FACTBOX-Key political risks to watch in Uganda

KAMPALA, July 12 Mon Jul 12, 2010 6:53am EDT

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KAMPALA, July 12 (Reuters) - Suspected Somali Islamists carried out two bomb attacks late on Sunday in the Ugandan capital that killed at least 64 people as they watched the World Cup final.

Uganda will become an oil-producing nation in 2011, allowing it to reduce its budget dependence on foreign aid and improve poor infrastructure. East Africa's third largest economy is seen growing between 7-8 percent in 2010/11 from 5.6 percent in 2009/10.

Here are some of the factors to watch:

BOMBING FALLOUT

The explosions ripped through two bars packed with soccer fans. Foreigners were among the dead including one American.

Al Qaeda-inspired al Shabaab militants in Somalia had threatened to attack Uganda for sending peacekeeper troops to the east Africa country to support its western and Ethiopian-backed government. An al Shabaab commander in Mogadishu welcomed to the attack while saying he did not know if they had carried it out.

What to watch:

-- Claims and attribution of responsibility. Ugandan authorities say they have identified the severed head of a Somali national who might have been a suicide bomber. Ethiopia has already blamed the Islamists. [ID:nLD66A0I2]

-- Any additional attacks would do much more to deter investors and tourists. Do Western countries change their travel advisories on Uganda? Any targeting of the oil sector could prove particularly damaging.

OIL WINDFALL

Uganda discovered commercial hydrocarbon deposits along its border with the Democratic Republic of Congo in 2006. British exploration firm Tullow Oil (TLW.L) and Heritage Oil HOIL.L have found up to 2 billion barrels of oil in the Albertine Rift Basin. Industry sources believe reserves could be four times that.

Five exploration licenses have been awarded while four blocks (8,000 sq km) remain open. The government halted licensing in 2007 pending the enactment of a new regulatory law.

Heritage is awaiting government approval to sell its 50 percent stakes in Blocks 1 and 3A to Tullow Oil for $1.5 billion. Heritage initially signed a Sale and Purchase Agreement (SPA) with Italy's ENI (ENI.MI) before Tullow, with whom Heritage jointly owns the blocks, later exercised its pre-emption right.

Tullow plans to sign partnership deals with France's Total (TOTF.PA) and China's CNOOC (0883.HK) to raise the funds required to develop infrastructure, which could include a refinery and pipeline to the Kenyan coast.

Tullow says it expects to start commercial oil production by the fourth quarter of 2011, gradually increasing output to a peak of 200,000 barrels daily.

What to watch:

-- A prolonged delay in the approval of Heritage/Tullow deal. Uganda has rejected Heritage's proposal to seek arbitration in London and an offer by the firm to deposit $108 million to settle a tax dispute.

Uganda's petroleum sector needs a heavy injection of capital to get into the production phase. Investors will be looking for clear government commitments on transparency and policy stability. Heritage has warned that the delay in approving its deal reflects poorly on government investment policy.

-- New regulations: The new law overseeing Uganda's hydrocarbon sector is expected to be passed by parliament in the second half of 2010. Remaining licenses could then be auctioned.

-- The impact of oil revenues on the broader economy: Uganda has enjoyed a decade of strong growth and economists forecast the trend will continue. However a sudden flow of petrodollars could divert attention from other sectors and encourage corruption.

-- Impact of oil on the local currency: The sudden inflow of petrodollars will strengthen the Uganda shilling UGX=, making other exports less competitive in neighbouring markets. A stronger local unit could drive up the import bill, mitigating some of the impact on the shilling's value.

-- Decline in donor dependence. The World Bank calculates Uganda will be earning 2 billion dollars from oil exports annually. Economists say the influx of petrodollars will help the government plug a substantial chunk of its fiscal deficit. This could diminish the leverage donors have and see the government ignore foreign pressure to combat corruption and expand the democratic space.

-- Tension between the central government and Bunyoro Kingdom: Nearly all the oil has been found within the Bunyoro Kingdom. The Banyoro, who have historically complained of marginalisation, deprivation and neglect, want a 10 percent cut of the petrodollars and more power for their monarch. An oil revenue-sharing formula is in the making.

REGIONAL RISKS

Uganda's economy has been buoyed by increasing exports, especially food, to the neighbouring economies of South Sudan, Rwanda, Democratic Republic of Congo and Kenya. The improved export flows have helped strengthen Uganda's balance of payments. The country registered a cross border (informal) trade surplus of $1.3 billion in 2008 from $776 million in 2007, according to the Uganda Bureau of Statistics (UBOS).

South Sudan, which emerged from a decades-long civil war in 2005, imported goods worth $910 million in 2009 compared to $465 million in 2007. As a land-locked country, Uganda is heavily dependent on imports from the Kenyan Indian Ocean port of Mombasa.

What to watch:

-- South Sudan referendum on secession in Jan. 2011: A yes vote is widely expected but if the result ignites a dispute with Khartoum, or even a resumption of war, trade routes could be blocked and demand hit. It could also undermine the fragile peace in Northern Uganda.

-- Kenya referendum on constitutional reform: On Aug. 4 Kenyans will vote on a new constitution aimed at avoiding a repeat of the 2007/08 post-election violence. One rights group has said an arms race is on between two of Kenya's largest ethnic communities ahead of the 2012 presidential poll.

The last bout of violence triggered a spike in fuel and food prices.

-- Uganda's army has sent more troops to its border with the Democratic Republic of Congo, after a rebel group killed five people while fleeing a Congolese army offensive.

-- Uganda is among five east African countries that have signed a new pact to govern sharing of the Nile waters, a life and death issue for Egypt.

-- Any shift in Somali policy following the bombing.

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