NSSF Uganda ventures into Dar, Nairobi as equity earnings drop

The Uganda National Social Security Fund headquarters. The Fund is now investing in Tanzania and Kenya, as it faces a period of diminished returns from equities. PHOTO | FILE |  NATION MEDIA GROUP

By BERNARD BUSUULWA

In Summary

• The state-controlled social security provider has invested around 26 per cent of its assets outside Uganda in line with regulatory guidelines that prohibit fund managers from investing in markets outside the East African region.
• The Fund put Ush67 billion ($19.5 million) in Tanzania’s government securities market between July 2015 and June 2016, in a pioneer transaction that highlights stronger integration in East Africa’s capital markets.
• About Ush152 billion ($44 million) was invested in Kenyan infrastructure bonds, raising the total value of this asset class to Ush493 billion ($144 million).

Uganda’s National Social Security Fund is now investing outside its borders, as it faces a period of diminished returns from equities.

The state-controlled social security provider has invested around 26 per cent of its assets outside Uganda in line with regulatory guidelines that prohibit fund managers from investing in markets outside the East African region.

NSSF made its first investment in Tanzania during the 2015/16 financial year, as its southern neighbour opened up its market to regional players.

The Fund put Ush67 billion ($19.5 million) in Tanzania’s government securities market between July 2015 and June 2016, in a pioneer transaction that highlights stronger integration in East Africa’s capital markets.

About Ush152 billion ($44 million) was invested in Kenyan infrastructure bonds, raising the total value of this asset class to Ush493 billion ($144 million). This transaction was concluded almost two years after the Fund’s failed entry into the Tanzanian market, which it blamed on political hurdles.

The Fund’s planned purchase of shares in Tanzania Breweries Ltd, a Dar es Salaam Stock Exchange-listed beer company, in 2014, was reportedly scuttled by red tape in securing legal approvals.

Tanzania opened up its capital account to foreign investors last year in a measure intended to comply with regional monetary union integration requirements.

“Tanzania’s economy offers good investment opportunities in sectors like fast moving consumer goods, energy and tourism. So far, our return on investment in this market has grossed 35-40 per cent and our future target exceeds 40 per cent. Current economic reforms being implemented in the country are promising and offer a lot of business potential,” said NSSF Uganda managing director, Richard Byarugaba.

“However, our equities portfolio delivered very weak returns in the past financial year, with returns on investment amounting to 7.2 per cent compared with 35 per cent realised in the 2014/15 financial year.”

He added: “Sharp declines in stockmarket indices across the region and the election season in Uganda contributed much to this poor performance.”

READ: Uganda NSSF cuts savings rate to 12.3pc

Falling stockmarket indices experienced across East Africa in late 2015 and earlier this year are largely attributed to massive investor capital flight sparked by reports that the US Federal Reserve Board intended to raise its policy rate and later jitters caused by the British referendum that voted to exit the European Union (Brexit).

A slump in stockmarket indices usually translates into shrinking stock prices, lower capital gains, lower market turnover levels and reduced returns on investment for investors, experts say. For instance, the All Share Index at the Uganda Securities Exchange (USE) dropped  by 14.5 per cent in 2015 in contrast with a growth of 17 per cent recorded by close of 2014, NSSF data indicates. Total dividends earned by the Fund last year were estimated at Ush35 billion ($10 million).

“The election season in Uganda put off many foreign investors active in the local stockmarket between late 2015 and early 2016, and this severely affected the All Share Index. Other stockmarkets in the region were affected by the US Federal Reserve’s intentions to raise interest rates and Brexit related fears. Some institutional investors based in the US, Britain and South Africa experienced liquidity-driven problems in their portfolios and were forced to sell off most of their assets in emerging markets last year in order to plug liquidity gaps,” said Henry Tamale, a stockbroker at Crested Capital Ltd.

Rising yields earned on Treasury bills and bonds in 2015 boosted NSSF’s total revenues, with interest rates on Ugandan government paper averaging 16-20 per cent as investors capitalised on huge government borrowing needs and election anxiety to maximise returns from debt securities

However, steady improvements registered in payment of members’ claims had an adverse side for the Fund. The average number of days taken to process member’s claims dropped from 10 days in 2014 to eight days last year, while total claims paid out rose to more than Ush200 billion ($58 million) last year.

The total number of retiring members is estimated at 2,000 employees per year. But an apparent increase in the number of distressed claimants who receive benefits and deplete in less than three years has created a fresh crisis for the Fund, with some of the affected individuals reportedly visiting its offices in search of urgent social welfare relief.

Though the Fund is quick to shift the challenge to government, the plight of financially distressed savers raises questions about the state of retirement planning in Uganda.

The Fund’s total assets increased to Ush6.6 trillion ($1.9 billion) by end of June this year while overall collections grew from Ush686 billion ($199.9 million) in 2014/15 to Ush785 billion ($228.8 million) in 2015/16. NSSF’s total income rose from Ush583 billion ($169.9 million) to Ush707 billion ($206 million) during the same period, while the cost to asset ratio fell to 1.3 per cent.