FACTBOX-Key political risks to watch in Uganda

KAMPALA, June 1 (Reuters) - 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:

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. [ID:nLDE62N1I8]

Five exploration licenses have been awarded while four blocks (8000 sq km) remain open. The government halted licensing in 2007 pending the enactment of a new law to regulate the sector.

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's petroleum sector needs a heavy injection of capital to get the sector into production phase. Investors will be looking for clear government commitments on transparency and policy stability. Heritage has warned the delay in approving their deal reflects poorly on government investment policy. [ID:nLDE6340DR]

-- 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 fuel 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 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 next presidential poll in late 2012 [ID:nLDE64000R].

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

POLITICS

President Yoweri Museveni will stand for a fourth term in elections in 2011, most likely up against his arch rival Kizza Besigye. Besigye lost the previous two elections but gained more votes in each ballot.

With the oil find, Museveni now has reason to cling onto power and entrench his family dynasty. At the same time, the opposition appears more united than ever, setting the scene for an electoral showdown that could turn violent.

What to watch:

-- Can the opposition unite behind one candidate? The leading opposition parties have formed the Inter-Party Cooperation (IPC) coalition and agreed to field a single candidate. Besigye, who heads the Forum for Democratic Change, is widely tipped to be the IPC's flag bearer ahead of ex-UN diplomat and Uganda People's Congress leader, Olara Otunnu. Some analysts point to the refusal of the major opposition Democratic Party to join IPC as an indication the opposition vote will fragment.

-- Opposition boycott? Opposition parties have threatened to boycott next year's ballot unless the government reconstitutes the Electoral Commission to make it impartial. [ID:nLDE64J1OT]

It is unclear whether the opposition would see through its threat but any boycott would be an embarrassment to donors who once hailed Museveni as a new breed of African leader and tie aid to good governance. Currency traders fear donors could either hold back or cut aid to lean on Museveni and say a sudden drop in dollars could weaken the shilling and drive up import costs.

-- Media and opposition crackdown: With oil revenues set to surge, some analysts say Museveni has more reason than ever to cling on to power. Experts expect the former guerrilla leader to become more intolerant of dissent, critical media and a strong opposition. [ID:nLDE61A11S]

-- Foreign aid cut? Donors have signalled they may cut aid in the next financial year if the government does not curb high-level corruption. Foreign aid contributes 30 percent of annual budget. Substantial cuts could stall key infrastructure projects. [ID:nLDE6231RD]

-- Investor jitters: Market analysts forecast some foreign portfolio investors are unlikely to roll over positions in government securities ahead of the vote and capital expenditures may slow around election time.

BUGANDA KINGDOM

Tensions between one of Uganda's traditional kingdoms, the Buganda, and President Yoweri Museveni's government exploded into days of bloody riots last September that left around 20 people dead. A fire which destroyed the royal tombs stoked hostilities. [ID:nLDE62G1LI] The Buganda's support for Museveni has fallen sharply in the last two presidential ballots, a trend seen continuing next year.

What to watch:

-- Museveni seeks to recapture Buganda's vote: Museveni could make concessions such as reopening its radio station and softening his criticism of the monarch or Kabaka, Ronald Mutebi, and his administration.

-- Alternatively, Buganda cosies up to opposition: Some political analysts expect the Buganda kingdom to become increasingly outspoken in support of the opposition. This could provoke intimidation tactics from Museveni but investor impact would likely remain low if the rhetoric remained just that.

-- Further outbreaks of violence: Relations between Museveni and the Baganda are at an all time low, fuelled by Museveni's perceived mistreatment of the Kabaka. If both sides continue to harden their stances, protests and street-battles with security forces could erupt again. Economic analysts say further bouts of violence would fuel uncertainty and risk spooking capital markets, possibly triggering a dash for dollars. (Editing by Richard Lough and Philippa Fletcher)