Uganda, a landlocked African nation once struggling to secure World Bank funding, has become a hotspot for investors seeking high yields as this year’s risk-on sentiment drives interest in domestic debt of smaller, riskier emerging economies known as frontier markets.
Analysts report that more than $2 billion of Uganda’s domestic government bonds are now held offshore, a record level, while other countries including Egypt, Nigeria, and Kazakhstan are also attracting foreign capital into local currency debt, according to Reuters
“You squeeze the lemon and the last drop in there is usually local (currency debt) and frontier,” said Philip Meier of Gramercy. Fueled by markets flush with cash and shaken confidence in traditionally safe developed-market debt, exotic domestic debt markets have increasingly drawn investors.
Yet with the U.S. dollar’s trajectory uncertain, a key driver for emerging markets, the sustainability of this inflow remains unclear.
“We are seeing at this point in time somewhat more of a diverse investor base that is entering into the space,” said Yvette Babb, portfolio manager with William Blair, noting that hedge funds, known for their volatility, are among the participants.
Investing in frontier markets typically requires specialist knowledge, as capital controls can complicate repatriation and local currency fluctuations can erode returns.
“On an index level, you haven’t made much money, if any, over the last 10-plus years,” Meier said of local currency frontier markets. He added that local currency investing “is very difficult.”
Several frontier market index funds closed in the years leading to 2025 due to liquidity challenges, including BlackRock’s iShares Frontier and Select EM exchange-traded fund.
However, a weakening dollar and renewed risk appetite have turned the tide, with emerging market local currency debt up nearly 17% over the past year on an index level.
Uganda is not included in a major JPMorgan index for local currency debt, making it a more exotic play.
For two years, the country was frozen out of World Bank funding due to an anti-LGBTQ law carrying the death penalty for certain offences.
Funding resumed in June, and by the IMF/World Bank meetings in Washington last month, offshore holdings of Ugandan debt and equities had reached nearly $3 billion.
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“This interest is symptomatic of sustained risk-on conditions until recently and stretched EM valuations, and the global search for yield,” said Samir Gadio of Standard Chartered.
S&P Global estimated that non-resident holdings in Uganda’s domestic debt had risen to about $2.7 billion, equivalent to 12% of total government domestic debt.
Uganda’s central bank did not release current figures, but at the end of 2024, offshore investors held 3,069.8 billion Ugandan shillings ($845 million) in bonds.
“While Uganda remains a relatively marginal destination for foreign portfolio investment, the momentum is clearly building,” said Tomi Einesalo, a portfolio manager at LGT Capital Partners, citing the country’s credible central bank, resilient foreign exchange market, and prudent economic policies.
The inflows are boosting government coffers, but “hot” money from hedge funds and other non-specialist investors is prone to exit quickly, making returns sensitive to shifts in risk appetite, Babb noted.
The political environment could also affect investor confidence. President Yoweri Museveni, who has ruled Uganda since 1986, is expected to stand for re-election in a January ballot, a prospect that may concern some investors.
Opponents and human rights groups have accused his government of abuses, including abductions and illegal detentions, allegations Museveni denies.
Even non-emerging-market specialists are showing interest. Banks such as JPMorgan and Bank of America report clients increasing exposure to select frontier markets.
The broader emerging market local currency index recently reached an all-time high, and a late October Bank of America note described the environment as “as good as it gets” for frontier markets.
“The global backdrop has been particularly favourable this year, defined by a weak U.S. dollar, an anchored bond market, supportive equity market and mixed commodities,” wrote Merveille Paja, BoFA’s sovereign credit strategist.
The broader funding has helped frontier nations rebuild reserves, which “translates into an improvement in the overall fundamentals.”
JPMorgan highlighted similar drivers, recommending long positions in local currency debt in Nigeria, the Dominican Republic, and Paraguay.
Ghana and Zambia, still finalizing debt restructuring deals, and Uzbekistan have also performed well, while Vietnam was the only negative performer in frontier local markets.
Yet risks persist. “This balance could be upset in several ways,” Paja wrote. Fading global growth, declining commodity prices, or a strengthening U.S. dollar could derail frontier markets, and “hot” money could quickly exit, exposing investors to volatility.
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Image Credit: Muniini K. Mulera
