanned

expenditure,tobeacquiredinlinewiththePublicDebtManagementFramework2013

(PDM2013)policyobjectives.Therefore,theMTDSisprimarilyfocusedondeterminingthe

appropriateoverallcompositionoftheentiredebtportfoliooverthemediumterm,taking

intoaccountmacroeconomicindicatorsandthemarketenvironment.

AdoptingsuchanexplicitandformalMTDSwillenabletheGovernmentofUganda(GOU)to

makeinformeddecisionsonthecostsandrisksassociatedwithanyalternativefinancing

considerations.TheMTDSwillguideonthemostappropriatefinancingoptionwhichwill

ensurethatGOUtakesadvantageofnewfinancingopportunitieswithoutimpairingourcost

andriskthresholdsinthePDM2013.

WecommittoannuallyreviewtheMTDSinlinewiththemediumtermfiscalframeworkto

alwaysprovideaninsightandclearguidanceontheriskandcosttradeͲoffsthatcanbe

accommodatedconsistentwiththelongͲtermdebtmanagementframework.Implementing

theMTDSwillhelpusavoidtheconsequencesarisingfromunsustainableaccumulationof

public debtand build broadͲbased support for responsible financial stewardship,and

accountability.

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LIST

OF

ABBREVIATIONS

AfDB AfricanDevelopmentBank ADF AfricaDevelopmentFund ATM AverageTimetoMaturity ATR AverageTimetoReͲfixing

BADEA ArabBankforEconomicDevelopedinAfrica BoU BankofUganda

DSA DebtSustainabilityAnalysis EIB EuropeanInvestmentBank GDP GrossDomesticProduct GoU GovernmentofUganda

HIPC HeavilyIndebtedPoorCountry

IDA InternationalDevelopmentAssociation IDB IslamicDevelopmentBank

IFRS

IFMS

InternationalFinancialReportingStandard IntegratedFinancialManagementSystem

IMF InternationalMonetaryFund IR InterestRate

MDRI MultiͲlateralDebtReliefInitiative MEPD MacroeconomicPolicyDepartment

MoFPED MinistryofFinance,PlanningandEconomicDevelopment

MTDS MediumͲTermDebtManagementStrategy MTEF MediumTermExpenditureFramework PDM2013 PublicDebtManagementFramework2013 PFMA PublicFinanceManagement Act

PSC PrivateSectorCredit PV PresentValue ST ShortTerm

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EXECUTIVE

SUMMARY

ThePublicFinanceManagementAct2015requirestheHon.MinisterofFinance,Planning

andEconomicDevelopmenttohaveaMediumTermDebtStrategyagainstwhichaReport

onthemanagementofPublicDebtcanbepublishedasprovided(Section42(2)(b)ofthe

PFMAct2015).ThisfirstformalMediumTermDebtManagementStrategy(MTDS2015)

coversaperiodoffivefinancialyearsFY2015/106 ͲFY2019/20andprovidesafinancing

frameworktomeetthemediumtermfiscalfinancingrequirementthatwouldminimisedebt

servicingbudgetarycostsandriskexposureswhileendeavouringtomaintainourpublicdebt

sustainable.TheMTDS2015illustratescostsandriskexposureembeddedinthecurrent

debtportfolioandtogetherwithcostandrisktradeͲoffsassociatedwithdifferentfinancing

optionstoinformfiscalpolicymanagement.

ThekeyaimfortheMTDS2015istoascertainthecostandrisktradeͲoffoffinancingthe

medium term fiscal deficit through borrowing while remaining mindful of our debt

sustainability. TheMTDS2015hasbeendevelopedwithintheguidelinessetoutinour

PublicDebtManagementFramework(PDM2013)whosemainobjectivesare(i)tomeet

Government’sfinancingrequirementsattheminimumcost,subjecttoaprudentdegreeof

risk;(ii)toensurethatthelevelofpublicdebtremainssustainable,bothinthemediumand

longtermhorizonwhilebeingmindfulofthefuturegenerations;and(iii)topromotethe

developmentofthedomesticfinancialmarkets.Accordingly,theMTDS2015informsthe

government’s financing plan by setting out, inter alia, the least cost combination of

borrowinginstrumentswiththemostprudentdegreeofriskthroughwhichtoraisethe

financingrequirementsoverthemediumterm.Thisisbydeterminingthemostappropriate

and realistic overall composition of the public debt portfolio, taking into account

macroeconomicindicatorsandthemarketenvironment.

Overthemediumtermfiscalframework,theMTDS2015envisagesasignificantrelianceon

nonͲconcessional external financing and domestic borrowing from the domestic debt

markettomeettheGovernment’sbudgetaryfinancingrequirements.Thisisinrecognition

of the limited availability of concessional financing for Uganda’s significant planned

infrastructureprojectsoverthemediumterm.

FourborrowingStrategiesrepresentingdifferentfinancinginstrumentshavebeenassessed

toestablishthemostrealisticStrategywiththeleastcostandrisktradeͲoffs. Themost

preferredStrategyisthenrecommendedasthefinancingbasisforconsiderationoverthe

mediumterm. ThefourStrategiesthatwehaveassessedareasfollows.Strategy1(S1)

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attemptstomirrorourtraditionalpostdebtreliefapproachofprioritizingconcessional

financing. Strategy2(S2)considersadebutEuroBond.TheSovereignBondIssuance

exploresintothecostandrisktradeͲoffsofasovereignbondissuanceontheinternational

marketifthisfinancingalternativeweretobeconsidered.Strategy3(S3)assumeslargely

nonͲconcessionalborrowingontermssimilartothosefromthemostrecentbilateraland

commercial creditors’ negotiations. This Strategy particularly recognises the limited

availabilityofconcessionalfinancingforourlargeinfrastructureprojectsplannedoverthe

mediumterm. TheStrategyassessthecostandrisktradeͲoffsofthecurrentfinancing

distributionasdetailedinthemediumtermfiscalframeworkwithabiastowardsnonͲ

concessionalexternalfinancing.FinallyStrategy4(S4)assumesapredominantrelianceon

domesticfinancingwithaviewofalsoestablishingthecostandrisktradeͲoffsoflargely

borrowingfromdomesticfinancialmarket. TheassessmentoftheStrategiesfocusedon

twosolvencyindicatorsofdebtͲtoͲGDP(Debt/GDP)andPresentvalueͲofͲDebtͲtoͲGDP(PV

ofDebt/GDP);andtwoliquidityindicatorsofinterestͲtoͲGDP(interest/GDP)andinterest

costͲtoͲDomesticRevenueexcludinggrants(Interestcost/Revenue).

Asexpected,S1,whichmaximisesconcessionalborrowingprovidesthelowestcostandrisk

combinationdespitehavingthehighest exposuretoforeignexchangeraterisk. This

Strategy,however,underminesthelimitedavailabilityofhighlyconcessionalfunds.S4

whichlargelyborrowsfromthedomesticfinancialmarketprovidesthehighestinterestcost

exposureamongstallthestrategiesasaggressivedomesticsecuritiesissuancedoesnot

allowdomesticinterestratestocomedownfaster. Highdomesticinterestrateswould

worsentheinterestcostandthereforenotidealforlargeissuanceoflongtermdated

instrumentsastheylockinthehighratesoveralongperiod.S4thoughhasthelowest

foreignexchangeriskexposuregiventhedominanceofshillingsdominatedloansinthe

portfolio.S2isthemostriskStrategyandrelativelymorecostlythantheotherstrategies.

The current increasing interest ratesat the international financial markets makethe

SovereignBondmorecostlyandtherateshighlyunpredictablegiventhesubjectivenature

ofthepricingmechanismofsuchbonds. Exploringintotheinternationalmarket(S2),

therefore,istheleastattractiveofallthestrategies.S3exposesUganda’sdebttorelatively

highinterestratesandshortermaturitiescomparedtolargelyconcessionalfinancing(S1)

thatGovernmenthasaccessedinthepast,reducingtheoverallaveragetimetomaturityof

theentireportfoliobyendJune2020. TheStrategy(S3),notwithstanding,isthemost

realisticamongstthestrategiesasitprovidesthemostrealisticcostandriskimplications

toUganda’soveralldebtsustainability,despitealargeconcentrationofnonͲconcessional

borrowingoverthemediumterm.

GenerallytheMTDS2015tendstoindicatethatthetotalpublicdebtwillrisesubstantiallyon

theaccountoflargeinfrastructurefinancingprojectedoverthemediumterm.ThePVͲDebtͲ

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to38.3bytheendofJune2020.TheexternalnonͲconcessionalborrowingduringthe

mediumtermwouldalmostuseupallthefiscalspaceasthePVͲexternalͲdebtͲGDPunderS3

of26.6percentnearlyreachesthemaximumlimitof30percent.Nonetheless,thepresentͲ

valueͲofͲdebtͲGDPwouldstillbewithintheEACdebtconvergencecriteriaoflessthan50

percentthoughlimitinganysubstantialexternalborrowinginthenearfuture.

Itisimportanttonotethattheseresultsdependonthegrowthandexpenditureforecasts

built into the medium term fiscal framework. If economic growth forecasts are not

sustained,thiswillimpactthePVdebtͲtoͲGDPratio.Similarly,theresultsinthisMTDS

consideronlytheborrowingcommitmentsthatarealreadyembeddedinthemediumterm

fiscalframework.Anyadditionalfutureborrowingwouldworsenthedebtsustainabilityand

riskindicators.Theroomforanyadditionalfutureborrowingisdependentoneconomic

performance.

Goingforward,anannualreviewofpotentialfinancingstrategiesshallalwaysbecarriedout

toestablishtheirfeasibilityandrelativemerits.Nonetheless,iftherearesignificantand

sustaineddeviationsineconomicandfiscaloutturnsrelativetothoseassumedinthisMTDS,

thenStrategy3(S3)maybereviewedandrevisedbeforethemandatoryannualreview.This

Ministryshallthereforecontinuouslymonitorthekeymacroeconomicandinterestrates

assumptionsagainstthoseassumedintheanalysis.Anysignificantandsustainedchange

wouldindicatetheneedtorevisethestrategygoingforward.Monthlyreviewofthecost

andriskindicatorsshallalwaysbeassessedagainstthePDM2013toidentifyanysignificant

deviationsandtoestablishanyearlysignalsrequiringurgentdebtmanagementattention.

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CHAPTER

1 Ͳ

MediumTermDebtManagement

1.1 Overview

The overall purpose of the MTDS is toguide the contractingand management of

government’sdebtportfolioforthefiveyearperiodfromFinancialYear(FY)2015/16to

FY2019/20.TheMTDSfocusesexplicitlyonthecharacteristicsofthedebtportfolio,by

outliningthegovernment’spreferredcompositionofthedebtportfolio–takinginto

accountthecostͲrisktradeͲoffsinherentindebtmanagement–andthebroadfinancing

planitintendstoimplementtoachievethepreferredportfoliocomposition.

WhilethePublicDebtPolicyFramework(PDP2013)setsouttheoverarchingobjectives,

principlesandlimits,withwhichdebtpolicyoverthenextfiveyearsmustbeconsistent,the

MTDSfocusesondebtmanagementissues.TheMTDSisinformedbyanddevelopedwithin

theguidelinessetoutinthePDM2013,andwillbeupdatedeachyearasaGovernment’s

rolling5ͲyearMediumͲTermDebtManagementStrategyasrequiredbySection42ofthe

PublicFinanceManagementAct.ThisMTDSinformsthegovernment’sfinancingplan,

whichsetsout,interalia,thetotalamounttheGovernmentplanstoraisethrougheach

categoryofborrowinginstrumentsinordertomeettheannualfinancingrequirementfor

theyearahead.

ThisIntroductionpresentsthebackgroundfortheMTDS,includingGoU’soveralldebtpolicy

framework,PDM2013,withinwhichthisMTDShasbeendeveloped.Chapter2providesan

analysisofthecurrentdebtportfolio.Chapter3providesthechosenMediumͲTermDebt

ManagementStrategyanditsrationale.

1.2 The

Debt

Strategy

Objectives

TheobjectivesinthePublicDebtManagementFrameworkformthefoundationforthe

MediumTermDebtManagementStrategy(MTDS)forFY2015/16Ͳ2019/20.Thepriorityof

thepolicyframeworkremainsensuringdebtsustainability. TheFrameworkalsorequires

that,forallborrowingconsiderations,evaluationofcostsandrisktradeͲoffsshouldbedone

toarriveatthemostoptimalfinancingstrategyforeachfinancialyear.TheFramework

considersdomesticborrowingnotonlyasanalternativesourceofGovernmentfinancing

butalsoasameanstopromotethedomesticfinancialmarkets.TheDebtPolicyFramework

objectivesarerepeatedhere:

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1. tomeetGovernment’sfinancingrequirementsattheminimumcost,subjecttoa

prudentdegreeofrisk;

2. toensurethatthelevelofpublicdebtremainssustainable,overthemediumand

longtermhorizonwhilebeingmindfulofthefuturegenerations;and

3. topromotethedevelopmentofthedomesticfinancialmarkets.

Governmentshallcontinuetopursuethesameobjectivesoverthemediumterm.ThisDebt

Strategy,therefore,shallguideGovernmentdebtmanagementoperationsin2015/16and

overthemediumtermfiscalframeworkwhilemindfuloftheassociatedcostandrisktradeͲ

offsofourpublicdebtasweconsidernewandnonͲtraditionalfinancingoptions;support

macroeconomicstabilityandensuringdebtsustainability.

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CHAPTER2Ͳ

PublicDebtPortfolioReview

Thenominalpublicandpubliclyguaranteeddebtoutstandinganddisbursed(stockof

debt)increasedfromUS$6.4billionasatendJune2013toUS$7.5billionasattheendof

June2014(ofwhichUS$4.3billionwasexternalandUS$3.2billionwasdomestic.The

increaseinstockmorethanoffsettheimpactoftherebasedGDPonthedebttoGDPratio

whichroseby2percentagepoints,from26.3percentofGDPasatendofJune2013to

28.6percentasofendJune2014or20.8percentinPresentValue(PV)1terms(seeTable1

belowrefer).Externaldebtincreasedbyjustlessthanonepercentagepointto16.3percent

ofGDPor8.5percent inPVterms,whiledomesticdebtincreasedby lessthantwo

percentagepointsto12.3percentofGDPasofendJune2014.Figure.1belowshowsthe

evolutionofthenominalpublicdebtoverthelast10yearswithrecentlevelsofpublicdebt

toGDPtrendingwellbelowthe75.43percentpeakexperiencedbeforetheHIPCandMDRI

andthe74percentCPIApolicyͲdependantthreshold.

InPresentValueterms,Uganda’spublicdebtincreased

Figure.1:PublicDebtTrendsfromFY2003/04–FY2013/14

Source: DMD-MoFPED

2.1 External

Debt

Stock

OverthepostͲMDRIperiodUganda’sexternalstockofdebtdisbursedandoutstanding

(DoD)hasrisenfromUS$1.47billioninFY2006/07toUS$4.3billioninFY2013/14–orfrom

11.0percentofGDPto16.1percentofGDP(18 percent before GDP rebasing).Over70

percentofthisborrowinghasbeenprimarilyusedforfinancinginfrastructureandsocial

1_The_{PresentValueundertheMTDSͲTool}_{isderivedfromthesummationofdiscounteddebtserviceflowsof} bothprincipalandinterest.OtherDebtManagementtoolssuchastheLICͲDSAtoolderivethePresentValueby onlysummingthediscountedprincipalrepaymentflows.

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Medium services remaind Thebu account below. Bankre multilat current isfrom credito Source: D mTermDe sdevelopm derhasbee

lkofUgand tfor89.0 IDAandA espectively teralcredit tlyaccount NonͲParisͲ rs. Figure DMD-MFPED ebtManag mentsrequi enusedfor da’sextern percentof ADFconcess accountfor orsaccoun foronly13 ͲClubbilate 3:Externa gementStra iredtoenh generalbud nalDoDisc fthetotal sionalwind r58percen tfor5per .0percent eralcreditor alDebtCred ategy2015 hanceprod dgetsuppo contracted externalde dowsofthe ntand21pe centand3 oftotalext rs,whileon ditors’Com Other Multilate 3% 5 uctivityand rt. frommain ebtportfol eWorldBa ercentresp percentre ternaldebt nly2perce mpositionas rals Japan 1% China 8% Oth dtofight lymultilate io,asillust ankandAfr pectivelywh espectively. portfolioo ntisfrom satendJun IDA 58% herParisClub

Bilaterals 1% OtherN ClubB 3 Pag poverty,w eralcredito tratedbyF ricanDevel hileIFADan .Bilateralc fwhich11 BilateralPa ne2014 ADF 21% NonͲParis Bilateral 3% ge12 whilethe ors,who Figure3 lopment ndother creditors percent arisClub IFAD 5%

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2.2 Domestic

Debt

Stock

ThetotalstockofoutstandinggovernmentsecuritiesatendͲJune2014wasShs.7,691

billion2_at_cost._Treasury_Bills_accounted_for_Shs._2,557_billion₍₃₃_per_cent)_while_Bonds accountedfortheremainingShs.5,124billion(67percent).Thistotalrepresents12.3per

centofGDP.

TheratioofTreasuryͲBondstoTreasuryͲBillis67:33,whichisslightlybelowthePDM2013

targetratioof70:30.However,thisrepresentsanimprovementfromthepreviousyear

whentheratiowas64:36asmoreemphasishasbeenputonlongerͲdatedsecurities.Itis

expectedthattheratiowillproceedtowardsthebenchmarkoverthemediumterm.

Figure4:Stockofoutstandinggovernmentsecurities,andshareofBillsandBonds,From

endͲFY03/04toendͲFY13/14

Source:DMDͲMoFPEDandFMDͲBOU.

2.3 Cost

and

Risk

Characteristics

of

the

Existing

Debt

Portfolio

Thecurrentdebtportfolioisdominatedbyexternaldebt,whichlargelyconsistsofhighlyͲ

concessionalloanscharacterisedbylongrepaymentperiodsandwithverylowfixedinterest

rates.Thesefeatureshaveastronginfluenceontheoverallcostandriskexposureof

Uganda’sexistingdebtportfolio(ExternalandDomestic3debt)asofendJune2014,as

describedbelow.

2_{This includes Shs.1.3trillion for monetary policy operations} 3_D_{omesticdebtiscomposedofthestockofgovernmentsecurities} Ͳ 2,000 4,000 6,000 8,000 10,000 0% 20% 40% 60% 80% 100% FY 03/04 FY 04/05 FY 05/06 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 FY 13/14 Domesticdebtstock(Shsbn)(atcostvalue)

TreasuryBills%age TreasuryBonds%age

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MediumTermDebtManagementStrategy2015 Page14 Table1:Cost&RiskIndicatorsforExistingDebtasatendͲJune2014 Source:MTDSͲ2015

2.3.1 Interest

rate

risks

AllUganda’sdebtdisbursedandoutstandingatendͲJune2014wascontractedatfixed

rates.TheoverallAverageTimetoReͲfixing(ATR)4oftheportfolioisthereforethesameas

theAverageTimetoMaturity(seeTable1above).Theportfolio’sATRasatendͲJune2014

was11.8yearswhiletheATRforexternalanddomesticdebtwere18.3and2.3years

respectively.Thisindicatorsuggestsverylowinterestrateexposurefortheaggregated

portfoliogiventhelengthofthematurityprofileoftheentirepublicdebt.Thisisexpected

giventhatUganda’sdebtlargelyconsistsofhighlyconcessionalloanscharacterizedbylong

repaymentperiodsofover40yearsatverylowfixedinterestratesoflessthanone

percentagepoint. Theriskisneverthelesshighfordomesticdebtgiventhelargelyshort

termnatureofthedebtinstrumentshavinganaveragetimetomaturityof2.3years.

Interestraterisk:Uganda’spublicdebtisstilllessvulnerabletointerestraterisk–interest

ratevolatilitiesintheglobalanddomesticmarkets–astheportfolioispredominantlyfixed

ratedebt.TheWeightedAverageInterestRate(WAIR)fordomesticdebtisapprox.12.3

percent,whiletheaverageinterestrateforexternaldebtisonepercentagepointasthe

currentexternalloanportfolio’stermsarehighlyconcessionalwithcontractualinterest

rates significantlybelow marketrates, which significantly brings down theportfolio’s

averageinterestrateto5.9percent.

4_{The average time to refixing (ATR) is a measure of weighted average time until when all the principal}

payments in the debt portfolio become subject to a new interest rate. If all instruments in the portfolio are contracted under fixed interest terms, the ATR will be the same as the average time to maturity.

Externaldebt Domesticdebt Totaldebt 4,300.0 3,234.0 7,534.1

16.3 12.3 28.6 8.5 12.3 20.8 Costofdebt WeightedAv.IR(%) 1.0 12.3 5.9 ATM(years) 18.9 2.3 11.8 Debtmaturingin1yr(%oftotal) 3.3 49.5 23.2 ATR(years) 18.9 2.3 11.8 Debtrefixingin1yr(%oftotal) 3.3 49.5 23.2 Fixedratedebt(%oftotal) 100.0 100.0 100.0 FXdebt(%oftotaldebt) 57.1 STFXdebt(%ofreserves) 4.6 RiskIndicators

Refinancingrisk

Interestraterisk FXrisk

Amount(inmillionsofUSD) Nominaldebtas%GDP PVas%ofGDP

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2.3.2 Refinancing/Rollover

Risks

Theexternaldebtaveragetimetomaturity(ATM)was18.9yearswhiledomesticATMwas

2.3yearsbringingdowntheportfolioATMto11.8years.Thewidedisparityinthesenumbers

isexplainedbythedifferentmaturitystructures:externaldebtismadeupofloansoflong

maturity;whilealmosthalfofdomesticdebti.e.49.5percentismaturingwithinoneyear.As

aresult,theredemptionprofile(figure5)showsapeakofprincipalpaymentinthenext

yearduetoshortͲtermsecurities.Theredemptionprofileforexternaldebtoverthelong

termisrelativelysmooth.

Figure5:PublicDebtMaturityProfileasatendͲJune2014

Source:MTDSͲ2015

Overall,boththeATMandtheproportionsofdebtmaturingina1and2yearssuggestlow

refinancing risk exposure for Uganda’spublic debt portfolio. The proportion of debt

maturing in 1 year from June 2014 is estimated to be only 23.2 percent. The

refinancing/rolloverriskisremainslargefordomesticdebtas49.5percentofdomestic

debtisduetomaturewithinoneyearcomparedtoonly2percentofexternaldebt.Tothe

contrary,theindicatorspointtothefactofverylowrefinancing/rolloverriskassociatedwith

externaldebt.

Figure5aboveshowsbunchingofpaymentsinthefirstthreeyears,followedbyafairly

smoothprofile.Thebunchingofpaymentsinthefirstthreeyearsisonaccountofthelarge

stockoftreasurysecuritiesfallingdueinthatperiod.Thesmoothprofilethatfollowsupto

theendoftheprojectionperiodisprimarilyattributedtoexternalloansforwhichonlya

smallproportionmatureseachyear. 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 5,000,000 20 15 20 17 20 19 20 21 20 23 20 25 20 27 20 29 20 31 20 33 20 35 20 37 20 39 20 41 20 43 20 45 20 47 20 49 20 51 External Domestic

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2.3.3 Exchange

Rate

Risk

BytheendofJune2014,foreigncurrencydenominateddebtconstituted57.1percentdown

from62.1percentoftotalgovernmentdebt,withtheSDRasthemostdominantcurrency.

The breakdown of theSDR5 into different currency component shows that the main

exposureofexchangerisktoforeigncurrenciesistheUSdollar(25.1percentoftotaldebt),

followedbytheEuro(16.9percent)andtheBritishpound(5.1percent).TheJapaneseyen

andtheChineseYuanaccountedfor5.0percentand4.4percentofthetotalexternaldebt,

respectively.Together,these5currenciesaccountfor99percentofthetotalexternaldebt

portfolio. Figure6:CurrencyDistributionofthePublicDebt,endofJune2014 Source:MTDSͲ2015

Suchexposurecanbehedgedbygovernmentborrowingdomesticallywhileraisingits

foreignexchangeearningspreferablyinthecurrenciesrequiredtoservicedebttomatchits

obligations.

5_The_Special_Drawing_Rights_(SDR)_is_a_composed_of_different_currencies_i.e._US_dollar,_British_pounds,_Euro_and Japaneseyeneachaccountingfordifferentweight.

USD 25% JPY 5% CNY 4% EURO 17% Others 1% GBPs 5% Ug.Shs. 43%

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CHAPTER

3 Ͳ

AGGREGATE

MEDIUM

TERM

DEBT

STRATEGY

BroadlythePublicDebtPolicyFramework(PDP2013)envisageslowerlevelsofconcessional

borrowingthaninpreviousDebtStrategies,asthecountry’saccesstotheconcessional

windowgetsmoreconstrained.Subsequently,domesticdebtfinancingisenvisagedtogain

moreprominencein themediumterm. This MTDStakesinto considerationthe key

provisionsofthePDM2013,todeterminethefinancingdistributionandbroaderdebt

managementstrategyforthenextfiveyears.

3.1 Macroeconomic

Assumptions

ThemacroeconomicassumptionsunderpinningtheMTDSareconsistentwiththemedium

term macroeconomic and fiscal framework for financial years 2015/16 – 2019/20.

Uganda’seconomicperformanceinthemediumtermisexpectedtoremainrobust.The

mediumtermeconomicoutlookassumestheeconomyshallgrowfrom5.3percentin

FY2014/15toreach5.8percentinFY2015/16(Table2below)toattainanaverageof6.3

percentoverthemediumtermfiscalframework.

Table2:SelectedMediumTermMacroeconomicandFiscalAssumptions

Source:MoFPEDͲMacroeconomicPolicyDep’t

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Estimates Projections Projections Projections Projections Projections FiscalProjections

Revenuesandgrants(Shs.Bn) 10,750.79 12,348.39 13,574.73 15,327.92 17,270.87 19,767.86 Totalexpenditureandnetlending(Shs.Bn) 15,018.81 18,133.86 19,962.84 22,268.09 22,714.97 24,092.02 TotalBudgetdeficit(Shs.Bn) (4,268.02) (5,785.48) (6,388.11) (6,940.17) (5,444.10) (4,324.16) Publicsectorinterestexpenditure 1,309.40 1,761.35 1,856.28 1,910.57 1,890.25 1,940.14 PublicSectorprimaryexpenditures 13,709.41 16,372.52 18,106.56 20,357.51 20,824.72 22,151.87 Primarydeficit(Shs.Bn) (2,958.62) (4,024.13) (4,531.83) (5,029.59) (3,553.86) (2,384.01)

Grants 939.99 1,038.42 633.24 483.88 272.58 256.06

As%agesofGDP

Revenuesandgrants%ofGDP) 14.3% 14.8% 14.7% 15.0% 15.3% 15.8%

Totalexpenditureandnetlending(%ofGDP) 20.0% 21.7% 21.6% 21.8% 20.1% 19.2% TotalBudgetdeficit(%ofGDP) Ͳ5.7% Ͳ6.9% Ͳ6.9% Ͳ6.8% Ͳ4.8% Ͳ3.5%

Primarydeficit(%ofGDP) Ͳ3.9% Ͳ4.8% Ͳ4.9% Ͳ4.9% Ͳ3.1% Ͳ1.9%

Memorandumitems

RealMPGDPgrowth 5.3% 5.8% 5.9% 6.4% 6.6% 6.8%

Govtdomesticborrowing 1,386.00 1,385.30 950.00 1,200.00 1,400.00 1,421.00 GovtExternalborrowing(US$) 711.80 1,481.01 1,795.18 1,807.09 1,308.72 846.04 NorminalGDP(Shs.Bn,Marketprices) 75,183.61 83,688.38 92,243.97 101,939.60 112,903.76 125,331.19

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RealGDPgrowthisprojectedtoincreasefrom5.3percentbytheendofJune2015and

trendupwardsto5.8percentinFY2015/16andtoanaverageof6.3percentoverthe5Ͳyear

mediumtermtoFY2019/20.GovernmentrevenueexcludinggrantsasapercentageofGDP

isprojectedtoaverage14.5percentduringtheMTDSperiodgrowingbyhalfpercentage

pointannuallywithaprojectedoutturnof13.0percentofGDPinFY2014/15and13.5

percentofGDPinFY2015/16.

Governmentexpendituresisprojectedtoremainatanaverageof20.9percentofGDP

duringthemediumtermperiodwithaprojectedoutturnof20.0percentofGDPfor

FY2014/15and21.7percentofGDPinFY2015/16. Thesamelevelof21.7percentis

projectedthroughFY2016/17andFY2017/18butlaterscaleddownto19.2inFY2019/20as

partofthefiscalconsolidationplan.Duringthemediumterm,Governmentshallpursuean

expansionary fiscal policy to accommodate the huge level of infrastructure projects

including:hydropower(Karuma,IsimbaandMuzizihydropowerprojects);Mirama–Kabaale

TransmissionandDistributionline; EntebbeAirportRehabilitation Phase 1;Albertine

RegionAirport;oilrelatedinfrastructureprojects;andanumberroads.Thetotalcostfor

these projects is estimated at US7.0billion spread over the five years medium term

framework,tobefinancedthroughexternalnonͲconcessionalborrowing.Overthemedium

term,thefiscaloutlookprojectstheprimarydeficittorisefrom3.9percentofGDPin

FY2014/15to4.8percentinFY2015/16andtoanaverageof3.9percentoverthe5Ͳyear

mediumtermprojectionperiod.Nonetheless,towardstheendofthemediumterm,fiscal

consolidationwillbeanimportantelementingovernment’sprudentfiscalmanagement

withadecreasingfiscaldeficittoreducethepressuresondebtmanagement.Inflationis

projectedtoremainwithinthe5percenttargetoverthemediumtermwhiletheexchange

rateisprojectedtodepreciateby12.1percentinFY2015/16andbyanaverageof2.4

percentfortheremainingyearsofthemediumterm.

TheMTDStoolthatisusedfortheanalysistakestheprojectedprimarydeficitprojectionsas

givenaswellastheprojectedprincipalrepaymentsonthecurrentdebtoutstandingand

disbursedasatendͲJune2014.Differentpotentialfinancingstrategieswouldthenattribute

different additional interest costs and principal repayment profiles, andsubsequently

differentgrossfinancingprofiles.Thedetailsofthefinancingcompositionandindicative

financingvolumesareinformedbytheMTDStool.TheMTDSanalysisbelowtakesinto

accountcostandrisktradeͲoffsandtheborrowinglimitwithinwhichdebtisenvisagedto

remainsustainable,inlinewithPublicDebtManagementFramework2013benchmarks.

3.2 Interest

rate

assumptions

Fordomesticborrowinginterestratecost,theMTDSassumesthatinvestorswillchargean

(20)

appliedtheinflationforecast).Accordingly,theMTDSprojectsthattheendJune2014yield

curvenominalinterestratesshallgrowbythemediumterminflationforecastsinorderto

derivethenominalinterestrateforthemediumtermyears.Forwardyieldcurvesare

subsequentlyderivedforoverthemediumterm.

3.3 Potential

Financing

Sources

Governmentshallcontinuetoprioritizeconcessionalfinancingasthepreferredmeansof

meeting external financing requirementsespecially for projects designedto meet

Government’ssocialservicesdeliveryobjectives.Overthemediumterm,however,more

nonͲconcessionalborrowingisprojecttoaddressthefinancingneedstoscaleuppublic

investment. Accordingly,GoUwillseektoachievethemostbeneficialandcostͲeffective

termsandconditionsforexternalfinancing.

a) NonͲconcessionalborrowingwillonlybeconsideredforfinancingofprojectsthat

willprovideaneconomicrateofreturngreaterthantheinterestratecharged.Any

highlynonͲconcessionalloans,suchasaEurobond,willonlybeissuedtofinance

projectswhichnotonlyprovideahighereconomicreturnthantheinterestrateon

theloan,butalsoenablingGovernmenttogenerateasufficientfiscalreturnto

meettheprincipalandinterestcostoftheloan(PDM2013).

b) Thefollowingtermshavebeenassumedforallnewexternalborrowing:

(i) Loansforsocialservicedeliveryanddevelopmentmustbehighlyconcessional

i.e.“IDAcomparableorbetterterms”(38yearmaturity,6yeargraceperiod,0.75

percentofinterest)orwithagrantelement6ofnotlessthan50percent.

(ii) Loansforprojectsintendedtoenhanceproductivitybutonlessconcessional

termsthanthosein(i)aboveshallbeontermswithaminimumof(23year

maturity,6yeargraceperiodandinterestratep.a.ofnotmorethan1.5percent)

oragrantelementofnotlessthan35percent.

(iii) Finally,nonͲconcessionalloansappetitehasbeenlimitedtoonlythosethat

would provideagrantelementofnotlessthan25percentinadditionto

providinganeconomicrateofreturn. Thegrantelementofnotlessthan25

percentalsoappliestoanycommercialborrowingduringthemediumterm.

6_The_grant_element_measures_the_{concessionality}_(softness)_of_a_loan_and_reflects_the_financial_terms_of_a_transaction:

interestrate,maturity(intervaltofinalrepayment)andgraceperiod(intervaltofirstrepaymentofcapital).Itiscalculated asthedifferencebetweenthefacevalueofaloanandthediscountedpresentvalueofthedebtservicepaymentsthe borrowerwillmakeoverthelifetimeoftheloan,expressedasapercentageofthefacevalue.

(21)

3.3.1 Stylized

Financing

Instruments

Underexternalsourcesoffinancing,sevenstylizedinstrumentswereusedindifferent

combinationstorepresentfutureborrowingstrategies.Indevelopingthestylizedfinancing

instruments,referencehasbeenmadetofinancingtermsfromourcurrentcreditorsand

fromtermsofrecentlyconcludednegotiations. Theseinstrumentsaregroupedinthree

broadcategories–(1)multilateralcreditors;(2)bilateralcreditors;and(3)commercial

creditors.

Multilateralcreditorshavethreestylizedinstruments:

x TwoinstrumentswithhighlyconcessionalfixedͲratedtermsi.e.

i. IDAwithinterestrateof0.75percent,witha38Ͳyearsmaturityand6Ͳyears

graceperiod.

ii. ADFwithinterestrateof0.75percent,witha40Ͳyearmaturityand10Ͳyear

graceperiod.

TheseinstrumentsrepresentlargelyloansfrommultilateralsourcessuchasIDA,ADF,IFAD,

andNordicFundthatalltendtohavesimilarterms.

iii. AninstrumentwithnonͲconcessionalfixedͲratedterms.Thiscategory

includescreditorssuchasBADEA,OPEC,EIB,IDBwithanassumedmaturity

periodofaminimumof21Ͳyearsmaturity,3Ͳyearsgraceperiodata

maximumof4percentrateofinterest.

Therearetwostylizedinstrumentsforbilateralcreditorsmuchasthe“OtherConcessional”

instrumentcrosscutsbetweenbilateralandmultilateralcreditors:

iv. OtherͲConcessional–fixedrateloanswith23Ͳyearsofmaturity,and6Ͳyears

graceperiodatamaximumof2percentrateofinterest.Thisincludesboth

bilateralandmultilateralcreditorsthatofferseeminglysimilarconcessional

terms;i.e.IDAͲBlend;KuwaitFund,AbuDhabiFund,UKͲExportCredit

Guarantee,etc

v. Bilateral–NonͲconcessionalfixedrateloanswith20Ͳyearsofmaturityand3Ͳ

yearsgraceperiodatamaximumof4percentrateofinterest.

Commercialcreditorswithtwostylizedinstruments:

vi. Eurobond–fixedrateinstrument,whichispricedbasedon10ͲyearsUSͲ

treasuryinterestrateswithariskspreadof600basispoints,implyinga9

percentcouponusingcurrentrates7_.

(22)

vii. Purecommercialloan–instrumentwith7Ͳyearsofmaturityand3Ͳyears

graceperiodat400basispointsplusinterestspreadsofamaximumof1.5

percent.

Onlyfive(5)domesticstylizedmarketdebtinstrumentsareassumed:

viii. OneTͲbills–representingTͲBillswithmaturityof91Ͳdays,182Ͳdaysand364Ͳ

days;and

ix. FourTͲbondsstylizedinstrumentswithmaturitiesof2,5,10and15years.

Alldomesticinstrumentshavebulletpaymentstructures(i.e.arerepaidinfullattheir

respectiveterminationdates).Theprimarymarketyieldsofthelatestauctionhavebeen

assumedforcurrentTͲBonds.

3.4 Debt

Management

Strategies

and

Market

Scenarios

3.4.1 Description

of

Alternative

Financing

Strategies

TheborrowingStrategiesconsideredbelowareinformedbytheborrowingpaththecountry

islikelytotreadduringthemediumterm.Thesestrategiesreflectalternativewaysto

financethegrossborrowingrequirement,recognisingthefactthatconcessionalborrowing

is limited given the medium term fiscal appetite to meet Government’s planned

infrastructureprojects.Fourstrategiesareassessed,asfollows:

Strategy1(S1):MaximisingConcessionalFinancing.Thisstrategymirrorsourtraditional

post debt relief approach to borrowingbyprioritizing concessionalfinancing by

maximisingavailableconcessionalfinancingallocations,ascommittedbyourlargest

financingpartners.TheStrategyalsotakesadvantageofanyadditionalconcessional

financingfromnonͲtraditionaldevelopmentpartnersthatcouldbeavailable.Under

thisstrategy, externalborrowing accountsforan average of65percentoverthe

mediumtermofnewborrowing,while35percentisthroughdomesticdebtissuance

distributedbetweenTͲBillsandTͲBonds(Table3below).

Strategy2(S2):SovereignBondIssuance:Thisstrategyexploresintotheinternational

marketbyconsideringadebutsovereigndebtissuanceinordertoestablishthecost

andrisktradeͲoffsagainstotheralternativefinancingstrategies.Underthisstrategy,

externalfinancingisassumedtoaccountfor70percentofwhich52percenti.e.36

percentoftheentirefinancingrequirementbeingraisedfromthedebutsovereignbond

issuance.Domesticborrowingisonlyassumedtoaccountfor30percent.

(23)

Strategy3(S3):NonͲConcessionalBorrowing:ThisStrategyassumesabiastowardsnonͲ

concessionalborrowingontermssimilartothosefromourmostrecentbilateraland

commercialcreditors’negotiations.Recognisingthelimitedavailabilityofconcessional

financing for Uganda’s planned infrastructure projects; the medium term fiscal

frameworkassumesquiteasubstantialamounttoberaisedfromnonͲconcessional

sources.TheStrategyusestheexactfinancingdistributionasdetailedinthemedium termfiscalframework;betweenexternalanddomesticwithalargebiastowardsnonͲ concessionalexternalfinancing. Anaverageof60percentofexternalnewborrowing overthemediumtermfiscalframeworkisused,ofwhichover15percentand36 percentoftheentirefinancingrequirementisfromnonͲconcessionalandcommercial borrowingrespectively;Table3refers.

Strategy4(S4):Thisstrategyassumesapredominantrelianceondomesticfinancing

withaviewofalsoestablishingthecostandrisktradeͲoffsofgreaterdevelopmentof

thedomesticfinancialmarket.Underthisstrategy,70percentofnewdebtisassumed toberaisedthroughdomesticborrowing.30percentofthetotaldomesticisassumedto beraisedthroughTͲBillswiththeremaindersplitamongstTͲBondsinstrumentswitha biastowardslongerdatedinstrumentsoftenͲyearandfifteenͲyeargovernmentbond.

Table3:SummaryofAlternativeFinancingStrategies,FY2015/16ͲFY2019/20

Source:MTDSͲ2015

3.4.2 The

Market

Scenarios:

Thefollowingmarketscenarioshavebeenusedtoassesstherobustnessofthedifferent alternativefinancingstrategiesdescribedaboveinresponsetoshocksininterestratesand

exchangerates. Newdebt S1 S2 S3 S4 IDA FX 13% 0% 3% 3% AfDF FX 13% 4% 3% 3% Multilateralnonconcessional FX 13% 4% 0% 9% Other_Concessional. FX 16% 4% 3% 9% Bilateral_nonͲconcess. FX 10% 4% 15% 6% EURO_Bond FX 0% 36% 0% 0% Commercial FX 0% 20% 36% 0% Tbills DX 11% 9% 12% 14% Tbonds_2 DX 11% 9% 12% 11% Tbonds_5 DX 7% 6% 8% 18% Tbonds_10 DX 4% 3% 4% 14% Tbond_15 DX 4% 3% 4% 14% External(US$) 65% 70% 60% 30% Domestic(Shs.) 35% 30% 40% 70%

(24)

Scenario1:Currencydepreciation:A30percentdepreciationthatmaterializesinFY

2015/16andissustainedthroughthereminderofthetimehorizon(throughFY

2019/20).Thisrepresentsarealshockthatisnotpassedthroughtoinflationor

changesinGDP.

Scenario2:AsharponeͲoffincreaseindomesticinterestratesthatmaterializesinFY

2015/16.Interestratesonforeigncurrencydenominatedinstrumentsremainas

underthebaselineassumptions.

Scenario3:Underthisscenario,domesticinterestratesareassumedtoremainas

underthebaselineassumptions.StartingfromFY2015/16,interestratesonforeign

currencydenominatedinstrumentsarecumulativelyincreasedby100bpseachyear.

Scenario4:acombinedshockscenario,whichassumesadepreciationofUGXby15

percentwithrespecttoUSdollarscombinedwithashocktothedomesticyield

curveinFY2015/16asinScenario2.

3.5 Cost

Ͳ

Risk

Analysis

of

Alternative

Debt

Management

Strategies

Thissectionoutlinestheanalysisthathasbeenconductedforasetofdifferentborrowing

strategiesunderalternativeassumptionsofinterestratesandexchangerates.Fromthese

results,theMTDSisselected,assetoutintheconclusiontothischapter.

TheMTDS8Toolisadeterministicscenarioanalyticaltool,wherecomparisonofcostand

riskismadebasedon:theprojectedcashflowsontheexistingdebt;macroeconomic

assumptions;fiscalandfinancialmarketprojections;andalternativeborrowingstrategies.

Thepreferredstrategyisdeterminedbasedon:therelativecostandrisktradeͲoffsagainst

thedebtpolicyobjectives,benchmarksandlimitssetoutPDM2013;andontheextentof

availabilityoftheassumedfinancingsource.Thetoolsubsequentlyprovidesasolidbasisfor

comparingdifferentcostandriskmeasures,andafirmbasisuponwhichthespecific

strategyhasbeendecided.

3.5.1 Description

of

the

Cost

and

Risk

Indicators

The performance ofthefour alternative financing strategieswas assessedunder the

baselineandshockscenariosidentifiedabove.

Fourcostindicatorswereconsidered:twosolvencyindicatorsofnominaldebttoGDP(debtͲ

toͲGDPratio)andpresentvalue(PV)ofdebttoGDP(PVͲdebtͲtoͲGDPratio);andtwo

liquidityindicators ofinterest costͲtoͲGDPratioand interestcostto domesticrevenue

(25)

ratiohavebeenusedThedebtͲtoͲGDPratioisimportantwhenanalyzingthechangesinthe

sizeoftheoutstandingdebtduetoexchangeratechanges,asittakesintoaccountvaluation

effects.ThePVͲdebtͲtoͲGDPrecognizesthematurityprofileandinterestcostsoftheentire

debtportfoliotoprovideamorerealisticcurrentvalueofourfuturedebtobligation.

InterestcostͲtoͲGDPandinterestcostͲtoͲRevenueratiosassesseachstrategy’simpacton

thegovernment’sbudget.

Riskforagivenfinancingstrategyisdefinedasthedifferencebetweenthestrategy’scost

indicator’soutcomeunderariskscenario(i.e.onewithashocktothebaseline)anditscost

outcome underthebaseline.Themaximum riskoutcomeacross thefour alternative

scenarios described above is used to compare the risk associated with each of the

strategies.Forthepurposeofcomparison,thefocusisontheoutcomeattheendofthe

timehorizoni.e.FY2019/2020.

3.5.2 Analysis

of

Alternative

Financing

Strategies

ThemainobjectiveintheanalysisistoestablishafinancingStrategythatwouldprovide

Governmentwiththenecessaryfiscalfinancingatthelowestpossiblecostsubjecttoa

prudentdegreeofrisk.Notwithstanding,theanalysisalsoassessesthemediumtermfiscal

appetite against the sustainability benchmarks set in our Public Debt Management

Framework2013withtheviewofprovidinganydebtmanagementpolicydirection.

AllthefourstrategiestendtoincreasethetotaldebtͲtoͲGDPsubstantiallyunderthecurrent

mediumtermfiscalframework,from28.6percentendJune2014toalmost50percentasat endͲ2020 for the worst Strategy.The sharp rise of the debtͲtoͲGDP amongst all the

financingStrategiesisduetosubstantialprojectedincreasesinborrowingoverthemedium

termtofinancethefiscaldeficit.Theinterestcostalsosubstantiallyincreaseswithinterest

paymenttoGDPincreasingfrom1.4percentendJune2014toalmost4percentforthe

worstStrategy.

x Using the nominaldebt to GDP cost indicator, S1(S1:Ͳmaximizing concessional

financing) has the lowest cost of all the strategies followed by S3(S3:ͲNonͲ

concessionalfinancing),despitebothraisingthenominaldebtͲtoͲGDPto43.9percent

and45.5percentrespectivelycomparedto28.6percentendJune2014.S4(S4:Ͳ

maximizedomesticdebt)hasthelowestriskexposureofthefourstrategies.S4,

however,raisesthedebtͲtoͲGDPcostindicatorconsiderablyto48.1percentdueto

the multipliereffectofinterest cost, whichtranslatesintoadditionalfinancing

requirementresultingfromlargeshareofdomesticborrowing.Subjectingtheresults

toexchangeratedepreciationsandinterestratesshocks,thecostindicatorworsens

withanexchangerateshockof30percentdepreciation,whichraisesthedebtͲtoͲ

(26)

x PVͲdebtͲGDPcostindicatorisalsolowestunderS1followedbyS3withratiosof30.3

percentand38.3percentrespectively(seeFig7below),withS3almostdoublingthe

endJune2014PVͲdebtͲtoͲGDPof20.8percent. Whilethegeneralriseinthecost

indicator is a resultof substantial increaseinexternalborrowing,S1assumes

significantconcessionalfinancing,whichgivesalowerPVͲdebtͲtoͲGDPcomparedto

S3.S1wasanattempttosimulatetheimpactonourdebtifweweretofinancethe

mediumtermfiscaldeficitswithhighlyconcessionalloantermslikeinpastwhen

concessionalloanswereinabundance.S3tothecontrary,simulatedamorerealistic

StrategywithabiasofnonͲconcessionalandcommercialsourcesoffinancing. S2 (S2:ͲDebutSovereignBond)hasthehighestcostindicatorof42.1percentandalso

thehighestriskexposureamongstallthefinancingstrategies.Thisisattributedto

thehighinterestratesassociatedwithsovereignbondissuancesontheinternational

markets. The magnitude of risk exposure amongstS1, S3 and S4 however is

similarunderthepresentvaluecostindicatorgiventhelargeshareofconcessional

debtstillinthecurrentdebtportfolio.Subjectingthecostindicatorstodifferent

shockscenarios,illustratesthatthemaximumriskshockforallstrategiescomes

fromthescenariowitha30percentdepreciationofUGXexchangerateagainstthe

US$seeTable4below.

Table4:ImplicationsofDifferentShockscenariosontheStrategies

x ConsideringtheliquiditycostindicatorofinterestpaymentstoGDP,strategyS1

providesthelowestriskandcost combination with1.8 percentofGDPagain

followedbyS3with2.4percentofGDP.Theratiosarehoweverhigherthan1.4

percentofendJune2014.S4isthemostexpensivewith3.7percentofGDPwhileS2

isthemostriskystrategydespitehavinganinterestcosttoGDPof2.8percent

interestpaymentsofGDP(Fig.8).

x TheinterestͲpaymentͲtoͲdomesticͲRevenuemaintainsthesamerankingwithS1

havingthelowestinterestcostsof11.6percentofdomesticrevenueexcluding

grantsfollowedbyS3with15.6percent. WhileS3marginallyfailstomeetthe

PDM2013benchmarkof15percentofdomesticrevenueexcludinggrantsbya

percentagepoint,S2andS4significantlyfailshortofthebenchmarkwithinterest

costsof18.2percentand23.9percentrespectively.

Figure7:Uganda.SolvencyCostandRiskasofendFY2019/20

Scenarios

S1

S2

S3

S4

Baseline

(Debt

Ͳ

to

Ͳ

GDP)

43.9

46.6

45.5

48.1 Exchange

rate

shock

(30%)

56.5

60.5

57.5

58.2 Interest

rate

shock

1 ([Name

IR

shock

1])

44.0

46.9

45.7

48.4 Interest

rate

shock

1 ([Name

IR

shock

2])

44.1

47.0

45.8

48.6 Combined

shock

(15%

depreciation

and

interest

rate

46.5

49.5

47.9

50.5

(27)

DebttoGDPasatendFY2019/20 PVofDebttoGDPasatendFY2019/20

Datasource:MTDSApril2015

Figure8:Uganda.LiquidityCostandRiskasofendFY2019/20

InterestpaymentstoGDPasatendͲFY2019/20 InterestcosttoDomesticRevenue(exclgrants)as

atendFY2019/20

3.5.3 Other

Risk

Indicators.

ThematurityprofilecharacterizestheanalysisonAverageTimetoMaturity(ATM)and

AverageTimetoRefixing(ATR)uponwhichtheanalysisofrefinancingandinterestraterisks

areanchored.ConcessionalfinancingunderS1helpstoevenouttheportfolio’smaturity

profilewithdebtservicepaymentsevenlydistributed.Howeverbecauseofthelimited

abundanceofconcessionalfinancingotheroptionsareconsidered. Exploringintothe internationalmarketwithasovereignbond(s)(S2)providestheworstdebtservicestress

werematuritiesareskewedtowardstheshorterendofthematurity.Theimpactisevident

fromthematurityprofilebelowwithsizeabledebtservicesamountsinlessthantenyears

whiledisadvantaginganyotherfinancingoptionsthatwouldprovidealternativelonger

maturities. S1 S2 S3 S4 43.50 44.00 44.50 45.00 45.50 46.00 46.50 47.00 47.50 48.00 48.50 0.00 5.00 10.00 15.00 Cost(%) Risk S1 S2 S3 S4 Ͳ 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Cost(%) Risk S1 S2 S3 S4 Ͳ 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Ͳ 0.10 0.20 0.30 0.40 0.50 Cost(%) Risk S1 S2 S3 S4 Ͳ 5.00 10.00 15.00 20.00 25.00 30.00 Ͳ 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Cost(%) Risk

(28)

Switchingtothedomesticmarket(S4)withabiastolongtermbondswouldlengthenthe

maturityprofilegivensomelongdatedinstruments. Preferencefor10Ͳyearand15Ͳyear

bondinstrumentsfairlyprovideamoreidealalternativetoasovereignbond(S2)whose

longestmaturityiscurrently10yearsformostemergingmarkets.However,switchingto

longͲtermbonds(S4) doesnotprovidesignificantimprovementinthe domesticdebt

redemptionprofileoverthelongtermrelativetoS2.Thisisbecausetheswitchtolonger

termdomesticinstrumentsisnotaggressivegiventhedepthofUganda’sfinancialmarket

withlessliquidityandwithfewinstitutionalinvestorswhowouldbeinterestedinlongterm

instruments.Accordingly,inbothS3andS4,themovefromTͲBillstoTͲBondshasbeenused

toenhance2Ͳyearand5Ͳyearbonds.

S3–nonͲconcessionalfinancingprovidesablendbetweenlongdatedandshortdated

instruments. Whilecommercialloansareshortterminnature,mostofthemarecoͲ

financed with long dated nonͲconcessional loans. S3recognizes this fact and where

commercialloanshavebeenassumed,asizeableamountofnonͲconcessionalfinancingis

alsoincluded.Thereforewhilelargepaymentsareevidentattheshorterend,Fig9below

refers,theyareevenlydistributedandlatersmoothenedouttowardsthelongerendofthe

maturityprofile. Thelongerendofthematurityprofileishowevernotsignificantly

differentfromS2andS4giventhatthebulkofnonͲconcessionaldebt(S3)hasamaximum

maturityof20ͲyearscomparedtoS1financinginstrumentswithmaturitiesof40Ͳyears.See

Fig9below.

Figure9:DebtRepaymentProfilesbyStrategy,inShs.Millions,end2020

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 2 0 2 0 2 0 2 3 2 0 2 6 2 0 2 9 2 0 3 2 2 0 3 5 2 0 3 8 2 0 4 1 2 0 4 4 2 0 4 7 2 0 5 0 2 0 5 3 2 0 5 6 2 0 5 9 2 0 6 2 2 0 6 5 2 0 6 8

Strategy

1

External Domestic

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 2 0 2 0 2 0 2 3 2 0 2 6 2 0 2 9 2 0 3 2 2 0 3 5 2 0 3 8 2 0 4 1 2 0 4 4 2 0 4 7 2 0 5 0 2 0 5 3 2 0 5 6 2 0 5 9 2 0 6 2 2 0 6 5 2 0 6 8

(29)

Refinancing Risk:All the financing Strategies’ portfoliosreflect lower Average Time to

Maturity(ATM)comparedtotheendJune2014saveforS1,whichprioritizesconcessional

financingasabaselineStrategy.WehoweverseegreatimprovementsintheATMfor

domesticdebtforallthestrategiesbyissuingmorelongͲtermdatedinstruments.Theeffect

ofissuinglongͲtermdomesticsecuritiesisrelativelybigunderS4withdomesticdebt

portfolioATMincreasingto7.4yearsfromof2.3yearsofendJune2014,seeTable4below.

RefinancingriskexposureforexternaldebtisgenerallyimpairedunderalltheStrategies’

especially with S2 and S3 that have substantial amounts of nonͲconcessional and

commercialdebt. S2hasanexternaldebtATMof10.4yearswhileS3has11.0years

comparedto18.9yearsofendJune2014.S2includesissuanceofEuroBondsandother

highlynonͲconcessionalloansonhighlycommercialtermsandshortmaturitiesthatalso

impairalltheinterestrateriskindicatorsunderS2(Table4above).Contractingloanson

variableinterestratesunderS3andS2reducestheATM(alsoAverageTimetoReͲfixing)to

8.0yearsand8.8years.

InterestrateRisk:TheshareofdebtreͲfixingin1year,increasesunderS2andS3to36.7

yearsand31.4yearsfrom23.2years,mainlyontheaccountofborrowingoncommercial

terms.Theportfolios’weightedaverageinterestrates(WAIR)arehighunderS2andS4at

6.8percentand8.8percentrespectivelycomparedtotheendJune2014portfolio’sinterest

rateof5.9percent.ThisisontheaccountoftheEurobondissuanceunderS2andasizeable

domesticfinancing.TheWAIRunderS3isjustabouttheendJune2014rate.

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2 0 2 0 2 0 2 3 2 0 2 6 2 0 2 9 2 0 3 2 2 0 3 5 2 0 3 8 2 0 4 1 2 0 4 4 2 0 4 7 2 0 5 0 2 0 5 3 2 0 5 6 2 0 5 9 2 0 6 2 2 0 6 5 2 0 6 8

Strategy

3

External Domestic

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 2 0 2 0 2 0 2 3 2 0 2 6 2 0 2 9 2 0 3 2 2 0 3 5 2 0 3 8 2 0 4 1 2 0 4 4 2 0 4 7 2 0 5 0 2 0 5 3 2 0 5 6 2 0 5 9 2 0 6 2 2 0 6 5 2 0 6 8

(30)

Table4:CostRiskIndicatorsoftheDebtPortfoliosResultingfromPursuingAlternative DebtManagementStrategies,asatendͲFY2020

S1,whichmaximisesconcessionalmultilateralborrowingandafairdistributionbetween bilateral–nonconcessionalandconcessionalcreditors,providesthelowestcostandrisk combination despite having the highest exposure to foreign exchange rate risk. This Strategy,however,isontheextremeendofconcessionalfinancingthatitunderminesthe limitedavailabilityofhighlyconcessionalfunds.S4whichlargelyborrowsfromthedomestic financialmarketisonanotherextremeendfinancingStrategy.WhileS4greatlyminimises thecurrencyriskexposure,itprovidesthehighestinterestcostexposureamongstallthe strategies. Aggressivedomesticsecuritiesissuancemayalsonotallowdomesticinterest ratestocomedownfaster. Insucharelativelyhighdomesticinterestrateenvironment, largeissuanceinlongterminstrumentsmaynotbecosteffectiveastheywouldlockinthe high rates over a long period. The Strategywhich explores the international market

(S2)seemstheleastattractiveofallthestrategiesleavingS3asthemostrealistic.S3which alsodescribestheproposedmediumtermfiscalframeworkalsoattemptstoestablishthe costimplicationsofsuchaStrategytotheBudgetanditsimplicationstoUganda’soverall debtsustainability.

3.5.4 Cost

Ͳ

Risk

Analysis

of

Alternative

Strategies

against

the

PDP2013

Debt

Management

Benchmarks

Thefinalsectionoftheanalysisistoassessthemediumtermfiscalappetiteagainstthe sustainabilitybenchmarkssetinourPublicDebtManagementFramework2013withthe viewofprovidinganydebtmanagementpolicydirection.

GenerallyallthefourStrategieswouldnotviolatethePublicDebtManagementPolicy Framework2013costindicatorforPVͲdebtͲtoGDPof50percent.Nonetheless,S4PVͲ domesticͲdebtͲGDPof24.8percentwouldviolatethePDM2013limitof20percentbythe

RiskIndicators 2014 Current S1 S2 S3 S4 Nominaldebtas%ofGDP 28.6 43.9 46.6 45.6 48.1 PVas%ofGDP 20.8 30.3 40.3 38.3 39.6 Impliedinterestrate(%) 5.9 4.5 6.8 5.9 8.8 Refinancingrisk ATMExternalPortfolio(years) 18.9 16.8 10.4 11.0 15.4 ATMDomesticPortfolio(years) 2.3 5.6 5.6 5.7 7.4 ATMTotalPortfolio(years) 11.8 14.8 9.6 9.9 11.6 Interestraterisk ATR(years) 11.8 14.8 8.0 8.8 11.6 Debtrefixingin1yr(%oftotal) 23.2 4.2 36.7 31.4 5.8 Fixedratedebt(%oftotal) 100.0 100.0 67.2 73.1 100.0 FXrisk FXdebtas%oftotal 57.1 77.2 79.5 74.3 49.4 STFXdebtas%ofreserves 4.6 3.8 12.0 11.1 3.3 AsatendFY2020

(31)

endofJune2020.Inaddition,S4wouldalsolargelycrowdouttheprivatesectoroverthe

mediumtermwithDomesticDebtStock/PrivateSectorCreditratioof160.3percentway

abovethe75percentlimitandalsohigherthantheendJune2014ratio.S2wouldhavethe

highestPVͲexternalͲdebtͲtoGDPof30.8 percent by endJune2020,thoughmarginally

exceedingthePDM2013limitof30percent.

Table5:ComparisonofCostsandRiskIndicatorsagainstDebtPolicyBenchmarks

S3withaPVͲexternalͲdebtͲtoGDPof26.6percentbyendJune2020isconsideredthemost

realisticfinancingalternativegiventhelimitationstoconcessionalfinancingwhichislargely

consideredunderS1. Whilethiswouldbelessthanthe30percentlimitbyjust3.4

percentagepoints,itwouldreduceanysubstantialexternalborrowinginthefuturebeyond

FY2019/20,almostusingupthefiscalspaceonexternalborrowing.Thenominalinterest

costtoGDPof15.6percentunderS3byendJune2020andthedomesticdebtstock/PSC

indicatorof75.9percentarebothmarginallyabovethePDM2013benchmarkof15percent

and75percentrespectivelybylessthanapercentagepoint.ThedomesticATMandtheATR

bothimproveoverthemediumtermontheaccountoflongͲtermdatedinstruments.

Thelargefiscaldeficitofanaverageof6.1percentoverthemediumtermtobefinanced

largelyfromnonͲconcessionalandcommercialborrowingindicatesconsiderableincrease

inthePVofdebttoGDP.Accordingly,theexpectednewborrowingoverthemediumterm

ofapprox.US$7bnwouldalmostdoublethePVͲdebtͲtoͲGDPto38.7percent(S3)from20.8

percentofendJune2014.

S1 S2 S3 S4 S1 S2 S3 S4 PVofDebtas%ofGDP <50% 20.8% 24.5% 25.2% 29.5% 28.6% 28.3% 30.3% 40.3% 38.3% 39.6% PVofExternaldebtstock/GDP <30% 8.5% 12.5% 15.5% 20.6% 17.4% 12.2% 20.7% 30.8% 26.6% 14.9% PVofDomesticdebtstock/GDP <20% 12.3% 12.0% 9.7% 8.8% 11.2% 16.1% 9.6% 9.4% 11.7% 24.8% Nominalinterestcost/Domesticrevenue(exclgrants) <15% 10.9% _11.8% _10.2% _11.2% _12.7% _13.7% _11.6% _18.2% _15.6% _23.9%

Domesticinterestcost/TotalGovernmentExpenditure <10% 8.4% 6.9% 5.3% 5.0% 6.7% 7.8% 7.4% 7.0% 8.6% 18.2% Domesticdebtstock/PrivateSectorCredit <75% 93.1% 95.1% 73.7% 67.4% 85.4% 122.8% 62.1% 61.1% 75.9% 160.3%

AverageTimetoRefix(ATR)(Years)(Domestic) >3Years 2.3 5.6 5.6 5.7 7.4

AverageTimetoMaturity(ATM)(years):(Domestic) >3Years 2.3 5.6 5.6 5.7 7.4

Proj.2016 Proj.2020

CostandRiskIndicators Benchmark End June 2014 Est.End June 2015

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CHAPTER4Ͳ

CONCLUSION

ThekeyaimfortheMTDS2015wastoascertainthecostandrisktradeͲoffoffinancingthe

mediumtermfiscaldeficitthroughborrowingwhilemindfulofourdebtsustainability.This

isintendedtoinformGovernment’sfinancingplanbysettingout,interalia,theleastcost

combinationofborrowinginstrumentswiththemostprudentdegreeofriskthroughwhich

toraisethefinancingrequirementsoverthemediumterm.Thisisachievedbydetermining

themostrealisticoverallcompositionofthepublicdebtportfolio,takingintoaccount

macroeconomicindicatorsandthemarketenvironment.

TheMTDS2015indicatesthatthetotalpublicdebtisexpectedtorisesubstantiallyonthe

accountoflargeinfrastructurefinancingprojectedinthemediumtermfiscalframework.

ThePVͲDebtͲtoGDPisprojectedtodoubleoverthemediumtermfrom20.8percentasof

endJune2014to38.3percentbytheendofJune2020.Thisisontheassumptionthatthe

currentrealgrowthprojectionsoverthemediumtermshallbesustained. Thiswould

neverthelessstillbewithintheEACdebtconvergencecriterionthatrequiresaPVͲofͲdebtͲ

GDPoflessthan50percentatalltimes.

WhileS1mayappeartodominatethealternativeborrowingstrategies,itsconstrainedby

thelimitedavailabilityofconcessionalfinancingtomeetthefinancialrequirementfor

infrastructuredevelopment.Therefore,takingintoaccountthatfactandthecost/risktradeͲ

offs,Strategy3(S3)isjudgedtobethemostrealisticstrategyoverthemediumterm.

Nonetheless,thecurrentmediumfiscalframeworkfinancingassumptionsalsoconsidered

S3,arelikelytoposeanumberofdebtmanagementrisksasobservedabove.ThenonͲ

concessional and commercial financing, therefore, needs to be cautiously negotiated

withoutimpairingtheborrowingtermlimitsinourPDM2013,whichhavebeenlargely

appliedunderthisMTDS.Thetermsofthedifferentfinancinginstrumentappliedinthis

Strategyshouldbeappliedasthelimitsi.e.asaceilingforinterestratesandasaminimum

formaturityterms.AnytermscontrarywouldriskworseningtheStrategy.

Secondlyforallvariableinterestrateloanstobenegotiated,itisrecommendedtoeitherfix

thevariableinterestratesuponconcludingtheagreementorhaveaprovisioninthe

agreementthatallowsGovernmenttofixtheinterestratesatleastonceduringtheloanlife.

Thisishighlycriticalgiventhehighinterestcostexposure,whichisattributedtovariable

interestrates.Currently,interestratesareonupwardtrendandifvariableratesareleftto

runfortheentireloanmaturitywithoutanycontrolmeasure,theycanbecostly.In

addition,theMTDScautionsGovernmentoverthelargebiastowardslongtermdated

bondsof10Ͳyearand15Ͳyeargiventhecurrenthighinterestrates.TheMTDSassessment

oftheStrategiesagainsthighinterestratestendstoindicatethatGovernmentwouldrisk

lockingintohighinterestratesforalongperiod.ThedebtreorganisationthereforefromTͲ

(33)

Finally,thechoiceofS3overtheotherfinancingStrategiesisconsistentwiththePDP2013

objectivesof;meetingGovernment’sfinancingrequirementsattheminimumcostand

prudent degree of risk; maintaining the level of public debt sustainable; and the

developmentofUganda’sdomesticfinancialmarkets.However,thismarkedlyreducesany

fiscalspaceforanyfutureexternalborrowingduringthemediumtermifwearetoabideby

ourPDM2013externaldebtlimitofPVͲofͲdebtͲGDPoflessthan30percent.

Inconclusion,theMTDS2015assessmentofthemediumtermfiscalframeworkindicates

highsensitivenessofthesolvencyindicatorsofDebtͲtoͲGDPandPVͲDebtͲtoͲGDPtoGDP

growthassumptions.Cautionisthereforewarrantedtoensurethatthecurrentsustainable

public debt positionis sustained over the mediumͲterm. Therefore, attaining the

programmedeconomicgrowthassumptionsandtheefficientuseofborrowedfundsare

highlycriticalinmaintainingthesolvencyindicatorsbelowtheprojectedlevelstocreate

roomforanyfutureexternalborrowingandtoensurethatourlongtermdebtsustainability

ismaintained.Accordingly,largerrecoursetodomesticdebtfinancingbeyondthecurrent

limitsundermediumtermfiscalframeworkcouldworsenthedomesticinterestratesand

putpressureonthebudgetexecutionduringtheMediumterm.Inaddition,therecourseto

nonͲconcessionalexternalfinancingwhilefoundidealgiventhelimitedaccesstolarge

concessionalfinancing,largesumsofnonͲconcessionalborrowingwithinashortperiodmay

increasetheriskofdebtdistress.TheborrowingenvisagedundertheMTDS2015therefore,

shallbeundertakenwithcautiontakingintoaccounttheabovefactors.

Goingforward,anannualreviewofpotentialstrategiesshallbecarriedouttoestablishtheir

feasibilityandrelativemerits.Nonetheless,iftherearesignificantandsustaineddeviations

ineconomicandfiscaloutturnsrelativetothoseassumedintheMTDS2015,thenStrategy3

(S3)maybereviewedandrevisedbeforethemandatoryannualreview.

Medium Term Debt Management Strategy (MTDS)

Medium Term Debt

Management Strategy

(MTDS)

April 2015

MediumTermDebtManagementStrategy

(MTDS)

2015/16–2019/20

April2015

AproductoftheDirectorateofDebtandCashManagement

MINISTRYOFFINANCE,PLANNINGANDECONOMICDEVELOPMENT

TableofContents

FOREWORD

LIST

OF

ABBREVIATIONS

EXECUTIVE

SUMMARY

CHAPTER

1

Ͳ

MediumTermDebtManagement

1.1

Overview

1.2

The

Debt

Strategy

Objectives

CHAPTER2Ͳ

PublicDebtPortfolioReview

2.1

External

Debt

Stock

2.2

Domestic

Debt

Stock

2.3

Cost

and

Risk

Characteristics

of

the

Existing

Debt

Portfolio

2.3.1 Interest

rate

risks

2.3.2 Refinancing/Rollover

Risks

2.3.3 Exchange

Rate

Risk

CHAPTER

3

Ͳ

AGGREGATE

MEDIUM

TERM

DEBT

STRATEGY

3.1

Macroeconomic

Assumptions

3.2

Interest

rate

assumptions

3.3

Potential

Financing

Sources

3.3.1 Stylized

Financing

Instruments

3.4