Foreign Exchange Failures Drain NSSF as Ugandans Get Meager Returns
The National Social Security Fund (NSSF) has incurred colossal losses amounting to a staggering 1 trillion shillings due to foreign exchange disasters, despite offering a modest 10 percent interest to hardworking Ugandans.
The NSSF’s financial woes are attributed to economic upheavals, particularly in Kenya and the broader East African region. Foreign exchange losses stemming from NSSF’s investments beyond Uganda have soared by a jaw dropping 76.86 percent, reaching a mind boggling 1.05 trillion shillings for the fiscal year ending June 2023, as per the Fund’s annual report.
This report, which sheds light on the NSSF’s performance for the 2022/23 fiscal year, points fingers at the surge in foreign exchange losses, attributing them to a combination of capital flight and constrained cash flows from cross border equity investments. The bulk of these losses, according to the report, were incurred on amortized debt instruments, ballooning from a mere 18.99 billion shillings in June 2022 to a shocking 831.67 billion shillings.
Additionally, the Fund recorded losses on internally managed equity securities, rocketing from UGX 3.6 billion in June 2022 to an alarming UGX 200.8 billion in the same period of 2023. On the flip side, income from dividends generated by externally managed equity securities witnessed an upswing, climbing from UGX 4.39 billion to UGX 13.16 billion.
The excuse provided by NSSF for these losses is the depreciation of foreign currencies against the Ugandan shilling, which has adversely affected foreign denominated assets and liabilities. They particularly point fingers at the weakening of the Kenyan shilling against the Ugandan shilling as the primary driver of this debacle.
NSSF has reluctantly acknowledged that these losses pose market risks to its business model and adversely affect the income generated from its financial instruments. These losses are predominantly the result of market risks associated with the volatility in equity prices, interest rates, and foreign exchange rates.
Speaking during the announcement of the Fund’s 10 percent interest rate, NSSF Managing Director Mr. Patrick Ayota tried to downplay the situation, citing it as a temporary setback caused by volatilities in the Kenyan economy and the region as a whole. He attempted to reassure investors, stating that they are in it for the long haul and emphasizing the attractiveness of their investments in Kenyan bonds offering favorable rates of up to 15 percent compared to other options.
However, the truth remains that NSSF’s investments in entities like Safaricom, Tanzania Breweries, Bank of Kigali, East African Breweries, Trade and Development Bank, and Twiga, among others, have exposed the Fund to significant currency risks, resulting in substantial foreign currency gains or losses.
NSSF claims to take measures to match foreign currency assets to liabilities to maintain an acceptable level of net exposure concerning monetary assets and liabilities in foreign currencies, but the damage is already done.
NSSF members have raised concerns about the Fund’s persistence in holding onto unresponsive stocks like Uganda Clays, which have consistently yielded lower or no returns over time. NSSF justifies this by stating that the losses from such companies are offset by dividends from better performing ones, such as MTN, as part of their diversification strategy.
Given the volatility of equities, NSSF is compelled to reduce its investments in them to avoid significant losses while attempting to offer savers an interest rate that surpasses the 10 year inflation rate by 2 percentage points. For the period ending June 2023, the interest rate was just slightly more than 3 percent higher than the 5.8 percent average 10 year rate.
NSSF’s investments are spread both within and outside Uganda, with 12.51 percent in equities, 9.01 percent in real estate, and a whopping 78.48 percent in fixed income. Surprisingly, despite these astronomical losses, the Fund managed to report an increase in investment income, climbing from UGX 1.9 trillion to UGX 2.2 trillion during the review period. Additionally, the Fund saw an uptick in assets under management, rising from UGX 17.26 trillion to UGX 18.56 trillion.
As NSSF strives to reach the ambitious target of Shs20 trillion by June 2024, a year earlier than planned, the question remains: Will Ugandans continue to bear the brunt of these risky investments while receiving only a fraction of the returns?