Uganda Shilling Slides as Donors Cut Aid on Anti-Gay Law

Uganda’s shilling fell the most since March 2012 against the dollar after donors started cutting aid after President Yoweri Museveni signed a law that imposes life sentences on some homosexual acts.

Norway is withholding aid and Denmark said it will redirect assistance to private industries, while Swedish Finance Minister Anders Borg is reconsidering his nation’s program. That comes after Standard & Poor’s cut Uganda’s credit rating last month on concern that the budget deficit will widen as spending increases and donors including the World Bank, the U.K. and Ireland suspended support in 2012 because of corruption. Africa’s biggest coffee exporter relies on donors for about 20 percent of its annual budget.

Museveni signed the law on Feb. 24 after scientists in Uganda found no genetic link to homosexuality. Uganda’s shilling has dropped for three straight days, paring gains in Africa’s third-best performing currency this year. The currency of East Africa’s third-biggest economy fell 2.2 percent to 2,513 per dollar by 6:57 pm. in Kampala, the capital.

“In the long run, foreign-direct investment could be withdrawn, which will have a bigger impact than the donor aid,” Jacques Nel, an economist at NKC Independent Economists in Paarl, South Africa, said by phone. The law “creates increased risk that companies may no longer invest in the country or invest less,” he said.

Economic Growth

The shilling’s gain of 3.1 percent this year to Feb. 21, the last trading day before the law was signed, has been bolstered by economic growth forecast to accelerate to 6.5 percent this year from 5.6 percent in 2013, according to the International Monetary Fund. The central bank began cutting its benchmark interest rate two years ago, halving it to 11.5 percent from 23 percent, while neighboring Kenya cut its lending rate to 8.5 percent from 18 percent over the period.

While the drop in the shilling on the aid cuts may be an immediate “overreaction,” because of the portion of the nation’s budget it accounts for, there’s an increased risk that potential investments of more than $2 billion in 2014 this year may slow, NKC’S Nel said.

The shilling’s decline may be related to other economic fundamentals other than the signing of the bill, Tamale Mirundi, the president’s press secretary, said by phone from Kampala. Investors and other countries “cannot force us to take what we don’t want,” he said in reference to pressure to reverse the laws.

Sochi Games

Homosexuality is a crime in 38 of 54 sub-Saharan Africa nations, according to Amnesty International. Nigerian President Goodluck Jonathan signed a law last month that bans gay groups, imposes a 14-year jail sentence for same-sex couples who live together and 10 years for people who make a “public show of same-sex amorous relationships.”

Sponsors of the Sochi Winter Olympics, including McDonald’s Corp. and Coca-Cola Inc., faced protests from consumers over Russia’s anti-gay legislation. American Airlines Group Inc. and Apple Inc. are among companies calling on Arizona Governor Jan Brewer to veto a bill permitting businesses to refuse service on religious grounds, a measure that opponents say is meant to allow discrimination against gays.

In Uganda, where a tabloid newspaper yesterday printed a list of dozens of people it said are gay, some companies wouldn’t comment on the stricter laws. Sanlam Ltd., a Cape Town-based insurer with operations in the country, declined to comment on the legislation, Ainsley Moos, head of group of communications, said in an e-mailed response to questions.

“Barclays Africa Group is assessing the potential impact of the Ugandan law relating to homosexuality,” the unit of London-based Barclays Plc said in an e-mailed response to questions. Standard Bank Group Ltd. is reviewing the legislation and isn’t able to comment, said Kate Johns, a spokeswoman for the lender, Africa’s largest.

Uganda’s yields on local-currency bonds due November 2028 rose 15 basis points, or 0.15 percentage points, to 15 percent, the first climb in 13 days, according to Standard Chartered data compiled by Bloomberg. The Bank of Uganda auctioned 70 billion shillings ($28 million) of 15-year paper at a yield of 15.25 percent, little changed from a sale in December.

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