Medium Term Debt Management Strategy (MTDS)

REPUBLIC OF UGANDA Medium Term Debt Management Strategy (MTDS) 2015/16 2019/20 April 2015

REPUBLIC OF UGANDA MediumTermDebtManagementStrategy (MTDS) 2015/16 2019/20 April2015 MediumTermDebtManagementStrategy2015 Page1

AproductoftheDirectorateofDebtandCashManagement MINISTRYOFFINANCE,PLANNINGANDECONOMICDEVELOPMENT Enquiriesconcerningthepublicationshouldbeaddressedto: TheDirector DirectorateofDebt&CashManagement TreasuryBuilding MinistryofFinance,Planning&EconomicDevelopment P.O.Box8147,Kampala,Uganda Tel:+256 414 707110 MediumTermDebtManagementStrategy2015 Page2

TableofContents FOREWORD...4 EXECUTIVESUMMARY...6 CHAPTER1 MEDIUMTERMDEBTMANAGEMENT...9 1.1 OVERVIEW...9 1.2 THEDEBTSTRATEGYOBJECTIVES...9 CHAPTER2 PUBLICDEBTPORTFOLIOREVIEW...11 2.1 EXTERNALDEBTSTOCK...11 2.2 DOMESTICDEBTSTOCK...13 2.3 COSTANDRISKCHARACTERISTICSOFTHEEXISTINGDEBTPORTFOLIO...13 2.3.1 2.3.2 2.3.3 CHAPTER3 INTERESTRATERISKS...14 REFINANCING/ROLLOVERRISKS...15 EXCHANGERATERISK...16 AGGREGATEMEDIUMTERMDEBTSTRATEGY...17 3.1 MACROECONOMICASSUMPTIONS...17 3.2 INTERESTRATEASSUMPTIONS...18 3.3 POTENTIALFINANCINGSOURCES...19 3.3.1 STYLIZEDFINANCINGINSTRUMENTS...20 3.4 DEBTMANAGEMENTSTRATEGIESANDMARKETSCENARIOS...21 3.4.1 3.4.2 DESCRIPTIONOFALTERNATIVEFINANCINGSTRATEGIES...21 THEMARKETSCENARIOS:...22 3.5 COSTRISKANALYSISOFALTERNATIVEDEBTMANAGEMENTSTRATEGIES...23 3.5.1 3.5.2 3.5.3 DESCRIPTIONOFTHECOSTANDRISKINDICATORS...23 ANALYSISOFALTERNATIVEFINANCINGSTRATEGIES...24 OTHERRISKINDICATORS...26 3.5.4 COSTRISKANALYSISOFALTERNATIVESTRATEGIESAGAINSTTHEPDP2013DEBTMANAGEMENT BENCHMARKS...29 CHAPTER4 CONCLUSION...31 GLOSSARY...33 MediumTermDebtManagementStrategy2015 Page3

FOREWORD TheUgandaVision2040aspirestotransformUgandaintoamodernandprosperoussociety within30yearsthroughprovisionofadequateinfrastructure,developmentofagriculture, humanresourceandservicessectors,enlargementofmarkets,strengtheningoftheprivate sectorandthroughindustrialization. ImplementationoftheUganda2040Visionwillrequiresubstantialresourcesthatwillpartly be garnered through domestic and international borrowing. To ensure that our debt remainssustainable,suchborrowinghastobecarriedoutthroughaproperlyformulated MediumTermDebtStrategy(MTDS). The 2015/162019/20 MTDS provides a financing framework to meet the medium term fiscal financing requirement that would minimise debt servicing budgetary costs and the risksexposuretogovernmentwhileatthesametimeendeavouringtomaintainourdebt sustainable. This MTDS has been prepared by the Ministry of Finance, Planning and Economic Development and it illustrates government s cost and risk tradeoffs associated with different financing options and the risk exposure embedded in the current debt portfolio.itisacoherentframeworkwhichdeterminestheappropriatefinancingmixof concessional, semi concessional and nonconcessional debt necessary to finance planned expenditure, to be acquired in line with the Public Debt Management Framework 2013 (PDM2013)policyobjectives.Therefore,theMTDSisprimarilyfocusedondeterminingthe appropriateoverallcompositionoftheentiredebtportfoliooverthemediumterm,taking intoaccountmacroeconomicindicatorsandthemarketenvironment. AdoptingsuchanexplicitandformalMTDSwillenabletheGovernmentofUganda(GOU)to make informed decisions on the costs and risks associated with any alternative financing considerations.themtdswillguideonthemostappropriatefinancingoptionwhichwill ensurethatgoutakesadvantageofnewfinancingopportunitieswithoutimpairingourcost andriskthresholdsinthepdm2013. WecommittoannuallyreviewtheMTDSinlinewiththemediumtermfiscalframeworkto always provide an insight and clear guidance on the risk and cost tradeoffs that can be accommodatedconsistentwiththelongtermdebtmanagementframework.implementing themtdswillhelpusavoidtheconsequencesarisingfromunsustainableaccumulationof public debt and build broadbased support for responsible financial stewardship, and accountability. MediumTermDebtManagementStrategy2015 Page4

MediumTermDebtManagementStrategy2015 Page5 LISTOFABBREVIATIONS AfDB AfricanDevelopmentBank ADF AfricaDevelopmentFund ATM AverageTimetoMaturity ATR AverageTimetoRefixing 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 MultilateralDebtReliefInitiative MEPD MacroeconomicPolicyDepartment MoFPED MinistryofFinance,PlanningandEconomicDevelopment MTDS MediumTermDebtManagementStrategy MTEF MediumTermExpenditureFramework PDM2013 PublicDebtManagementFramework2013 PFMA PublicFinanceManagement Act PSC PrivateSectorCredit PV PresentValue ST ShortTerm

EXECUTIVESUMMARY ThePublicFinanceManagementAct2015requirestheHon.MinisterofFinance,Planning andeconomicdevelopmenttohaveamediumtermdebtstrategyagainstwhichareport onthemanagementofpublicdebtcanbepublishedasprovided(section42(2)(b)ofthe PFM Act 2015). This first formal Medium Term Debt Management Strategy (MTDS2015) covers a period of five financial years FY2015/106 FY2019/20 and provides a financing frameworktomeetthemediumtermfiscalfinancingrequirementthatwouldminimisedebt servicingbudgetarycostsandriskexposureswhileendeavouringtomaintainourpublicdebt sustainable. The MTDS2015 illustrates costs and risk exposure embedded in the current debtportfolioandtogetherwithcostandrisktradeoffsassociatedwithdifferentfinancing optionstoinformfiscalpolicymanagement. ThekeyaimfortheMTDS2015istoascertainthecostandrisktradeoffoffinancingthe medium term fiscal deficit through borrowing while remaining mindful of our debt sustainability.the MTDS2015 has been developed within the guidelines set out in our Public Debt Management Framework (PDM2013) whose main objectives are (i)to meet Government sfinancingrequirementsattheminimumcost,subjecttoaprudentdegreeof risk;(ii)toensurethatthelevelofpublicdebtremainssustainable,bothinthemediumand longtermhorizonwhilebeingmindfulofthefuturegenerations;and(iii)topromotethe development of the domestic financial markets.accordingly, the MTDS2015 informs the government s financing plan by setting out, inter alia, the least cost combination of borrowing instruments with the most prudent degree of risk through which to raise the financingrequirementsoverthemediumterm.thisisbydeterminingthemostappropriate and realistic overall composition of the public debt portfolio, taking into account macroeconomicindicatorsandthemarketenvironment. Overthemediumtermfiscalframework,theMTDS2015envisagesasignificantrelianceon nonconcessional 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 to establish the most realistic Strategy with the least cost and risk tradeoffs.the most preferredstrategyisthenrecommendedasthefinancingbasisforconsiderationoverthe medium term.the four Strategies that we have assessed are as follows. Strategy 1 (S1) maximisesconcessionalfinancingwithabiastolongtermdatedinstruments.thisstrategy MediumTermDebtManagementStrategy2015 Page6

attempts to mirror our traditional post debt relief approach of prioritizing concessional financing.strategy 2 (S2) considers a debut Euro Bond. The Sovereign Bond Issuance exploresintothecostandrisktradeoffsofasovereignbondissuanceontheinternational marketifthisfinancingalternativeweretobeconsidered.strategy3(s3)assumeslargely nonconcessionalborrowingontermssimilartothosefromthemostrecentbilateraland commercial creditors negotiations. This Strategy particularly recognises the limited availabilityofconcessionalfinancingforourlargeinfrastructureprojectsplannedoverthe medium term.the Strategy assess the cost and risk tradeoffs of the current financing distribution as detailed in the medium term fiscal framework with a bias towards non concessionalexternalfinancing.finallystrategy4(s4)assumesapredominantrelianceon domestic financing with a view of also establishing the cost and risk tradeoffs of largely borrowing from domestic financial market.the assessment of the Strategies focused on twosolvencyindicatorsofdebttogdp(debt/gdp)andpresentvalueofdebttogdp(pv of Debt/GDP); and two liquidity indicators of interesttogdp (interest/gdp) and interest costtodomesticrevenueexcludinggrants(interestcost/revenue). Asexpected,S1,whichmaximisesconcessionalborrowingprovidesthelowestcostandrisk combination despite having the highest exposure to foreign exchange rate risk. This Strategy, however, undermines the limited availability of highly concessional funds. S4 whichlargelyborrowsfromthedomesticfinancialmarketprovidesthehighestinterestcost exposure amongst all the strategies as aggressive domestic securities issuance does not allow domestic interest rates to come down faster.high domestic interest rates would worsen the interest cost and therefore not ideal for large issuance of long term dated instruments as they lock in the high rates over a long period. S4 though has the lowest foreign exchange risk exposure given the dominance of shillings dominated loans in the portfolio.s2isthemostriskstrategyandrelativelymorecostlythantheotherstrategies. The current increasing interest rates at the international financial markets make the SovereignBondmorecostlyandtherateshighlyunpredictablegiventhesubjectivenature of the pricing mechanism of such bonds.exploring into the international market (S2), therefore,istheleastattractiveofallthestrategies.s3exposesuganda sdebttorelatively highinterestratesandshortermaturitiescomparedtolargelyconcessional financing(s1) thatgovernmenthasaccessedinthepast,reducingtheoverallaveragetimetomaturityof the entire portfolio by end June 2020.The Strategy (S3), notwithstanding, is the most realisticamongstthestrategiesasitprovidesthemostrealisticcostandriskimplications touganda s overall debt sustainability,despite a large concentration of nonconcessional borrowingoverthemediumterm. GenerallytheMTDS2015tendstoindicatethatthetotalpublicdebtwillrisesubstantiallyon theaccountoflargeinfrastructurefinancingprojectedoverthemediumterm.thepvdebt togdpisprojectedtodoubleoverthemediumtermfrom20.8percentasofendjune2014 MediumTermDebtManagementStrategy2015 Page7

to 38.3 by the end of June 2020. The external nonconcessional borrowing during the mediumtermwouldalmostuseupallthefiscalspaceasthepvexternaldebtgdpunders3 of26.6percentnearlyreachesthemaximumlimitof30percent.nonetheless,thepresent valueofdebtgdpwouldstillbewithintheeacdebtconvergencecriteriaoflessthan50 percentthoughlimitinganysubstantialexternalborrowinginthenearfuture. Itisimportanttonotethattheseresultsdependonthegrowthandexpenditureforecasts built into the medium term fiscal framework. If economic growth forecasts are not sustained, this will impact the PV debttogdp ratio. Similarly, the results in this MTDS consideronlytheborrowingcommitmentsthatarealreadyembeddedinthemediumterm fiscalframework.anyadditionalfutureborrowingwouldworsenthedebtsustainabilityand risk indicators. The room for any additional future borrowing is dependent on economic performance. Goingforward,anannualreviewofpotentialfinancingstrategiesshallalwaysbecarriedout to establish their feasibility and relative merits. Nonetheless, if there are significant and sustaineddeviationsineconomicandfiscaloutturnsrelativetothoseassumedinthismtds, thenstrategy3(s3)maybereviewedandrevisedbeforethemandatoryannualreview.this Ministry shall therefore continuously monitor the key macroeconomic and interest rates assumptions against those assumed in the analysis. Any significant and sustained change wouldindicatetheneedtorevisethestrategygoingforward.monthlyreviewofthecost andriskindicatorsshallalwaysbeassessedagainstthepdm2013toidentifyanysignificant deviationsandtoestablishanyearlysignalsrequiringurgentdebtmanagementattention. MediumTermDebtManagementStrategy2015 Page8

CHAPTER1 MediumTermDebtManagement 1.1 Overview The overall purpose of the MTDS is toguide the contractingand management of government s debt portfoliofor the five year period from Financial Year (FY) 2015/16 to FY2019/20.The MTDS focuses explicitly on the characteristics of the debt portfolio, by outlining the government s preferred composition of the debt portfolio taking into accountthecostrisktradeoffsinherentindebtmanagement andthebroadfinancing planitintendstoimplementtoachievethepreferredportfoliocomposition. While the Public Debt Policy Framework (PDP2013) sets out the overarching objectives, principlesandlimits,withwhichdebtpolicyoverthenextfiveyearsmustbeconsistent,the MTDSfocusesondebtmanagementissues.TheMTDSisinformedbyanddevelopedwithin theguidelinessetoutinthepdm2013,andwillbeupdatedeachyearasagovernment s rolling5yearmediumtermdebtmanagementstrategyasrequiredbysection42ofthe Public Finance Management Act. This MTDS informs the government s financing plan, whichsetsout,interalia,thetotalamountthegovernmentplanstoraisethrougheach categoryofborrowinginstrumentsinordertomeettheannualfinancingrequirementfor theyearahead. ThisIntroductionpresentsthebackgroundfortheMTDS,includingGoU soveralldebtpolicy framework,pdm2013,withinwhichthismtdshasbeendeveloped.chapter2providesan analysisofthecurrentdebtportfolio.chapter3providesthechosenmediumtermdebt ManagementStrategyanditsrationale. 1.2 TheDebtStrategyObjectives The objectives in the PublicDebt Management Framework form the foundation for the MediumTermDebtManagementStrategy(MTDS)forFY2015/162019/20.Thepriorityof the policy framework remains ensuring debt sustainability.the Framework also requires that,forallborrowingconsiderations,evaluationofcostsandrisktradeoffsshouldbedone to arrive at the most optimal financing strategy for each financial year.the Framework considers domestic borrowing not only as an alternative source of Government financing butalsoasameanstopromotethedomesticfinancialmarkets.thedebtpolicyframework objectivesarerepeatedhere: MediumTermDebtManagementStrategy2015 Page9

1. to meet Government s financing requirements at the minimum cost, subject to a prudentdegreeofrisk; 2. to ensure that the level of public debt remains sustainable, over the medium and longtermhorizonwhilebeingmindfulofthefuturegenerations;and 3. topromotethedevelopmentofthedomesticfinancialmarkets. Governmentshallcontinuetopursuethesameobjectivesoverthemediumterm.ThisDebt Strategy,therefore,shallguideGovernmentdebtmanagementoperationsin2015/16and overthemediumtermfiscalframeworkwhilemindfuloftheassociatedcostandrisktrade offsofourpublicdebtasweconsidernewandnontraditionalfinancingoptions;support macroeconomicstabilityandensuringdebtsustainability. MediumTermDebtManagementStrategy2015 Page10

CHAPTER2 PublicDebtPortfolioReview The nominal public and publicly guaranteed debt outstanding and disbursed (stock of debt)increasedfromus$6.4billionasatendjune2013tous$7.5billionasattheendof June2014(ofwhichUS$4.3billionwasexternalandUS$3.2billionwasdomestic.The increaseinstockmorethanoffsettheimpactoftherebasedgdponthedebttogdpratio whichroseby2percentagepoints,from26.3percentofgdpasatendofjune2013to 28.6percentasofendJune2014or20.8percentinPresentValue(PV) 1 terms(seetable1 belowrefer).externaldebtincreasedbyjustlessthanonepercentagepointto16.3percent of GDP or 8.5 percent in PV terms, while domestic debt increased by less than two percentagepointsto12.3percentofgdpasofendjune2014.figure.1belowshowsthe evolutionofthenominalpublicdebtoverthelast10yearswithrecentlevelsofpublicdebt togdptrendingwellbelowthe75.43percentpeakexperiencedbeforethehipcandmdri andthe74percentcpiapolicydependantthreshold. InPresentValueterms,Uganda spublicdebtincreased Figure.1:PublicDebtTrendsfromFY2003/04 FY2013/14 Source: DMD-MoFPED 2.1 ExternalDebtStock Over the postmdri period Uganda s external stock of debt disbursed and outstanding (DoD)hasrisenfromUS$1.47billioninFY2006/07toUS$4.3billioninFY2013/14 orfrom 11.0 per cent of GDP to 16.1 per cent of GDP(18 percent before GDP rebasing).over 70 percent of this borrowing has been primarily used for financing infrastructure and social 1 ThePresentValueundertheMTDSToolisderivedfromthesummationofdiscounteddebtserviceflowsof bothprincipalandinterest.otherdebtmanagementtoolssuchasthelicdsatoolderivethepresentvalueby onlysummingthediscountedprincipalrepaymentflows. MediumTermDebtManagementStrategy2015 Page11

services developments required to enhance productivity and to fight poverty, while the remainderhasbeenusedforgeneralbudgetsupport. The bulk of Uganda s external DoD is contracted from mainly multilateral creditors, who account for 89.0 percent of the total external debt portfolio, as illustrated by Figure 3 below. IDA and ADF concessional windows of the World Bank and African Development Bankrespectivelyaccountfor58percentand21percentrespectivelywhileIFADandother multilateralcreditorsaccountfor5 percentand3percentrespectively..bilateralcreditors currentlyaccountforonly13.0percentoftotalexternaldebtportfolioofwhich11percent isfromnonparisclubbilateralcreditors,whileonly2percentisfrombilateralparisclub creditors. Figure3:ExternalDebtCreditors CompositionasatendJune2014 Other Multilaterals 3% Japan 1% China 8% OtherParisClub OtherNonParis Bilaterals ClubBilateral 1% 3% ADF 21% IFAD 5% IDA 58% Source: DMD-MFPED MediumTermDebtManagementStrategy2015 Page12

2.2 DomesticDebtStock The total stock of outstanding government securities at endjune 2014 was Shs. 7,691 billion 2 at cost. Treasury Bills accounted for Shs. 2,557 billion (33 per cent) while Bonds accountedfortheremainingshs.5,124billion(67percent).thistotalrepresents12.3per centofgdp. TheratioofTreasuryBondstoTreasuryBillis67:33,whichisslightlybelowthePDM2013 target ratio of 70:30. However, this represents an improvement from the previous year whentheratiowas64:36asmoreemphasishasbeenputonlongerdatedsecurities.itis expectedthattheratiowillproceedtowardsthebenchmarkoverthemediumterm. Figure4:Stockofoutstandinggovernmentsecurities,andshareofBillsandBonds,From endfy03/04toendfy13/14 100% 10,000 80% 60% 40% 20% 0% FY FY FY FY FY FY FY FY FY FY FY 03/0404/0505/0606/0707/0808/0909/1010/1111/1212/1313/14 8,000 6,000 4,000 2,000 Source:DMDMoFPEDandFMDBOU. Domesticdebtstock(Shsbn)(atcostvalue) TreasuryBills%age TreasuryBonds%age 2.3 CostandRiskCharacteristicsoftheExistingDebtPortfolio Thecurrentdebtportfolioisdominatedbyexternaldebt,whichlargelyconsistsofhighly concessionalloanscharacterisedbylongrepaymentperiodsandwithverylowfixedinterest rates. These features have a strong influence on the overall cost and risk exposure of Uganda s existing debt portfolio (External and Domestic 3 debt) as of end June 2014, as describedbelow. 2 This includes Shs.1.3trillion for monetary policy operations 3 Domesticdebtiscomposedofthestockofgovernmentsecurities MediumTermDebtManagementStrategy2015 Page13

Table1:Cost&RiskIndicatorsforExistingDebtasatendJune2014 RiskIndicators Externaldebt Domesticdebt Totaldebt Amount(inmillionsofUSD) 4,300.0 3,234.0 7,534.1 Nominaldebtas%GDP 16.3 12.3 28.6 PVas%ofGDP 8.5 12.3 20.8 Costofdebt WeightedAv.IR(%) 1.0 12.3 5.9 ATM(years) 18.9 2.3 11.8 Refinancingrisk Debtmaturingin1yr(%oftotal) 3.3 49.5 23.2 ATR(years) 18.9 2.3 11.8 Debtrefixingin1yr(%oftotal) 3.3 49.5 23.2 Interestraterisk Fixedratedebt(%oftotal) 100.0 100.0 100.0 FXdebt(%oftotaldebt) 57.1 FXrisk STFXdebt(%ofreserves) 4.6 Source:MTDS2015 2.3.1 Interestraterisks All Uganda s debt disbursed and outstanding at endjune 2014 was contracted at fixed rates.theoverallaveragetimetorefixing(atr) 4 oftheportfolioisthereforethesameas theaveragetimetomaturity(seetable1above).theportfolio satrasatendjune2014 was 11.8 yearswhile the ATR for external and domestic debt were 18.3 and 2.3 years respectively.this indicator suggests very low interest rate exposure for the aggregated portfoliogiventhelengthofthematurityprofileoftheentirepublicdebt.thisisexpected giventhatuganda sdebtlargelyconsistsofhighlyconcessionalloanscharacterizedbylong repayment periods of over 40 years at very low fixed interest rates of less than one percentagepoint.the risk is nevertheless high for domestic debt given the largely short termnatureofthedebtinstrumentshavinganaveragetimetomaturityof2.3years. Interestraterisk:Uganda spublicdebtisstilllessvulnerabletointerestraterisk interest ratevolatilitiesintheglobalanddomesticmarkets astheportfolioispredominantlyfixed rate debt. The Weighted Average Interest Rate(WAIR)for domestic debt is approx. 12.3 percent, while the average interest rate for external debt is one percentage point as the current external loan portfolio s terms are highly concessional with contractual interest rates significantly below market rates, which significantly brings down the portfolio 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. MediumTermDebtManagementStrategy2015 Page14

2.3.2 Refinancing/RolloverRisks Theexternaldebtaveragetimetomaturity(ATM)was18.9yearswhiledomesticATMwas 2.3yearsbringingdowntheportfolioATMto11.8years.Thewidedisparityinthesenumbers isexplainedbythedifferentmaturitystructures:externaldebtismadeupofloansoflong maturity;whilealmosthalfofdomesticdebti.e.49.5percentismaturingwithinoneyear.as a result, the redemption profile (figure 5) shows a peak of principal payment in the next yearduetoshorttermsecurities.theredemptionprofileforexternaldebtoverthelong termisrelativelysmooth. Figure5:PublicDebtMaturityProfileasatendJune2014 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Source:MTDS2015 External Domestic 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 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/rollover risk is remains large for domestic debt as 49.5 per cent of domestic debtisduetomaturewithinoneyearcomparedtoonly2percentofexternaldebt.tothe contrary,theindicatorspointtothefactofverylowrefinancing/rolloverriskassociatedwith externaldebt. Figure 5 above shows bunching of payments in the first three years, followed by a fairly smoothprofile.thebunchingofpaymentsinthefirstthreeyearsisonaccountofthelarge stockoftreasurysecuritiesfallingdueinthatperiod.thesmoothprofilethatfollowsupto theendoftheprojectionperiodisprimarilyattributedtoexternalloansforwhichonlya smallproportionmatureseachyear. MediumTermDebtManagementStrategy2015 Page15

2.3.3 ExchangeRateRisk BytheendofJune2014,foreigncurrencydenominateddebtconstituted57.1percentdown from62.1percentoftotalgovernmentdebt,withthesdrasthemostdominantcurrency. The breakdown of thesdr 5 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 Ug.Shs. 43% USD 25% GBPs 5% EURO 17% CNY 4% JPY 5% Source:MTDS2015 Others 1% Such exposure can be hedged by government borrowing domestically while raising its foreignexchangeearningspreferablyinthecurrenciesrequiredtoservicedebttomatchits obligations. 5 TheSpecialDrawingRights(SDR)isacomposedofdifferentcurrenciesi.e.USdollar,Britishpounds,Euroand Japaneseyeneachaccountingfordifferentweight. MediumTermDebtManagementStrategy2015 Page16

CHAPTER3 AGGREGATE MEDIUM TERM DEBT STRATEGY BroadlythePublicDebtPolicyFramework(PDP2013)envisageslowerlevelsofconcessional borrowing than in previous Debt Strategies, as the country s access to the concessional windowgetsmoreconstrained.subsequently,domesticdebtfinancingisenvisagedtogain more prominence in the medium term. This MTDS takes into consideration the key provisions of the PDM2013, to determine the financing distribution and broader debt managementstrategyforthenextfiveyears. 3.1 MacroeconomicAssumptions ThemacroeconomicassumptionsunderpinningtheMTDSareconsistentwiththemedium term macroeconomic and fiscal framework for financial years 2015/16 2019/20. Uganda s economic performance in the medium term is expected to remain robust.the medium term economic outlook assumes the economy shall grow from 5.3 percent in FY2014/15toreach5.8percentinFY2015/16(Table2below)toattainanaverageof6.3 percentoverthemediumtermfiscalframework. Table2:SelectedMediumTermMacroeconomicandFiscalAssumptions 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) 5.7% 6.9% 6.9% 6.8% 4.8% 3.5% Primarydeficit(%ofGDP) 3.9% 4.8% 4.9% 4.9% 3.1% 1.9% 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 Source:MoFPEDMacroeconomicPolicyDep t MediumTermDebtManagementStrategy2015 Page17

Real GDP growth is projected to increase from 5.3 percent by the end of June 2015 and trendupwardsto5.8percentinfy2015/16andtoanaverageof6.3percentoverthe5year mediumtermtofy2019/20.governmentrevenueexcludinggrantsasapercentageofgdp is projected to average 14.5 percent during the MTDS period growing by half percentage point annually with a projected outturn of 13.0 percent of GDP in FY2014/15 and 13.5 percentofgdpinfy2015/16. Government expenditures is projected to remain at an average of 20.9 percent of GDP during the medium term period with a projected outturn of 20.0 percent of GDP for FY2014/15 and 21.7 percent of GDP in FY2015/16.The same level of 21.7 percent is 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 Transmission and Distribution line; Entebbe Airport Rehabilitation Phase 1; Albertine Region Airport; oil related infrastructureprojects; and a number roads.the total cost for these projects is estimated at US7.0billion spread over the five years medium term framework,tobefinancedthroughexternalnonconcessionalborrowing.overthemedium term, the fiscal outlook projects the primary deficit to rise from 3.9 percent of GDP in FY2014/15to4.8percentinFY2015/16andtoanaverageof3.9percentoverthe5year mediumtermprojectionperiod.nonetheless,towardstheendofthemediumterm,fiscal consolidation will be an important element in government s prudent fiscal management with a decreasing fiscal deficit to reduce the pressures on debt management. Inflation is projectedtoremainwithinthe5percenttargetoverthemediumtermwhiletheexchange rate is projected to depreciate by 12.1 percent in FY2015/16 and by an average of 2.4 percentfortheremainingyearsofthemediumterm. TheMTDStoolthatisusedfortheanalysistakestheprojectedprimarydeficitprojectionsas given as well as the projected principal repayments on the current debt outstanding and disbursedasatendjune2014.differentpotentialfinancingstrategieswouldthenattribute different additional interest costs and principal repayment profiles, and subsequently different gross financing profiles. The details of the financing composition and indicative financing volumes are informed by the MTDS tool. The MTDS analysis below takes into accountcostandrisktradeoffsandtheborrowinglimitwithinwhichdebtisenvisagedto remainsustainable,inlinewithpublicdebtmanagementframework2013benchmarks. 3.2 Interestrateassumptions Fordomesticborrowinginterestratecost,theMTDSassumesthatinvestorswillchargean interest rate that is consistent with their inflation expectation (in this case we have MediumTermDebtManagementStrategy2015 Page18

appliedthe inflation forecast). Accordingly, themtdsprojects that theend June 2014yield curve nominal interest ratesshall grow by the medium term inflation forecastsin order to derive the nominal interest rate for the medium term years.forward yield curves are subsequentlyderivedforoverthemediumterm. 3.3 PotentialFinancingSources Government shall continue to prioritize concessional financing as the preferred means of meeting external financing requirementsespecially for projects designedto meet Government s social services delivery objectives. Over the medium term, however, more nonconcessional borrowing is project to address the financing needs to scale up public investment.accordingly, GoU will seek to achieve the most beneficial and costeffective termsandconditionsforexternalfinancing. a) Nonconcessionalborrowingwillonlybeconsideredforfinancingofprojectsthat willprovideaneconomicrateofreturngreaterthantheinterestratecharged.any highly nonconcessional loans, such as a Eurobond, will only be issued to finance projectswhichnotonlyprovideahighereconomicreturnthantheinterestrateon the loan, but also enabling Government to generate a sufficient fiscal return to meettheprincipalandinterestcostoftheloan(pdm2013). b) Thefollowingtermshavebeenassumedforallnewexternalborrowing: (i) Loans for social service delivery and development must be highly concessional i.e. IDAcomparableorbetterterms (38yearmaturity,6yeargraceperiod,0.75 percentofinterest)orwithagrantelement 6 ofnotlessthan50percent. (ii) Loans for projects intended to enhance productivity but on less concessional terms than those in (i) above shall be on terms with a minimum of (23 year maturity,6yeargraceperiodandinterestratep.a.ofnotmorethan1.5percent) oragrantelementofnotlessthan35percent. (iii) Finally, nonconcessional loans appetite has been limited to only those that would provide a grant element of not less than 25 percent in addition to providing an economic rate of return.the grant element of not less than 25 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 as the difference between the face value of a loan and the discounted present value of the debt service payments the borrowerwillmakeoverthelifetimeoftheloan,expressedasapercentageofthefacevalue. MediumTermDebtManagementStrategy2015 Page19

3.3.1 StylizedFinancingInstruments Under external sources of financing, seven stylized instruments were used in different combinationstorepresentfutureborrowingstrategies.indevelopingthestylizedfinancing instruments, reference has been made to financing terms from our current creditors and from terms of recently concluded negotiations.these instruments are grouped in three broad categories (1) multilateral creditors; (2) bilateral creditors; and (3) commercial creditors. Multilateralcreditorshavethreestylizedinstruments: Twoinstrumentswithhighlyconcessionalfixedratedtermsi.e. i. IDAwithinterestrateof0.75percent,witha38yearsmaturityand6years graceperiod. ii. ADFwithinterestrateof0.75percent,witha40yearmaturityand10year graceperiod. TheseinstrumentsrepresentlargelyloansfrommultilateralsourcessuchasIDA,ADF,IFAD, andnordicfundthatalltendtohavesimilarterms. iii. Aninstrumentwithnonconcessionalfixedratedterms.Thiscategory includescreditorssuchasbadea,opec,eib,idbwithanassumedmaturity periodofaminimumof21yearsmaturity,3yearsgraceperiodata maximumof4percentrateofinterest. Therearetwostylizedinstrumentsforbilateralcreditorsmuchasthe OtherConcessional instrumentcrosscutsbetweenbilateralandmultilateralcreditors: iv. OtherConcessional fixedrateloanswith23yearsofmaturity,and6years graceperiodatamaximumof2percentrateofinterest.thisincludesboth bilateralandmultilateralcreditorsthatofferseeminglysimilarconcessional terms;i.e.idablend;kuwaitfund,abudhabifund,ukexportcredit Guarantee,etc v. Bilateral Nonconcessionalfixedrateloanswith20yearsofmaturityand3 yearsgraceperiodatamaximumof4percentrateofinterest. Commercialcreditorswithtwostylizedinstruments: vi. Eurobond fixedrateinstrument,whichispricedbasedon10yearsus treasuryinterestrateswithariskspreadof600basispoints,implyinga9 percentcouponusingcurrentrates 7. 7 Using end March2015 10-year US Treasury Bond yield rate as a basis. MediumTermDebtManagementStrategy2015 Page20

vii. Purecommercialloan instrumentwith7yearsofmaturityand3years graceperiodat400basispointsplusinterestspreadsofamaximumof1.5 percent. Onlyfive(5)domesticstylizedmarketdebtinstrumentsareassumed: viii. OneTbills representingtbillswithmaturityof91days,182daysand364 days;and ix. FourTbondsstylizedinstrumentswithmaturitiesof2,5,10and15years. All domestic instruments have bullet payment structures (i.e. are repaid in full at their respective termination dates).the primary market yields of the latest auction have been assumedforcurrenttbonds. 3.4 DebtManagementStrategiesandMarketScenarios 3.4.1 DescriptionofAlternativeFinancingStrategies TheborrowingStrategiesconsideredbelowareinformedbytheborrowingpaththecountry is likely to tread during the medium term. These strategies reflect alternative ways to 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 borrowing by prioritizing concessional financing by maximisingavailableconcessionalfinancingallocations,ascommittedbyourlargest financingpartners.thestrategyalsotakesadvantageofanyadditionalconcessional financing from nontraditional development partners that could be available. Under this strategy, external borrowing accounts for an average of 65 percent over the medium termof new borrowing, while 35 percent is through domestic debt issuance distributedbetweentbillsandtbonds(table3below). Strategy2(S2):SovereignBondIssuance:Thisstrategyexploresintotheinternational marketbyconsideringadebutsovereigndebtissuanceinordertoestablishthecost andrisktradeoffsagainstotheralternativefinancingstrategies.underthisstrategy, external financing is assumed to account for 70 percent of which 52 percent i.e. 36 percentoftheentirefinancingrequirementbeingraisedfromthedebutsovereignbond issuance.domesticborrowingisonlyassumedtoaccountfor30percent. MediumTermDebtManagementStrategy2015 Page21

Strategy3(S3):NonConcessionalBorrowing:ThisStrategyassumesabiastowardsnon concessionalborrowingontermssimilartothosefromourmostrecentbilateraland commercialcreditors negotiations.recognisingthelimitedavailabilityofconcessional financing for Uganda s planned infrastructure projects; the medium term fiscal framework assumes quite a substantial amount to be raised from nonconcessional sources. The Strategy uses the exact financing distribution as detailed in the medium termfiscalframework;betweenexternalanddomesticwithalargebiastowardsnon concessionalexternalfinancing.anaverageof60percentofexternalnewborrowing over the medium term fiscal framework is used, of which over 15 percent and 36 percent of the entire financing requirement is from nonconcessional and commercial borrowingrespectively;table3refers. Strategy4(S4):Thisstrategyassumesapredominantrelianceondomesticfinancing withaviewofalsoestablishingthecostandrisktradeoffsofgreaterdevelopmentof thedomesticfinancialmarket.underthisstrategy,70percentofnewdebtisassumed toberaisedthroughdomesticborrowing.30percentofthetotaldomesticisassumedto beraisedthroughtbillswiththeremaindersplitamongsttbondsinstrumentswitha biastowardslongerdatedinstrumentsoftenyearandfifteenyeargovernmentbond. Table3:SummaryofAlternativeFinancingStrategies,FY2015/16FY2019/20 %ofborrowingoverprojectionperiod 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_nonconcess. 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% Source:MTDS2015 3.4.2 TheMarketScenarios: The following market scenarios have been used to assess the robustness of the different alternativefinancingstrategiesdescribedaboveinresponsetoshocksininterestratesand exchangerates. MediumTermDebtManagementStrategy2015 Page22

Scenario1:Currencydepreciation:A30percentdepreciationthatmaterializesinFY 2015/16 and is sustained through the reminder of the time horizon (through FY 2019/20). This represents a real shock that is not passed through to inflation or changesingdp. Scenario2:AsharponeoffincreaseindomesticinterestratesthatmaterializesinFY 2015/16. Interest rates on foreign currency denominated instruments remain as underthebaselineassumptions. Scenario 3:Under this scenario, domestic interest rates are assumed to remain as underthebaselineassumptions.startingfromfy2015/16,interestratesonforeign currencydenominatedinstrumentsarecumulativelyincreasedby100bpseachyear. Scenario4:acombinedshockscenario,whichassumesadepreciationofUGXby15 percent with respect to US dollars combined with a shock to the domestic yield curveinfy2015/16asinscenario2. 3.5 CostRiskAnalysisofAlternativeDebtManagementStrategies Thissectionoutlinestheanalysisthathasbeenconductedforasetofdifferentborrowing strategies under alternative assumptions of interest rates and exchange rates.from these results,themtdsisselected,assetoutintheconclusiontothischapter. TheMTDS 8 Toolisadeterministicscenarioanalyticaltool,wherecomparisonofcostand risk is made based on: the projected cash flows on the existing debt; macroeconomic assumptions;fiscalandfinancialmarketprojections;andalternativeborrowingstrategies. Thepreferredstrategyisdeterminedbasedon:therelativecostandrisktradeoffsagainst thedebtpolicyobjectives,benchmarksandlimitssetoutpdm2013;andontheextentof availabilityoftheassumedfinancingsource.thetoolsubsequentlyprovidesasolidbasisfor comparing different cost and risk measures, and a firm basis upon which the specific strategyhasbeendecided. 3.5.1 DescriptionoftheCostandRiskIndicators The performance of the four alternative financing strategies was assessed under the baselineandshockscenariosidentifiedabove. Fourcostindicatorswereconsidered:twosolvencyindicatorsofnominaldebttoGDP(debt togdp ratio) and present value (PV) of debt to GDP (PVdebttoGDP ratio); andtwo liquidityindicators of interest costtogdp ratioand interest cost to domestic revenue 8 MediumTermDebtStrategyisaWorldBankIMFdevelopedtool. MediumTermDebtManagementStrategy2015 Page23

ratiohavebeenusedthedebttogdpratioisimportantwhenanalyzingthechangesinthe sizeoftheoutstandingdebtduetoexchangeratechanges,asittakesintoaccountvaluation effects.thepvdebttogdprecognizesthematurityprofileandinterestcostsoftheentire debt portfolio to provide a more realistic current value of our future debt obligation. Interest costtogdp and interest costtorevenue ratios assess each strategy s impact on thegovernment sbudget. Riskforagivenfinancingstrategyisdefinedasthedifferencebetweenthestrategy scost indicator soutcomeunderariskscenario(i.e.onewithashocktothebaseline)anditscost outcome under the baseline. The maximum risk outcome across the four 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 AnalysisofAlternativeFinancingStrategies The main objective in the analysis is to establish a financing Strategy that would provide Government with the necessary fiscal financing at the lowest possible cost subject to a prudentdegreeofrisk.notwithstanding,theanalysisalsoassessesthemediumtermfiscal appetite against the sustainability benchmarks set in our Public Debt Management Framework2013withtheviewofprovidinganydebtmanagementpolicydirection. AllthefourstrategiestendtoincreasethetotaldebttoGDPsubstantiallyunderthecurrent mediumtermfiscalframework,from28.6percentendjune2014toalmost50percentasat end2020 for the worst Strategy.The sharp rise of the debttogdp amongst all the financingstrategiesisduetosubstantialprojectedincreasesinborrowingoverthemedium termtofinancethefiscaldeficit.theinterestcostalsosubstantiallyincreaseswithinterest payment to GDP increasing from 1.4 percent end June2014 to almost 4 percent for the worststrategy. Using the nominaldebt to GDP cost indicator, S1(S1:maximizing concessional financing) has the lowest cost of all the strategies followed by S3(S3:Non concessionalfinancing),despitebothraisingthenominaldebttogdpto43.9percent and 45.5 percent respectively compared to 28.6 percent end June2014. S4(S4: maximize domestic debt)has the lowest risk exposure of the four strategies. S4, however,raisesthedebttogdpcostindicatorconsiderablyto48.1percentdueto the multiplier effect of interest cost, which translates into additional financing requirementresultingfromlargeshareofdomesticborrowing.subjectingtheresults toexchangeratedepreciationsandinterestratesshocks,thecostindicatorworsens withanexchangerateshockof30percentdepreciation,whichraisesthedebtto GDPratiotoamaximumof58percent. MediumTermDebtManagementStrategy2015 Page24

PVdebtGDPcostindicatorisalsolowestunderS1followedbyS3withratiosof30.3 percentand38.3percentrespectively(seefig7below),withs3almostdoublingthe end June2014 PVdebttoGDP of 20.8 percent.while the generalrise in thecost indicator is a result of substantial increase in external borrowing, S1 assumes significantconcessionalfinancing,whichgivesalowerpvdebttogdpcomparedto S3.S1wasanattempttosimulatetheimpactonourdebtifweweretofinancethe medium term fiscal deficits with highly concessional loan terms like in past when concessionalloanswereinabundance.s3tothecontrary,simulatedamorerealistic Strategy with a bias of nonconcessional and commercial sources of financing.s2 (S2:DebutSovereignBond)hasthehighestcostindicatorof42.1percentandalso thehighestriskexposureamongstallthefinancingstrategies.thisisattributedto thehighinterestratesassociatedwithsovereignbondissuancesontheinternational markets. The magnitude of risk exposure amongsts1, S3 and S4 however is similarunder the present value cost indicatorgiven the large share of concessional debt still in the current debt portfolio.subjecting the cost indicators to different shock scenarios, illustrates that the maximum risk shock for all strategies comes fromthescenariowitha30percentdepreciationofugxexchangerateagainstthe US$seeTable4below. Table4:ImplicationsofDifferentShockscenariosontheStrategies Scenarios S1 S2 S3 S4 Baseline(DebttoGDP) Exchangerateshock(30%) 43.9 56.5 46.6 60.5 45.5 57.5 48.1 58.2 Interestrateshock1([NameIRshock1]) 44.0 46.9 45.7 48.4 Interestrateshock1([NameIRshock2]) 44.1 47.0 45.8 48.6 Combinedshock(15%depreciationandinterestrate 46.5 49.5 47.9 50.5 MaxRisk 12.6 13.9 12.0 10.1 Considering the liquidity cost indicator of interest payments to GDP, strategy S1 provides the lowest risk and cost combination with 1.8 percent of GDP again followed by S3 with 2.4 percent of GDP. The ratios are however higher than 1.4 percentofendjune2014.s4isthemostexpensivewith3.7percentofgdpwhiles2 is the most risky strategy despite having an interest cost to GDP of 2.8 percent interestpaymentsofgdp(fig.8). The interestpaymenttodomesticrevenue maintains the same ranking with S1 having the lowest interest costs of 11.6 percent of domestic revenue excluding grants followed by S3 with 15.6 percent.while S3 marginally fails to meet the PDM2013 benchmark of 15 percent of domestic revenue excluding grants by a percentagepoint,s2ands4significantlyfailshortofthebenchmarkwithinterest costsof18.2percentand23.9percentrespectively. Figure7:Uganda.SolvencyCostandRiskasofendFY2019/20 MediumTermDebtManagementStrategy2015 Page25

DebttoGDPasatendFY2019/20 Cost(%) 48.50 48.00 S4 47.50 47.00 46.50 S2 46.00 45.50 S3 45.00 44.50 44.00 S1 43.50 Risk 0.00 5.00 10.00 15.00 PVofDebttoGDPasatendFY2019/20 Cost(%) 45.0 40.0 S4 S3 S2 35.0 30.0 S1 25.0 20.0 15.0 10.0 5.0 Risk 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Datasource:MTDSApril2015 Figure8:Uganda.LiquidityCostandRiskasofendFY2019/20 InterestpaymentstoGDPasatendFY2019/20 InterestcosttoDomesticRevenue(exclgrants)as atendfy2019/20 Cost(%) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 3.5.3 OtherRiskIndicators. S1 S4 S3 Risk 0.10 0.20 0.30 0.40 0.50 S2 Cost(%) 30.00 The maturity profile characterizes the analysis on Average Time to Maturity (ATM) and AverageTimetoRefixing(ATR)uponwhichtheanalysisofrefinancingandinterestraterisks are anchored. Concessional financing unders1 helps to even out the portfolio s maturity profile with debt service payments evenly distributed. However because of the limited abundance of concessional financing other options are considered. Exploring into the internationalmarketwithasovereignbond(s)(s2)providestheworstdebtservicestress werematuritiesareskewedtowardstheshorterendofthematurity.theimpactisevident fromthematurityprofilebelowwithsizeabledebtservicesamountsinlessthantenyears while disadvantaging any other financing options that would provide alternative longer maturities. 25.00 20.00 15.00 10.00 5.00 S1 S4 S3 Risk 0.50 1.00 1.50 2.00 2.50 3.00 3.50 S2 MediumTermDebtManagementStrategy2015 Page26

Switchingtothedomesticmarket(S4)withabiastolongtermbondswouldlengthenthe maturity profile given some long dated instruments.preference for 10year and 15year bond instruments fairly provide a more ideal alternative to a sovereign bond (S2) whose longest maturity is currently 10 years for most emerging markets. However, switching to longterm bonds (S4) does not provide significant improvement in the domestic debt redemptionprofileoverthelongtermrelativetos2.thisisbecausetheswitchtolonger termdomesticinstrumentsisnotaggressivegiventhedepthofuganda sfinancialmarket withlessliquidityandwithfewinstitutionalinvestorswhowouldbeinterestedinlongterm instruments.accordingly,inboths3ands4,themovefromtbillstotbondshasbeenused toenhance2yearand5yearbonds. S3 nonconcessional financing provides a blend between long dated and short dated instruments.while commercial loans are short term in nature, most of them are co financed with long dated nonconcessional loans. S3recognizes this fact and where commercialloanshavebeenassumed,asizeableamountofnonconcessionalfinancingis alsoincluded.thereforewhilelargepaymentsareevidentattheshorterend,fig9below refers,theyareevenlydistributedandlatersmoothenedouttowardsthelongerendofthe maturity profile. The longer end of the maturity profile is however not significantly differentfroms2ands4giventhatthebulkofnonconcessionaldebt(s3)hasamaximum maturityof20yearscomparedtos1financinginstrumentswithmaturitiesof40years.see Fig9below. Figure9:DebtRepaymentProfilesbyStrategy,inShs.Millions,end2020 2,500,000 Strategy1 External Domestic 7,000,000 Strategy2 External Domestic 2,000,000 1,500,000 6,000,000 5,000,000 4,000,000 1,000,000 500,000 3,000,000 2,000,000 1,000,000 0 0 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 2068 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 2068 MediumTermDebtManagementStrategy2015 Page27

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Strategy3 External Domestic 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 2068 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Strategy4 External Domestic 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065 2068 Refinancing Risk:All the financing Strategies portfoliosreflect lower Average Time to Maturity(ATM)comparedtotheendJune2014saveforS1,whichprioritizesconcessional financing as a baseline Strategy. We however see great improvements in the ATM for domesticdebtforallthestrategiesbyissuingmorelongtermdatedinstruments.theeffect of issuing longterm domestic securities is relatively big under S4 with domestic debt portfolioatmincreasingto7.4yearsfromof2.3yearsofendjune2014,seetable4below. Refinancing risk exposure for external debt isgenerally impairedunder all the Strategies especially with S2 and S3 that have substantial amounts of nonconcessional and commercial debt.s2 has an external debt ATM of 10.4 years while S3 has 11.0 years comparedto18.9yearsofendjune2014.s2includesissuanceofeurobondsandother highly nonconcessional loans on highly commercial terms and short maturities that also impair all the interest rate risk indicators under S2(Table 4 above). Contracting loans on variableinterestratesunders3ands2reducestheatm(alsoaveragetimetorefixing)to 8.0yearsand8.8years. InterestrateRisk:Theshareofdebtrefixingin1year,increasesunderS2andS3to36.7 yearsand31.4yearsfrom23.2years,mainlyontheaccountofborrowingoncommercial terms.theportfolios weightedaverageinterestrates(wair)arehighunders2ands4at 6.8percentand8.8percentrespectivelycomparedtotheendJune2014portfolio sinterest rateof5.9percent.thisisontheaccountoftheeurobondissuanceunders2andasizeable domesticfinancing.thewairunders3isjustabouttheendjune2014rate. MediumTermDebtManagementStrategy2015 Page28

Table 4: Cost Risk Indicators of the Debt Portfolios Resulting from Pursuing Alternative DebtManagementStrategies,asatendFY2020 RiskIndicators 2014 AsatendFY2020 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 Source:MTDS2015 S1, which maximises concessional multilateral borrowing and a fair distribution between bilateral non concessional and concessional creditors, provides the lowest cost and risk combination despite having the highest exposure to foreign exchange rate risk. This Strategy,however,isontheextremeendofconcessionalfinancingthatitunderminesthe limitedavailabilityofhighlyconcessionalfunds.s4whichlargelyborrowsfromthedomestic financialmarketisonanotherextremeendfinancingstrategy.whiles4greatlyminimises thecurrencyriskexposure,itprovidesthehighestinterestcostexposureamongstallthe strategies.aggressive domestic securities issuance may also not allow domestic interest ratestocomedownfaster.insucharelativelyhighdomesticinterestrateenvironment, largeissuanceinlongterminstrumentsmaynotbecosteffectiveastheywouldlockinthe high rates over a long period. The Strategy which explores the international market (S2)seemstheleastattractiveofallthestrategiesleavingS3asthemostrealistic.S3which also describes the proposed medium term fiscal frameworkalso attempts to establish the costimplicationsofsuchastrategytothebudgetanditsimplicationstouganda soverall debtsustainability. 3.5.4 CostRiskAnalysisofAlternativeStrategiesagainstthePDP2013Debt ManagementBenchmarks The final section of the analysis is to assess the medium term fiscal appetite against the sustainability benchmarks set in our Public Debt Management Framework 2013 with the viewofprovidinganydebtmanagementpolicydirection. Generally all the four Strategies would not violate the Public Debt Management Policy Framework 2013 cost indicator for PVdebtto GDP of 50 percent. Nonetheless, S4 PV domesticdebtgdpof24.8percentwouldviolatethepdm2013limitof20percentbythe MediumTermDebtManagementStrategy2015 Page29

endofjune2020.inaddition,s4wouldalsolargelycrowdouttheprivatesectoroverthe medium term with Domestic Debt Stock/Private Sector Credit ratio of 160.3percent way abovethe75percentlimitandalsohigherthantheendjune2014ratio.s2wouldhavethe highest PVexternaldebtto GDP of 30.8 percent by end June 2020,though marginally exceedingthepdm2013limitof30percent. Table5:ComparisonofCostsandRiskIndicatorsagainstDebtPolicyBenchmarks CostandRiskIndicators Benchmark End June 2014 Est.End June 2015 Proj.2016 Proj.2020 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 Source:MTDS2015 S3withaPVexternaldebttoGDPof26.6percentbyendJune2020isconsideredthemost realisticfinancingalternativegiventhelimitationstoconcessionalfinancingwhichislargely considered under S1.While this would be less than the 30 percent limit by just 3.4 percentagepoints,itwouldreduceanysubstantialexternalborrowinginthefuturebeyond FY2019/20,almostusingupthefiscalspaceonexternalborrowing.Thenominalinterest costtogdpof15.6percentunders3byendjune2020andthedomesticdebtstock/psc indicatorof75.9percentarebothmarginallyabovethepdm2013benchmarkof15percent and75percentrespectivelybylessthanapercentagepoint.thedomesticatmandtheatr bothimproveoverthemediumtermontheaccountoflongtermdatedinstruments. Thelargefiscaldeficitofanaverageof6.1percentoverthemediumtermtobefinanced largely from nonconcessional and commercial borrowingindicates considerable increase inthepvofdebttogdp.accordingly,theexpectednewborrowingoverthemediumterm ofapprox.us$7bnwouldalmostdoublethepvdebttogdpto38.7percent(s3)from20.8 percentofendjune2014. MediumTermDebtManagementStrategy2015 Page30

CHAPTER4 CONCLUSION ThekeyaimfortheMTDS2015wastoascertainthecostandrisktradeoffoffinancingthe mediumtermfiscaldeficitthroughborrowingwhilemindfulofourdebtsustainability.this isintendedtoinformgovernment sfinancingplanbysettingout,interalia,theleastcost combinationofborrowinginstrumentswiththemostprudentdegreeofriskthroughwhich toraisethefinancingrequirementsoverthemediumterm.thisisachievedbydetermining the most realistic overall composition of the public debt portfolio, taking into account macroeconomicindicatorsandthemarketenvironment. TheMTDS2015indicatesthatthetotalpublicdebtisexpectedtorisesubstantiallyonthe account of large infrastructure financing projected in the medium term fiscal framework. ThePVDebttoGDPisprojectedtodoubleoverthemediumtermfrom20.8percentasof endjune2014to38.3percentbytheendofjune2020.thisisontheassumptionthatthe current real growth projections over the medium term shall be sustained.this would neverthelessstillbewithintheeacdebtconvergencecriterionthatrequiresapvofdebt GDPoflessthan50percentatalltimes. WhileS1mayappeartodominatethealternativeborrowingstrategies,itsconstrainedby the limited availability of concessional financing to meet the financial requirement for infrastructuredevelopment.therefore,takingintoaccountthatfactandthecost/risktrade offs, Strategy 3 (S3) is judged to be the most realistic strategy over the medium term. Nonetheless,thecurrentmediumfiscalframeworkfinancingassumptionsalsoconsidered S3,arelikelytoposeanumberofdebtmanagementrisksasobservedabove.Thenon concessional and commercial financing, therefore, needs to be cautiously negotiated without impairing the borrowing term limits in our PDM2013, which have been largely appliedunderthismtds.thetermsofthedifferentfinancinginstrumentappliedinthis Strategyshouldbeappliedasthelimitsi.e.asaceilingforinterestratesandasaminimum formaturityterms.anytermscontrarywouldriskworseningthestrategy. Secondlyforallvariableinterestrateloanstobenegotiated,itisrecommendedtoeitherfix the variable interest rates upon concluding the agreement or have a provision in the agreementthatallowsgovernmenttofixtheinterestratesatleastonceduringtheloanlife. Thisishighlycriticalgiventhehighinterestcostexposure,whichisattributedtovariable interestrates.currently,interestratesareonupwardtrendandifvariableratesareleftto run for the entire loan maturity without any control measure, they can be costly. In addition, the MTDS cautions Government over the large bias towards long term dated bondsof10yearand15yeargiventhecurrenthighinterestrates.themtdsassessment ofthestrategiesagainsthighinterestratestendstoindicatethatgovernmentwouldrisk lockingintohighinterestratesforalongperiod.thedebtreorganisationthereforefromt BillstoTBondsshouldratherhaveaconcentrationof5yearTBondinstrumentsinstead. MediumTermDebtManagementStrategy2015 Page31

Finally,thechoiceofS3overtheotherfinancingStrategiesisconsistentwiththePDP2013 objectives of; meeting Government s financing requirements at the minimum cost and prudent degree of risk; maintaining the level of public debt sustainable; and the developmentofuganda sdomesticfinancialmarkets.however,thismarkedlyreducesany fiscalspaceforanyfutureexternalborrowingduringthemediumtermifwearetoabideby ourpdm2013externaldebtlimitofpvofdebtgdpoflessthan30percent. Inconclusion,theMTDS2015assessmentofthemediumtermfiscalframeworkindicates high sensitiveness of the solvency indicators of DebttoGDP and PVDebttoGDP to GDP growthassumptions.cautionisthereforewarrantedtoensurethatthecurrentsustainable public debt positionis sustained over the mediumterm. Therefore, attaining the programmed economic growth assumptions and the efficient use of borrowed funds are highly critical in maintaining the solvency indicators below the projected levels to create roomforanyfutureexternalborrowingandtoensurethatourlongtermdebtsustainability ismaintained.accordingly,largerrecoursetodomesticdebtfinancingbeyondthecurrent limitsundermediumtermfiscalframeworkcouldworsenthedomesticinterestratesand putpressureonthebudgetexecutionduringthemediumterm.inaddition,therecourseto nonconcessional external financing while found ideal given the limited access to large concessionalfinancing,largesumsofnonconcessionalborrowingwithinashortperiodmay increasetheriskofdebtdistress.theborrowingenvisagedunderthemtds2015therefore, shallbeundertakenwithcautiontakingintoaccounttheabovefactors. Goingforward,anannualreviewofpotentialstrategiesshallbecarriedouttoestablishtheir feasibilityandrelativemerits.nonetheless,iftherearesignificantandsustaineddeviations ineconomicandfiscaloutturnsrelativetothoseassumedinthemtds2015,thenstrategy3 (S3)maybereviewedandrevisedbeforethemandatoryannualreview. MediumTermDebtManagementStrategy2015 Page32

Glossary 1. Domestic debt stock / GDP: This is a commonlyused measure of the level of domestic debt relativetothesizeoftheeconomy. 2. DomesticInterestCost/DomesticRevenue(excludinggrants):Thisratiocapturesthebudget sustainabilityofthedomesticdebtburden.thebenchmarkcapturestherelativelyhigherriskof accumulationofdomesticdebtinugandaduetotherelativelylowlevelofdomesticrevenueto GDP. 3. DomesticInterestCost/TotalGovernmentexpenditure:Thisratiodescribestheshareoftotal governmentexpenditurethatisdirectedtopaydomesticinterestcosts.thisthereforeprovides anindicationoftheextenttowhichavailableresourcesareusedtomeetfinancecostsatthe expense of growthenhancing activities. The higher the ratio, the higher will be the risk of holdingbackeconomicgrowth. 4. Domesticdebtstock/PrivateSectorCredit(PSC):Thisratiohelpsmonitortheextenttowhich governmentborrowingmaybecrowdingouttheprovisionofcredittotheprivatesector. 5. AverageTimetoMaturity(ATM)providesanindicatorfortheaveragelifeofdebt.Itmeasures theaveragelengthoftimeittakesfordebtinstrumentstomatureandthereforetheextentof the refinancing risk exposure. A long ATM implies lower refinancing risk exposure, and vice versa. 6. PercentMaturinginOneYear:Thisistheshareofdebtmaturinginthenexttwelvemonths. Highproportionsareindicativeofhighlevelsofinterestrateorrolloverrisk.Theriskismore pronouncedinlessliquidmarkets. 7. Percent maturing in any year after year one: To avoid refinancing requirements being particularlyconcentratedinanysingleyear,itisrecommendedtospreadmaturitiesevenlyover the maturity curve. This risk control measure helps prevent rollover risk from being simply shiftedtoalaterperiod,forexamplefromyearonetoyeartwo. 8. Share ofbonds/bills:atargetfor the shareoftreasurybonds tobillsoutstanding withinthe domestic debt stock acts as a useful rule of thumb to help in achieving the benchmarks for managingrefinancingrisk. 9. AverageTimetoRefix(ATR):ATRprovidesameasurefortheaveragelengthoftimeittakesfor interestratestobereset.thelongertheperiod,thelowertheinterestrateexposure. MediumTermDebtManagementStrategy2015 Page33

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