Fitch on Friday affirmed its B+ rating on Uganda’s debt and maintained a negative outlook, citing its fragile external position and reduced access to concessional finance arising from governance concerns, including the recently passed anti-homosexuality act.
The Fitch decision comes as Uganda contends with fallout from its recently enacted anti-homosexuality act. The World Bank, the largest provider of concessional funding to the government, said last month that it will not approve new financing because of the law. But Fitch, which adjusted Uganda’s credit outlook from stable to negative just this March, anticipates that the law will have little effect on the government’s access to funding.
“The World Bank is the single most important source of external financing, accounting for 33 per cent of government external debt,” Fitch said in its rating action commentary. “The impact of the anti-homosexuality act on funding in the fiscal year ending June 2024 appears manageable, as the majority of World Bank financing included in the government budget had already been approved by the [World Bank] board.”
Fitch added that only a small amount of financing not approved by the World Bank, totalling 4.2 per cent of the 2023/2024 budget, will not be released, in addition to implementation delays on approved projects due to increased monitoring.
Fitch also noted that the law could still be overturned in court, or otherwise, as the government yields to “international pressures amid threats of financing suspension.” On the other hand, “donors could also continue their projects in Uganda without a change in policy.”
It added: “Despite significant downside risks, at this stage our baseline assumption is that the anti-homosexuality act itself will not lead to a substantial deterioration in financing access.”
Rating action
Fitch’s issuer default ratings, assigned to a range of entities, including sovereign nations, are comparative assessments of an issuer’s ability to meet its financial obligations. The issuers are categorised based on Fitch’s perception of their vulnerability to default, with AAA denoting the highest credit quality. Investment-grade debt, characterised by low to moderate risk, includes issuers categorised as AAA to BBB, while debt rated from BB to D is often labelled as speculative, carrying a higher level of risk.
Uganda’s B+ long-term foreign currency issuer default rating indicates that its long-term foreign currency debt is considered highly speculative, with a risk of default, yet a “limited margin of safety.” The country is currently meeting its financial commitments, but the “capacity for continued payment is vulnerable to deterioration in the business and economic environment.”
There’s actually no B+ category. Several categories, including B, have rating levels denoted with “+” or “-”; issuers with B+ have a lower likelihood to default compared to others in the B category.
Meanwhile, the outlook on the rating signifies the direction Fitch thinks it is likely to move over the next one to two years. Uganda’s rating has a negative outlook, indicating that it is likely to be lowered. A rating outlook is adjusted when a rating agency observes a change in an issuer’s risk profile, but doesn’t yet consider it permanent enough to warrant a new credit rating. In Uganda’s case that last happened in March when it was revised downwards from stable.
Main rating drivers
In its commentary, Fitch said its rating of Uganda’s debt reflects “a strong medium-term growth outlook, an IMF programme that functions as a policy anchor, and a record of relative macroeconomic stability, aided by an independent central bank.”
It also noted that the government has reduced access to concessional finance and is likely to resort to borrowing at higher costs from external and domestic commercial creditors. It forecast an increase in Uganda’s “persistent[ly] high” current account deficit, and a decline in foreign exchange reserves.
Fitch added that a rise in government interest payments and increasing external debt service will “exacerbate financing and liquidity pressures.” It predicted a rise in government external debt service to 1.9 per cent of GDP in 2023/24, up from 1.5 per cent in the previous financial year. In addition, Fitch said the government plans to increase external budget financing to 2.6 per cent of GDP in 2023/24 from 2 per cent.
Fitch said government spending in the current financial year is likely to be restrained by financing constraints, driving a reduction in the budget deficit from 5.3 per cent of GDP last year to 3.8 per cent, and 3.5 per cent in 2024/25. Improvement in revenue collection owing to “reforms in tax administration and tax exemptions rationalisation” will also play a role.
Fitch expects the economy to grow by 5.5 per cent this financial year on agricultural production and investment in the oil sector. It also estimates that growth in 2024-2025 will average 6.2 per cent, boosted by oil sector investments.
However, those oil sector investments will increase Uganda’s import bill and widen its current account deficit from an estimate of 9.1 per cent of GDP in 2022/23 to 9.9 per cent in 2023/24. It added that it expects “net FDI inflows to continue increasing, which along with government borrowing, will help finance the current account deficit.”
Fitch also anticipates a decline in Uganda’s foreign exchange reserves to about $3bn by the end of this financial year, which translates to less than three months cover of future imports, weakening the country’s external liquidity position. Sovereigns rated ‘B’ by Fitch typically maintain a median foreign exchange reserve cover of at least 3.3 months for future imports.
