Ratings agency Moody’s on Friday cut Uganda’s long-term issuer bond rating by one notch to B2 from B1, but changed the outlook from ‘negative’ to ‘stable.’
Moody’s said the key driver of its downgrade is “the sustained erosion of fiscal strength that has occurred since the rating was assigned in 2013.”
“The Government of Uganda’s debt burden has risen 9 percentage points to 33% of GDP in the past four years, and is projected to continue rising towards 45% of GDP by 2020,” the agency said in justifying the rating. “Debt as a percentage of revenues has risen by 54pp since 2012 and is expected to exceed 250% by 2018.
“Deteriorating debt affordability is reflected in interest obligations expected to consume almost 16% of revenues by 2018, far exceeding the median for B-rated countries of 8%. Meanwhile, low, and in some respects eroding institutional strength will challenge the government’s capacity to manage the rising debt burden.”
Moody’s said Uganda’s debt burden has “risen faster than the government’s own resources, resulting in a debt-to-revenue ratio of 236%, one of the highest amongst B-rated sovereigns.” Uganda’s revenue-to-GDP ratio is 13.4% of GDP versus the median of 23% of GDP for B-rated countries, according to Moody’s.
The agency said it expects Uganda’s credit fundamentals to “remain commensurate to peers at the B2 level meaning a further rating downgrade is unlikely in the near term,” hence the stable outlook.
Debt rated B is “considered speculative and are subject to high credit risk,” according to Moody’s reference guide for its ratings. The colloquial term for such debt is “junk bonds.” Junk bonds are “risky investments but they have speculative appeal because they offer much higher yields than bonds with higher credit ratings,” according to the financial education website Investopedia.
In August Fitch Ratings affirmed its B+ rating on Uganda – also in junk category – with a stable outlook, citing high levels of infrastructure spending and sound macroeconomic policy. While it drew attention to the increasing ratio of public debt to GDP, it said it was extenuated by the fact that a lot of it is concessional and soft loans.
Moody’s however said that Uganda’s debt affordability is deteriorating, “in part due to a shift in composition of the debt burden towards non-concessional borrowing.” It said that over the next three financial years, “around 80% of gross financing requirements will be contracted on a non-concessional basis, with around 45% of the gross financing requirement to be met by the domestic market.”
The rating adds that Uganda has been persistently vulnerable to debt affordability, and the higher debt together with a shift in its sources will lead to more deterioration. It projects that “debt servicing will increase from 11% of government revenues in 2015 to almost 16% of revenues by 2018, far exceeding the median for B-rated sovereigns of 8%.”
Moody’s also lowered Uganda’s long-term local-curreny bond and deposit deposit ceilings to Ba2 from Ba1, and the long-term foreign-currency bond and deposit ceilings to Ba3 and B3 from Ba2 and B2, respectively.