FACTBOX-Key political risks to watch in Uganda

KAMPALA Aug 2 (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.

Somali rebels killed 79 people in Kampala as they watched the World Cup final on July 11 and said the suicide attacks were revenge for the presence of Ugandan peacekeepers in Somalia.

Here are some of the factors to watch:

BOMBING FALLOUT

President Yoweri Museveni is under pressure to act on al Shabaab and the rebels have said they will strike Uganda again if it does not withdraw its troops.

While the African Union agreed to send 4,000 more troops to Somalia, their mandate was not strengthened to let them attack the al Qaeda-inspired rebels.

What to watch:

-- Any additional attacks. Do Western countries change their travel advisories on Uganda? Any targeting of the oil sector could prove particularly damaging.

-- Any signs that the government is using the attacks as a pretext to clamp down on opposition ahead of 2011 presidential elections in which Museveni faces his stiffest challenge since coming to power in 1986.

-- Uganda may send more troops to Somalia, heightening the risk of another attack.

OIL WINDFALL

Uganda discovered oil along its border with the Democratic Republic of Congo in 2006. British firm Tullow Oil (TLW.L) and Heritage Oil (HOIL.L) have found up to 2 billion barrels of oil in the Albertine Rift Basin. Reserves may be four times bigger.

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 has sold 50 percent stakes in Blocks 1 and 3A to Tullow Oil for $1.45 billion. Tullow deposited $405 million of the total with the Ugandan government in an escrow account pending the resolution of a tax dispute.

The deal allows Tullow to start a $10 billion project to develop Uganda's reserves. It plans to bring in France's Total (TOTF.PA) and China's CNOOC (0883.HK) to fund infrastructure, which could include a refinery and pipeline to the Kenyan coast.

Tullow expects to start commercial oil production by the fourth quarter of 2011, increasing output to 200,000 bpd.

What to watch:

-- A prolonged wrangle between Heritage and the government over tax on the Tullow sale. Heritage says it has been advised it does not owe tax in Uganda, but the government wants the full $405 million. Uganda will decide in August whether to resolve the dispute through arbitration in London or via local courts.

Uganda's petroleum sector needs a heavy injection of capital to get into the production phase. Investors will be looking for government commitments on transparency and policy stability.

-- 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 on the economy: Economic growth is expected to continue. However, flows 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.

-- Decline in donor dependence. Economists say the influx of about $2 billion a year from oil will help the government plug 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 government and Bunyoro Kingdom: Nearly all the oil has been found in the Bunyoro Kingdom. The Banyoro 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. Landlocked Uganda is heavily dependent on imports from the Kenyan port of Mombasa.

What to watch:

-- South Sudan referendum on secession in January 2011: A yes vote is expected but if the result ignites a dispute with Khartoum, or even a resumption of war, trade could be blocked. 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.

The last bout of violence triggered a spike in fuel and food prices as imports to Uganda were held up in the Kenyan chaos.

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

POLITICS

President Museveni will stand for a fourth term in elections in 2011, most likely against arch rival Kizza Besigye. Besigye lost the previous two elections but gained votes latterly.

With the oil find, Museveni now has reason to cling onto power. But the opposition appears more united, setting the scene for an electoral showdown that could turn violent.

What to watch:

-- Can the opposition unite? Leading opposition parties have formed the Inter-Party Cooperation (IPC) coalition to field a single candidate. Besigye is tipped to be the IPC's flag bearer ahead of ex-UN diplomat and Uganda People's Congress leader, Olara Otunnu. The refusal of the Democratic Party to join IPC may mean 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.

Any boycott would embarrass donors who backed Museveni and tie aid to good governance. Currency traders say a sudden drop in aid 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 to power. Experts expect the former rebel to become more intolerant of dissent, critical media and strong opposition.

-- Foreign aid cut? Donors may cut aid in the next financial year if the government does not curb corruption.

Foreign aid contributes 30 percent of annual budget. Substantial cuts could stall key infrastructure projects.

-- Investor jitters: Analysts say some investors may not 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, Buganda, and 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.

Buganda's support for Museveni has fallen in the last two presidential ballots, a trend seen continuing next year.

What to watch:

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

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

-- Further violence: Relations between Museveni and the Baganda are bad. Violence would spook capital markets, triggering a dash for dollars. (Additional reporting by Peter Apps; Editing by David Clarke and Giles Elgood)