Ugandan investors often treat the choice as binary: invest in Shillings for high yields or invest in
US Dollars for safety. The smarter framing is simpler: What is your return made of—and what
risks are you paid to take?
The three drivers of return (in any currency)
Most investment outcomes come from three components:
i. Cash yield (income): interest, coupons, dividends, rent.
ii. Price movement (capital gains/losses): bond prices rise when yields fall, and fall when
yields rise; property and equities are dominated by price changes.
iii. Currency effect (FX): the UGX value of USD assets rises when USD/UGX rises—and falls
when the shilling strengthens.
In Uganda, FX and inflation often dominate. A 12% UGX yield can be wiped out if inflation and
depreciation are high; a modest USD return can look excellent in UGX terms when the currency
moves.
Shilling investing (UGX): pros and cons
Pros
– Higher nominal yields: Uganda money market and government securities often offer
attractive headline rates.
– Better match for UGX liabilities: if your expenses are local (rent, payroll, domestic school
fees), UGX assets reduce currency mismatch.
– Bond total return upside in disinflation: falling inflation and policy rates can produce bond
price gains, especially on longer maturities.
– Liquidity and simplicity: UGX instruments are easier to access and scale domestically.
Cons
– Inflation erosion: what matters is real return (after inflation, taxes, fees), not the quoted
rate.
– Depreciation risk for USD-linked goals: if you’re funding imports, offshore education,
travel, or preserving wealth in USD terms, UGX returns can underperform when the shilling
weakens.
– Concentration: many UGX portfolios are effectively a single macro bet on domestic
liquidity, policy, and sovereign risk.
– Reinvestment risk: short-term assets reprice quickly—good when rates rise, painful when
rates fall.
USD investing: pros and cons
Pros
– Hedge for USD expenses and capital preservation: reduces mismatch if future
spending is USD-linked.
– More stable inflation environment: supports long-term planning.
– Broader diversification: access to global bonds, balanced funds, credit, and equities.
– FX can be a major return contributor: USD/UGX moves can lift UGX-equivalent
results even when USD yields are modest-
Cons
– Lower yields in “safe” USD assets: protection is rarely high income.
– Timing risk: converting to USD at the wrong time can reduce UGX outcomes if the
shilling stabilises or strengthens.
– Access and friction: custody, fees, minimums, and operational complexity can matter.
– Not risk-free: USD portfolios still face duration risk (rates up, bond prices down) and
credit risk.
What really drives returns in Uganda
- Real yields (not nominal): Nominal return − inflation − taxes − fees.
- Exchange-rate path: current account, capital flows, reserves, and policy credibility
shape FX. - Interest-rate regime: bond returns depend on the direction of yields.
- Liquidity: thin markets can amplify price moves.
- Credit discipline: underwriting quality often separates “high yield” from “high return.”
A practical approach
For most investors, the answer is not UGX or USD—it’s alignment:
– Hold UGX for near-term needs and local liabilities.
– Hold USD for USD-linked goals and long-term purchasing power protection.
A structured mix reduces the risk that your entire wealth depends on one macro outcome.
Disclaimer: This article is for general information only and does not constitute investment
advice or a recommendation. Past performance is not a reliable indicator of future results.
Investments involve risk, including possible loss of capital—seek independent advice where
appropriate.