By Our Reporter
The economies within East Africa, where the National Social Security Fund (NSSF) has investments, weakened in 2015/16 but that did not stop the accumulation of assets by the fund. The assets have grown to Ushs 6.6trillion, a rise of Ushs 1trillion from Ushs 5.6trillion in 2014/15. According to Richard Byarugaba, the Managing Director NSSF, the growth in the assets was because of increased member contributions from a monthly average of Ushs 57.3 billion in 2014/15 to Ushs 66 billion.
NSSF has spread its risks in the region by investing in the low risk area of government debt in Kenya, Uganda and Tanzania. In Uganda, the specific target were treasury bills and bonds valued at Ushs 414 billion. In Kenya, the investment spread was between actual government securities and infrastructure bonds. In Tanzania, the focus was mostly premised on tax incentivized government infrastructure bonds.
The yield curve on government debt in the region went up during the financial year as governments in the region generated more returns. In Uganda the yield curve surged upwards north of 23% and 21% respectively for tenures between 1 year and 3 years up from about 16% and 14% respectively. That meant that for the short-term tenures, NSSF was able to make a good return on investment.
“Realized revenue went up by 21% from Ushs 583 billion to Ushs 708 billion, mainly due to the improved interest rate regime and higher dividend income obtained from equity investments. Treasury yields improved across all maturities, rising above the 17% mark compared to last year at 16.7%,” he said.
Byarugaba however said the Ugandan economy was not offering many more opportunities for NSSF to invest because of the limited incentive structure. The fund has been struggling to get a Withholding Tax exemption on returns on investment but this has persisted with Uganda Revenue Authority (URA) insisting the fund must pay. He described Tanzania as the “sleeping giant” in the region, noting that they country had opened by providing tax incentives on long-term investments for the fund.
“We have become big for the Ugandan market. Diversifying in the region is part of spreading our risk but we need further exposure,” he noted.
NSSF is still playing it safe with 77% of investments placed in the fixed income segment because of them being low-risk.
The only other sector that delivered higher returns was the real-estate sector because of increased rental charges and also increased valuations on the land NSSF holds. This segment remains one of the more sticky ones for the fund because of the stalled projects where processes of finding contractors are taking longer than expected. Byarugaba revealed that it could take almost 2 years to even start work on the second phase of Pension Towers, one of NSSF’s flagship projects that is almost four years behind schedule because of contractual issues.
Equities sting
NSSF holds about 16% of its assets in the equities segment across East Africa but all the stock exchanges in the region took a tumble during the years. This reduced the value of shares held by NSSF.
“Across the East African region, the equities market significantly came off compared to last year. In Uganda, the markets declined by 14.5% compared to a growth of 17.6% in 2014/2015. In Kenya, the markets also declined by 15% compared to a growth of 9.3% in 2014/2015. In Tanzania, the markets declined by 9% compared to a growth of 25.5% in 2014/2015,” Byarugaba said.
The stock exchanges were mostly affected by the reduced investor appetite in the region and other emerging markets as the developed markets like US became more attractive. In Kenya, they could be further affected by the capping of interest rates that could reduce the returns for the fund as income from Equity Bank and KCB could fall. Already, the value of shares held by NSSF in the two banks has fallen by almost 20% after the investor confidence dropped and caused capital flight by investors concerned about the capping of interest rates.
Uganda weaknesses
Uganda was almost the bad apple in NSSF’s performance in 2015/16. The economy grew slower than expected at 4.6% instead of the projected 5.6% and the Uganda Shilling weakened much faster in Uganda than the rest in the region. The result was a foreign exchange paper loss of Ushs74 billion.
“The Uganda shilling was volatile for most of the last financial year, depreciating at a much faster rate than other currencies in the East African region, negatively affecting Ugandan businesses and the economy. Since then, the shilling has somewhat stabilized. The volatility of the shilling affected investments,” Byarugaba said.
The 2016 elections also further compounded the problems for the fund as it dampened investor confidence.
NSSF is expected to announce the interest rate to its 700,000 members on Friday. The rate is usually based on the performance of the fund during the financial year.