Risk-on investors turn to Uganda to ’squeeze the last drop’ out of frontier markets

Global investors are increasingly buying frontier-market local-currency government bonds, with Uganda a standout—offshore holdings in its domestic debt have climbed to a record level (more than $2 billion, S&P estimates about $2.7 billion, roughly 12% of domestic debt)—while countries such as Egypt, Nigeria and Kazakhstan are also drawing inflows as the emerging-market local-currency index has risen nearly 17% over the past year. The rally is driven by a weak U.S. dollar, ample liquidity and a search for yield and has encouraged banks to recommend selective long positions, but significant risks remain—capital controls, currency volatility, the fickleness of hedge-fund ‘hot’ money, political exposures (notably upcoming elections in Uganda) and the potential for a dollar rebound or weaker global growth to trigger abrupt outflows.

Analysis

Global investors are rotating into frontier-market local-currency government bonds, with Uganda a standout: S&P estimates non-resident holdings in Uganda’s domestic debt have risen to about $2.7 billion (roughly 12% of domestic debt) and officials cited nearly $3 billion of offshore holdings of debt and equities. Uganda was frozen from World Bank funding for two years over an anti-LGBTQ law but funding resumed in June, and the central bank reported offshore holdings of 3,069.8 billion shillings ($845m) at end-2024, highlighting rapid recent inflows versus historical levels.

The rally is driven by a weak U.S. dollar, ample liquidity and a search for yield; emerging-market local-currency debt is up nearly 17% year-over-year and banks including JPMorgan and Bank of America are recommending selective long positions in frontier local-currency debt (JPMorgan cited Nigeria, the Dominican Republic and Paraguay). Uganda is excluded from JPMorgan’s key index, which makes it a more idiosyncratic, higher-risk exposure.

Material risks include capital controls, currency volatility that can quickly erode returns if the U.S. dollar rebounds, and the propensity for “hot” hedge-fund flows to reverse; political risk is elevated ahead of the expected January presidential ballot for long-time incumbent Yoweri Museveni. Prior product closures (BlackRock’s iShares Frontier ETF) underscore persistent liquidity constraints in the asset class.

Inflow-driven reserve and fiscal improvements have strengthened some sovereigns’ fundamentals, but gains are contingent on a benign macro backdrop; monitor USD direction, commodity prices and official engagement (IMF/World Bank) for signs the risk-on mood is reversing.

Key Decisions for Investors

• Consider modest, selectively sized exposure to frontier local-currency debt via specialist managers with demonstrated liquidity and on-the-ground access rather than passive frontier ETFs
• Avoid unhedged, direct positions in Uganda local-currency bonds unless you implement FX hedges and political-risk buffers given S&P’s $2.7bn estimate (~12% of domestic debt) and the upcoming January election
• Use clear macro triggers—USD rally, weaker commodity prices, or adverse IMF/World Bank signals—to de-risk positions quickly and prefer countries cited by banks only after sovereign/liquidity checks
• Monitor non-resident holding data, central bank reserve reports and ETF flows closely and consider currency forwards or sovereign hedges where available to protect against rapid outflows