• The auction is the first 25-year bond (UGX 500B), scheduled for Aug 6, aims to extend debt maturities and ease fiscal pressure.
• Targets long-term investors, cuts borrowing costs vs short-term, follows Kenya's lead.
• Risks are high, and yields are expected to be 18-20%. Test the market for an oil-driven growth strategy.

Uganda is preparing to issue its first 25-year Treasury bond, valued at approximately UGX 500 billion ($135 million), in an auction scheduled for August 6, 2025. Led by the Bank of Uganda (BoU), this bond represents the longest maturity for a government security in the country's history, surpassing the previous 20-year bond issued in 2020. This initiative comes amid increasing financing challenges, including public debts approaching 50-55% of GDP, high interest rates, and external shocks such as commodity price fluctuations and post-pandemic recovery issues.

In a recent discussion on CNBC Africa, Pamela Akidi, Retail Sales Manager at Stanbic Uganda's Global Markets, explained the rationale behind this debut. According to Akidi, who spoke to CNBC Africa, “The issuance of this bond is a strategic move to manage financing pressures by extending debt maturities.” Her insights highlight the bond's role in reducing refinancing risks, as Uganda deals with fiscal deficits driven by ambitious infrastructure projects, including oil pipelines and power developments expected to generate returns over several decades.

By extending debt maturities, the government aims to ease immediate cash flow issues and foster a more sustainable borrowing strategy, potentially attracting long-term investors such as pension funds and bolstering the local capital market. This bond forms part of a broader auction that also includes reissues of shorter-term instruments, reflecting a strategic shift towards longer-term financing at a time when short-term debt rollovers are becoming increasingly challenging.

Akidi's commentary demonstrates optimism within the market, suggesting that this instrument could reduce overall borrowing costs compared to repeated short-term issuances, even as current yields on similar bonds hover around 17-18%. This expert view from a prominent financial player underscores how the 25-year bond aligns with regional trends, where countries like Kenya have successfully issued ultra-long securities to stabilise their debt profiles.

The economic context underpinning this decision is complex, rooted in Uganda's need to balance growth ambitions with debt sustainability. Despite the Bank of Uganda's tight monetary policy, inflation remains above target, leading to increased interest rates—increasing short-term borrowing costs, as evidenced by recent yield rises of 2-3% on two- and five-year bonds. External factors, including a reduction in concessional loans from institutions such as the World Bank due to debt concerns, have prompted the government to turn to domestic markets.

The target amount for this bond is modest yet symbolic, intended to test investor interest without overwhelming the system. Strategically, this bond issuance acts as a test for the maturity of Uganda's local debt market. Historically dominated by shorter tenures, the market has seen limited engagement with long-dated instruments, but changing investor preferences—driven by pension reforms and institutional savings—may alter this landscape.

Scheduled to mature in 2050 with semi-annual coupons starting February 2026, the bond will be auctioned through competitive bids, where the yield to maturity will determine the fixed rate. Analysts expect yields around 18-20% to reflect the extended risk, with a 10% withholding tax on interest—lower than for shorter bonds. If successful, this move could encourage further issuances, normalising longer maturities and reducing the government's vulnerability to interest rate fluctuations, while also signalling confidence to international rating agencies.

However, risks remain. High current rates could lock in elevated costs over the long term, potentially straining future budgets if economic conditions improve and rates decline. Investor demand in a high-inflation environment remains uncertain, and the government retains the right to reject bids if yields exceed acceptable levels, as seen in recent auctions. Political factors, including upcoming elections in 2026, further complicate the outlook, as policy shifts could impact debt servicing. Despite these challenges, the focus on domestic funding reduces currency risks unlike external debt, and supports Uganda's oil-led growth narrative, where export revenues could comfortably cover obligations.

Idriss Linge