The government is planning to issue corporate bonds in the upcoming financial year as part of efforts to raise capital for state-owned enterprises and revitalize the country’s underperforming corporate bond market.
However, the move presents a challenge, as most state enterprises lack credit ratings, which are crucial for attracting investor confidence.
The funds raised through these bonds will be directed towards long-term, approved projects, helping to alleviate mounting pressures on the government to finance various investments in critical sectors such as transport, energy, education, health, and science and technology. According to the National Budget Framework paper for 2025/06-2029/30, select beneficiaries of these funds include the National Water and Sewerage Corporation (NWSC), Uganda Development Bank (UDB), and Uganda Development Corporation (UDC).
While the full details of the bond issuance are not yet available, it is understood that NWSC is facing a funding shortfall in its efforts to expand safe water coverage in urban centers. UDB, on the other hand, is seeking additional capital to finance long-term projects across various sectors, including manufacturing, education, healthcare, and agriculture.
NWSC currently manages over 500,000 water supply connections nationwide, while UDB received a Shs1 trillion ($271 million) capital injection from the government in 2020 to support small businesses hit by the COVID-19 pandemic. This funding was sourced from a $491 million loan provided by the International Monetary Fund (IMF) and was used to offer financial rescue packages, health sector support, and welfare grants to affected communities.
Meanwhile, UDC has invested in projects such as a fruit juice processing factory and the Atiak Sugar factory, which has faced delays despite consuming significant taxpayer money over the past five years. The delayed start of production at Atiak has raised concerns about the effectiveness of state-run investments.
One of the key challenges facing the corporate bond initiative is the rise in interest rates on treasury bills and bonds, which serve as benchmarks for pricing corporate bonds. Financial experts highlight that the yields on these instruments have increased to between 12% and 18% this year, driven by investor concerns over weak economic growth, declining tax revenues, and limited donor support.
Although UDB secured a foreign credit rating last year, neither NWSC nor UDC has obtained a credit rating for their commercial operations, which is a critical factor for investors when considering corporate bonds. Credit ratings provide assurance of a borrower’s ability to meet debt obligations on time.
Paul Bwiso, the CEO of Uganda Securities Exchange (USE), pointed out that corporate bonds are typically priced around the yield of the 182-day treasury bill. He also suggested that the government may limit the number of bids on these treasury bills to control yields on corporate bonds. According to Bwiso, a corporate bond issued by a government enterprise would be attractive to investors, provided the enterprise has strong growth prospects and robust corporate governance standards. Additionally, official government guarantees could help mitigate the lack of credit ratings for public enterprises.
Investors looking to invest in corporate bonds issued by government entities would need to consider various economic factors, such as economic growth, public debt levels, inflation, and tax revenue collection. The government debt yield curve, which directly influences borrowing costs, is a particularly sensitive factor in these decisions.
In the absence of credit ratings, official government guarantees could make such corporate bonds more appealing. Previous corporate bonds issued at the USE include offerings from the East African Development Bank (EADB), African Development Bank (AfDB), Housing Finance Bank Uganda, and Stanbic Bank Uganda. These bonds have since matured, according to capital markets sources. The last private debt offer on the USE was a $30 million corporate bond issued by Kakira Sugar in 2013, which carried an interest rate of 13% per annum and matured in 2023.
Dr. Patrick Birungi, the Executive Director of UDC, acknowledged that the corporate bond program is a long-overdue tool for mobilizing capital for productive investment rather than consumption. He emphasized that compared to neighboring countries’ debt levels, Uganda has less to fear regarding new borrowing arrangements.
