Bloomberg News
Uganda's Anti-Gay Law Punished in Foreign-Exchange Market
By Chris Kay and Jaco Visser February 27, 2014

Uganda's President Yoweri Museveni gestures after signing a new
anti-gay bill that sets harsh penalties, in Entebbe, Uganda, on Feb.
24, 2014. Photographer: Rebecca Vassie/AP Photo
The gains that had made Uganda's shilling the second-best performing
African currency this year are evaporating after President Yoweri
Museveni imposed harsher penalties against homosexuals.
The shilling slumped 2.9 percent against the dollar since Museveni
signed the bill on Feb. 24, the biggest decline among all currencies
after Ukraine's hryvnia and Haiti's gourde. That's a reversal of the
first seven weeks of the year, when the shilling rallied 3.1 percent,
the most on the continent after the 6.8 percent surge in Somalia's
currency.
The crackdown on homosexuality has caused a backlash against Uganda, a
$20 billion economy that exports more coffee than any other African
nation. Denmark and Norway have pulled or redirected aid while Sweden
said it's reconsidering its program and Virgin Group Ltd.'s Richard
Branson called for a business boycott in an interview with CNN.
Standard & Poor's cut Uganda's credit rating one level last month to
B, five below investment grade, on concern its budget deficit is
swelling and after donors including the World Bank and U.K. suspended
support in 2012 because of corruption.
"Aid inflows definitely matter for the balance of payments in Uganda
to a higher extent than in Nigeria and many other African countries,"
Mark Bohlund, a London-based sub-Saharan Africa economist at IHS
Global Insight, said by phone. "The homosexuality bill definitely
makes it more difficult to get this suspended budget support
reinstated. I was fairly optimistic they would be able to do it in the
current fiscal year, but now I think that is out of the question."
Twin Deficits
The currency fell 2.1 percent yesterday, the biggest one-day slide
since March 2012, to 2,512 per dollar. That was the worst decline
among 24 sub-Saharan African currencies monitored by Bloomberg. It
strengthened 1.5 percent to 2,474.77 per dollar by 4:49 p.m. in
Kampala.
Uganda's central bank sold dollars for a second day today to reduce
volatility in the market, Stephen Mulema, the director of financial
markets at the Bank of Uganda, said by phone, without giving more
details. The currency's drop is because of "sentiments that it will
depreciate" and market positions taken yesterday were "not proper," he
said.
The shilling's slump may not be related to the signing of the law, but
rather the result of other economic issues, Tamale Mirundi, the
president's press secretary, said by phone from Kampala, the capital.
As for the law, he said, investors and other countries "cannot force
us to take what we don't want."
Aid Dependence
Uganda, which relies on aid for about 20 percent of its annual budget,
may post a deficit equal to 7.1 percent of gross domestic product in
the fiscal year through June, up from an estimated 4.1 percent gap the
previous year, the International Monetary Fund said in a report dated
Dec. 30. The country's current-account deficit, the broadest measure
of foreign trade, may widen to 13.4 percent of GDP in the fiscal year
through June from an estimated 9.9 percent a year earlier, the IMF
said.
The deficits will put more pressure on the currency, sending it to an
average exchange-rate of 2,680 per dollar this year, Jacques Nel, an
economist at NKC Independent Economists in Paarl, South Africa, said
by phone yesterday.
"In the long run, foreign-direct investment could be withdrawn, which
will have a bigger impact than the donor aid," Nel said. The law
"creates increased risk that companies may no longer invest in the
country or invest less," he said.
Lenders including London-based Barclays Plc (BARC) and
Johannesburg-based Standard Bank Group Ltd., Africa's largest, said in
response to e-mailed questions that they are reviewing the
legislation. Woolworths Holdings Ltd., a South African food and
clothing retailer, said in an e-mailed response that its stores in
Uganda "remain open to talent of all races, cultures, beliefs and
sexual orientation."
Life Sentence
"I don't want to spend money in Uganda," Branson said in an interview
with CNN on Feb. 25, without saying whether he has business interests
in the country. "I would rather spend money in countries that treat
their people decently."
The law, which carries a life prison sentence for some homosexual
acts, was enacted after Museveni said scientists in the country found
no genetic link to being gay. In Nigeria, where gay sex has been
illegal since before independence from the U.K. in 1960, President
Goodluck Jonathan last month signed a law that imposes a 14-year jail
sentence for same-sex couples. Homosexuality is a crime in 38 of 54
sub-Saharan Africa nations, according to Amnesty International.
Stephen Kaboyo, managing director at Kampala-based Alpha Capital
Partners Ltd., said the outcry over the law won't hurt the Ugandan
government's finances or the shilling.
'Trading Range'
"The impact will not be significant because from this year the
government has had a strategy of reducing budget support from donors
and depending more on domestic revenue mobilization," Kaboyo said in a
telephone interview yesterday. "I don't think the shilling will go out
of the current trading range."
Uganda's local-currency bonds fells yesterday, sending yields on its
debt due 2028 up 0.15 percentage point to 15 percent, according to
Standard Chartered data compiled by Bloomberg. The Bank of Uganda sold
70 billion shillings ($28 million) of 15-year notes yesterday at a
yield of 15.25 percent, in line with the debut issuance of the
securities in December.
Swedish Finance Minister Anders Borg said on a visit to Kampala on
Feb. 25 that the country is considering changes to its aid program in
Uganda. Denmark announced two days ago it has withdrawn 50 million
kroner ($9.2 million) in aid to the government and it's shifting funds
to non-governmental organizations. Norway is also halting aid worth 50
million kroner ($8.3 million) over the anti-gay law, Foreign Minister
Borge Brende said yesterday.
Uganda, classified by the World Bank as one of the world's poorest
nations, last year agreed to refund 38.3 billion shillings to donors.
"These African governments don't care if they lose aid, FDI or
investments over these laws," Sebastian Spio-Garbrah, the managing
director of New York-based DaMina Advisors LLP, said in an e-mailed
response. "These governments are simply responding to the cultural and
religious biases of their electorate."
To contact the reporters on this story: Chris Kay in Lagos at
ckay5@bloomberg.net; Jaco Visser in Johannesburg at
avisser3@bloomberg.net
To contact the editor responsible for this story: Vernon Wessels at
vwessels@bloomberg.net
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