Many people in Africa have primarily allocated their money to domestic government bonds, fixed bank deposits, and real estate. However, most investors do not understand government bonds. This is a review of local bonds and government bonds issued in Uganda and Kenya.

Before investing or buying any bond, it is wise to ask yourself the following questions;

What type of bond are you investing in? 

There are mainly two types of bonds;

1. Government bonds are debt securities issued by the government to raise funds for government expenditures and projects. They act as loans from investors to the government. 
2. A corporate bond is a debt security issued by a company to raise capital. It represents a loan from investors to the company.

Why is this bond issued? This question holds the key to understanding the potential risks and returns associated with the bond. 

Understanding the purpose of bond issuance is crucial in making informed investment decisions.

Governments issue bonds to raise funds for government expenditures and projects.

Companies issue bonds to raise capital for various activities, including company operations, expansion, innovations, developments, mergers, and acquisitions. 

The Kenyan government has issued infrastructure bonds meant for infrastructure development; such bonds are safer because their purpose is defined and known. However, many bonds issued by governments in Africa lack clarity regarding their intended purpose, typically categorizing them under general government expenditure.

Therefore, how will the government generate funds to pay back the investors?

Will the bond issuer be able to pay the promised interest and return my funds on maturity?

Bonds are debt securities with a fixed interest and fixed date of maturity. For this reason, it is essential to know the credit rating of the bond you intend to buy or invest in. Credit ratings are indicators of a bond issuer's creditworthiness, financial strength, and ability to meet its debt obligations. Credit rating agencies like Moody's, S&P, and Fitch evaluate and issue the ratings. 

The ratings are; 

1. Bonds with a credit rating of AAA, A or A- indicate lower risk or the ability of the bond issuer to pay its obligations.
2. Bonds with credit ratings of BBB, B, B-, B3 or B2 indicate higher risk and the chance of the bond issuer failing to meet its debt obligations.
3. Bonds with a credit rating of C indicate that the issuer is extremely vulnerable to non-payment and are low-class bonds.
4. Bonds with credit rating D indicate that the bond issuer has entered bankruptcy filings, administration, receivership, and liquidation, and the bond is in default.

Therefore, investors must always seek to find out the credit rating of a bond they intend to buy or invest in. For example, Kenya and Uganda government bonds currently hold a "B—" long-term foreign currency credit rating from S&P Global Ratings, a "B" long-term foreign currency issuer default rating from Fitch Ratings, and a "B2" rating from Moody's. These ratings indicate a moderate level of risk, which means the potential returns are balanced with the risk of default.

Investors looking for bonds with credit ratings of AAA and A and that offer reasonable interest rates can contact us for guidance. However, a bond's credit rating alone is not a determinant of investing; the investor must know and acknowledge their risk profile or risk appetite.

What is the investor's risk appetite?

Every investor has a risk appetite. Risk is one constant in investments, and therefore, all investors must know their risk profile and appetite. A risk profile is a measure of an investor's willingness to take on risk in their investment portfolio. It is not just a recommendation; it's a responsibility that puts you in control of your investment decisions.

Investor Risk Profiles include, 

A low-risk Profile means that an investor is not willing to lose any of their capital or principal invested and is comfortable with potentially lower returns in exchange for a reduced chance of significant losses.

Medium Risk Profile means that the investor is comfortable with taking some risk on their investment, with the goal of balancing potential returns and capital preservation. 

High-Risk Profile: This means that the investor is comfortable taking significant risks with their capital and is relaxed if they lose their entire investment.

While investors have a risk profile, bonds also have a risk rating. Therefore, an investor must find out the risk rating of a bond; this helps to align the investor's risk profile with the bond's risk rating. For example, the majority of Kenya and Uganda's government bonds carry a medium-risk rating, while some have a high-risk rating. To align this with your personal risk profile, if you have a low-risk profile, you should consider bonds with a lower risk rating, and if you have a high-risk profile, you may be more comfortable with bonds with a higher risk rating.

Therefore, any investor must always ask for the bond's risk rating and credit rating to align it with their personal risk profile. 

Visit our website and complete a free investment risk profile questionnaire, or contact us to evaluate the risk profile together.

What are the taxes or deductions on the bond?

As much as the interest rate offered can be attractive, it is crucial to find out the taxes or deductions on interest earned. For example, the Ugandan government bonds with tenors up to 9 years attract 20% on withholding tax, whereas the bonds with tenors above 10 years attract 10%. In Kenya, the Withholding Tax is 15% on Treasury bonds with tenors up to 9 years, and 10% is for Treasury bonds with tenors of 10 years or more. However, the Kenyan government's infrastructure bonds are tax-exempt.

While taxes are standard in most African markets, it is essential to note that International Corporate and Government bonds are tax exempted. 

Have bonds defaulted? 

Yes, both corporate and government bonds are prone to default. For example, there are government bonds issued in Zambia and Ghana that defaulted, and investors have not received their principal and interest payments up to date. 

Extended maturity dates can be viewed as a sign of distress. Distressed bonds are those that are at risk of default due to the issuer's financial difficulties. For example, the Bank of Uganda has been extending the maturity dates of government bonds, including introducing longer-dated bonds like the 20-year government bond, while Kenya has been actively lengthening the maturity dates of its government debt, including Treasury bonds, through strategies like issuing benchmark bonds and debt swaps as part of its debt management strategy. Even if this is not a default, it can be seen as a sign of distress, indicating potential risks for the investor.

Therefore, it is wise to understand the purpose or reason why a bond is issued, who the issuer is, and the credit and risk rating, and align all your findings with your personal risk profile.

Next Steps

Do not be pained by financial indecision; contact us today to understand your risk profile, available bonds, and other products that can help you achieve financial freedom.

If you have any questions, you can email me at nelson@innovestglobalwealth.com.