Uganda’s new pension could swamp USE with new players

By BERNARD BUSUULWA

Posted  Saturday, December 13  2008 at  12:1

Uganda’s pension sector is expecting an influx of new players once parliament approves the Pension Bill 2007 and the setting up of a competent regulator.

However, financial industry players say the still immature Uganda Securities Exchange (USE) may not be able to absorb the overwhelming flow of funds from new entrants, leading to excessive demand for shares and dramatic increases in share prices.

On the other hand also, tight regulation in the form of a minimum percentage being in the form of government securities would hinder growth in pension schemes whose investment attitude is very risk-friendly.

Simon Rutega, the chief executive of the USE, however said, “Even as the Pension Bill 2007 is passed, it could take up to two years to commence implementation. But it will will definitely promote competition and diversity of players in the capital markets.

“Yes, in the short term, demand for shares could become overwhelming but we are not worried. We expect an increase growth in the number of companies interested in listing on the stock exchange in the near future, which will help in alleviating that problem.”

Despite the high risks associated with investing in stocks, pension schemes have not been discouraged from investing on the USE due to the steady and robust performances registered by most of the listed companies.

But the equities counter has recorded slow growth with only three initial public offerings executed in the past four years, leading to limited options for risk diversification.

The USE has attracted only six local listings, four cross-listings and four corporate bonds in its 10 years of operation.

By mid 2007, the number of pension fund schemes operating in Uganda was estimated at over 100, with a total book value in excess of $50 million.

The passing of the new pension law is expected to increase public confidence in the sector and boost growth in national savings.

An influx of new and aggressive investors on the stockmarket emerging from a reformed pension sector is likely to intensify demand for the limited shares in the short term, causing increases in share prices, and liquidity problems.

A sharp increase in equity listings and corporate bond issues will be needed to stabilise growth in share prices and retain investor interest, especially in the retail segment.

Nevertheless, the USE has registered remarkable growth in terms of market capitalisation and turnover in recent years, making it a favourite destination among risk-eager investment players who prefer the quick high returns from trading shares compared with the lower returns generated from government securities.

Market capitalisation at the USE had grown to over Ush4 trillion ($2.2 billion) by mid this year while total turnover is projected to reach Ush85 billion ($48.8 million) by the end of the year. In 2007, total market turnover was Ush84.8 billion ($47.6 million), representing a growth of 1.2 per cent.

But, as Mr Rutega pointed out, potential delays in the implementation of the new pension law will give room for enhancing growth on the bourse to absorb massive investment flows from new pension schemes.