Uganda bond tax hike may backfire on government

OFFSHORE investors who have departed Uganda’s debt market because of falling yields and fears about the currency’s strength have another reason to stay away: an increase in the withholding tax on income from Treasury bills and bonds.The plan to raise the tax from 15 percent to 20 percent, announced in last week’s budget, means Uganda will have a higher rate than its peers among sub-Saharan frontier sovereigns.Analysts say it could lead to a decline in foreigners buying Ugandan debt, with the reduction in dollar inflows undermining confidence in the currency.“Foreign investors are very wary about the stability of our currency,” said Arthur Nsiko, a research analyst at African Alliance Uganda. “The currency for the short term has very much been supported by foreign investor participation in the bond and T-bill market.”Offshore interest in Ugandan debt has been waning since Treasury bill yields fell below 20 percent.At the last Treasury bill auction, the yield on 1-year paper stood at 19.3 percent, compared to a peak of 24.3 percent in January.Finance minister Maria Kiwanuka said in her budget speech that the tax hike, which will come into effect on July 1, would generate 16.3 billion shillings of government revenue.However, it marks Uganda out from other African markets. The withholding tax in Kenya and Zambia is 15 percent - although Zambia also charges a separate 1 percent “health levy” - while Ghana, Nigeria and South Africa have no such tax.“It would put them on the high side. In that regard it’s not a welcome development,” said Graham Stock, chief strategist at Insparo Asset Management in London. “The fact that they’re moving slightly out of line probably should raise a bit of a red flag.”Ultimately, the tax could backfire if it ends up increasing Kampala’s borrowing costs. Typically, investors seek to pass the cost back to the government by demanding slightly higher yields, said Stuart Culverhouse, head of research at Exotix.Reuters

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Uganda bond tax hike may backfire on government