Keynote Speech by Michael Atingi-Ego - Deputy Governor

Keynote Speech by

        Michael Atingi-Ego
           Deputy Governor

   Absa Economic Outlook and
2020 Africa Financial Markets Index
           Presentation

           Virtual, Kampala

           9 February 2021

Mrs Nadine Byarugaba, Chair of the Board, Absa Bank Uganda

Mr Mumba Kalifungwa, Managing Director, Absa Bank Uganda

Mr Keith Kalyegira, CEO, Capital Markets Authority

Mr Richard Byarugaba, Managing Director, NSSF

The Presenters and Panellists

Ladies and gentlemen

Good morning to you all.

Thank you very much for inviting me to the Absa Bank Uganda Economic
Outlook Forum and the 2020 Africa Financial Markets Index (AFMI)
presentation.

As I begin addressing this forum, I am reminded of the saying that “What
gets measured gets managed”. This fourth edition builds on the record
of the AFMI as a credible measure of the progress and potential for
Africa’s financial markets development.

I thank Absa Bank and the Official Monetary and Financial Institutions
Forum (OMFIF) for continuing to track and publicise the growth
milestones of Africa’s financial markets.

Uncertainty makes investors cautious and potentially reduces market
responsiveness to policy actions. By measuring the openness,
transparency, and accessibility of financial markets, the AFMI measures
exactly what matters for building the critical framework for investor
decision making and thus enhancing confidence in the investment
destinations. It also provides a vital benchmark to guide policymakers
and regulators in closing the gaps in the African financial markets.

                                 Page 2 of 8

Before the initiation of the AFMI, foreign investors tended to look at
Africa as one market, except South Africa and perhaps Egypt, because
of a lack of detailed information on the national markets. The rankings in
the index across the six pillars present opportunities for national
differentiation as well as peer-learning for catch-up among the cohort.
Broadly, South Africa and Mauritius are the pacesetters that we should
look to emulate.

I note that Uganda has maintained its overall ranking of 10th from 2017 to
date. While pessimists might see that as stagnation; optimists will view it
as stability and resilience. Also, our national score increased from 50 in
2017/18 to 52 out of 100 in 2019/20. So, while Uganda has somewhat
consolidated its ground, a lot of room remains to be covered.

Uganda’s strength in access to foreign exchange, ranking only behind
South Africa, is anchored on a liquid forex market, healthy foreign
exchange reserves that are above 5 months of import cover as well as a
vibrant interbank swaps and forwards market that is supported by an
active interbank money market.

We also score strongly in market transparency, tax and regulatory
environment, ranking 6th overall, and 1st in the East African Community
(EAC). This reflects the moderate risk of national debt distress,
sustaining of the sovereign credit ratings at “B” by Standard and Poor’s
and “B+” by Fitch Ratings, and compliance with International Financial
Reporting Standards together with the commendable tax and
accounting environment that is overseen by an independent oversight
body –the Institute of Chartered Public Accountants of Uganda.

Uganda also offers competitive macroeconomic opportunity, ranking 6th
overall, and 1st in the EAC, due to a record of strong economic growth
always backed by appropriate monetary policy.

                                  Page 3 of 8

More recently, the accommodative monetary policy stance with the
policy rate at a low of 7 percent together with a host of credit relief
measures and fiscal stimulus have supported the economy during the
pandemic.

Turning to the weaknesses, Uganda has a lot to learn from its peers to
catch up in market depth, the capacity of local investors, as well as the
legality and enforceability of standard financial market master
agreements. A host of reforms are underway to address the poor
performance in some indicators, for better ranking in the future.

For example, to boost market depth by enhancing the size, liquidity and
diversity of market products, the Bank of Uganda together with
stakeholders, has undertaken a set of interventions including:

    reforming the Primary Dealership System in October 2020;
    working on linking the Central Securities Depository with the
      Securities Depository at the Uganda Securities Exchange;
    participating in developing the framework for EAC Designated
      Market Makers for cross border trading in Government securities;
    working towards a single EAC financial market by linking stock
      exchanges and central securities depositories among the partner
      states;
    working with Bloomberg and primary dealers on market pricing to
      generate a Bloomberg Valuation curve that is likely to facilitate
      listing of Uganda government bonds on the frontier and emerging
      fixed income market indices;
    extending the yield curve with the introduction of a 20-year bond;
      and
    working towards including forex swaps in the set of monetary
      operations tools.

                                  Page 4 of 8

Seeking to boost the capacity of local investors, the BoU in consort with
stakeholders is developing a platform to enable low-income earners
(“bottom of the pyramid investors”) to invest in government securities
using mobile phones. The Bank also continuously promotes investing in
government securities to the public, both locally and in the diaspora. To
improve performance on this pillar, we have a lot to learn from the
majority of our peer countries, especially Namibia and Botswana given
their high concentration of domestic assets from pension funds.

I must stress that the liberalisation of the pension sector in Uganda while
preserving national interests and securing public confidence in the
private institutional players, would significantly expand and deepen the
non-bank financial sector. The country needs a richer debate and a
coming together of minds to harvest the potential of a liberalised
pension sector.

Regarding the improvement of national performance on the pillar of
enhancing legality and enforceability of standard financial market master
agreements, the central bank together with partners has undertaken the
following measures:

    promotion of the adoption of the Global Master Repurchase
      Agreement;
    promotion of the Financial Markets Association (ACI) dealing
      certification to ensure conformity with a market code of conduct
      by dealers in the money, forex and debt markets;
    working with Frontclear on establishing the Umbrella Guarantee
      Facility to minimize the impact of market segmentation, enhance
      efficiency and boost policy transmission; and
    development of the implementing regulations for the National
      Payments Systems Act, 2020.

                                 Page 5 of 8

We are optimistic that the successful implementation of the reforms that
are underway will elevate Uganda’s performance in the AFMI going
forward.

As I come to the end of my remarks, allow me to say that much as
Uganda’s financial sector has been resilient through the pandemic partly
through accelerated digitalisation and the containment of near term risks
to financial stability aided by decisive policy measures by the BoU; we
are not out of the woods yet. The slow economic recovery poses
vulnerabilities to financial stability, including through the impact on
earnings of households and businesses as well as the banking sector
asset quality. But while credit extension remains subdued; on aggregate,
banking institutions have strong liquidity and capital buffers to absorb
emerging shocks.

Fortunately, in the Monetary Policy Statement of December 2020, the
BoU reported that the recovery was gradually gaining traction towards
the projection of economic growth above 3 percent in 2020/21.

In keeping with the spirit of optimism, the discovery and global
distribution of multiple vaccines together with better treatments of
COVID-19 will help to contain the negative impact of social distancing on
economic activity, as life slowly returns to normal.

A quick and safe return to normal life, supported by the lifting of all the
recent election-related restrictions to the internet and social media
access will relieve the strains on financial markets, FinTech firms, and
enhance economic growth, thereby helping to consolidate Uganda’s
good performance of 70/100 on the macroeconomic opportunity.

Before I conclude, I would like to highlight a key development on the
horizon. As you are aware, in 2017, the UK Financial Conduct Authority
and Bank of England announced that they would withdraw support for

                                  Page 6 of 8

LIBOR as a global benchmark and cease its publication on 31 December
2021, because it was not supported by underlying transactions. Since
then, various jurisdictions have developed alternative reference rates to
replace the previously used LIBOR benchmark and encouraged market
players to identify their LIBOR exposures and implement measures to
transition existing exposures to the new alternative reference rates.

BoU issued guidance to the supervised financial institutions in December
2020 on the transition away from LIBOR. Our guidance included critical
milestones, which each financial institution should accomplish within a
stipulated timeframe to ensure a successful transition to new reference
rates.

A preliminary assessment by the central bank indicates a LIBOR
exposure of approximately US$500 million for the banking sector, the
bulk of which is in loans and advances. Out of the total exposure, US$419
million will require transition to alternative reference rates since it will
mature after December 2021. Communication with the affected
customers already commenced, and we envisage that all institutions will
have implemented transition plans for their existing exposures to
alternative reference rates by 31 December 2021 when LIBOR ceases. It
is important for the boards and senior management of the supervised
financial institutions to build awareness of LIBOR cessation throughout
their institutions.

Returning to the old management proverb, what gets measured matters
because measures set up incentives that drive people’s behaviour. By
setting the AFMI as a benchmark for measuring countries’ performance
on critical indicators of financial market development, the index
motivates governments, regulators, and market participants to promote
open, accessible and transparent markets that will mobilise and promote
investment in Africa.

                                    Page 7 of 8

In this way, Absa is nudging African countries to advance their financial
market structures not least through constructive peer learning and peer
pressure.

Join me in congratulating and thanking Absa Bank and OMFIF for
producing the fourth edition of the 2020 Africa Financial Markets Index. I
wish you all a successful and most fruitful forum this morning.

My final words to you are – please observe the guidelines for controlling
the spread of COVID-19, and kudos to Absa for being mindful of
protecting public health and safety by hosting this event virtually.

I thank you all for your attention.

#StaySafeEveryone!!

                                      Page 8 of 8