Uganda hit by yearly liquidity crunch

Aug 16, 2009

KAMPALA<br><br>Uganda’s central bank is trying to relieve an annual liquidity squeeze, hoping that government security maturities next year will ease the cyclical crunch, market players said.

KAMPALA

Uganda’s central bank is trying to relieve an annual liquidity squeeze, hoping that government security maturities next year will ease the cyclical crunch, market players said.

The bank is injecting money into the market through extra sales of reverse repurchase agreements, aiming to keep up investment in one-year government paper following the end of the fiscal year.

“They’ve gotten tired of (the cyclical liquidity crunch), and we’re tired of it,” a fixed-income dealer said.

End of year tax payments in June and slow government expenditure at the start of the July-June financial year traditionally create a liquidity shortfall, driving up short-term interest rates and forcing the central bank to cancel scheduled Treasury bill auctions. The international credit crisis last year also prompted a sudden outflow of foreign investors from Ugandan paper, driving up yields and weakening the shilling

“This liquidity issue has been big in (central bank) minds for a while now since the withdrawal of considerable portfolio investment in late 2008,” said David Cowan, Africa economist for Citi. “You’ve seen them up money supply growth targets, and they’ve slowly and cautiously moved to ease interest rates.“The central bank, which usually cancelled government paper auctions around July, hoped maturing one-year notes would help to ease the crunch next year, the market players said.

“In the past they rejected auctions; they postponed the problem,” said one global markets trader.

Short-term interest rates have risen since mid-July with overnight and one-week rates hitting 11-14% from the usual 5-7% on the tightened liquidity, traders said. But from July 1 to August 13, four Treasury bill auctions were held compared with around two auctions in the same period in the last four years, according to the central bank Web site.

The central bank has injected more than 150 billion shillings ($72.30m) in one-week, rolling reverse repos at rates over 12%, dealers said.

Market players said that despite the high rate on the reverse repo sales, volumes had shot up substantially compared with previous years, due to the injections.

“Last year we wouldn’t see much volume, this year it’s twice,” the global markets trader said. Banks had not gone to the central bank to borrow money at the cheaper rate of 10.8%.

“It’s for pride,” he said.

Uganda’s short-term money market works on two week loops, in which rates rise during the first week as banks try to meet reserve requirements but then fall during the second week. Market players expected short-term rates to fall by the end of August or early September due to government releases and the maturing of securities.

“By early September, we’ll definitely see rates falling off,” a fixed-income trader said.

Reuters

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