Moody’s Investors Service maintained its appraisal of Uganda’s debt, citing its favourable medium-term economic prospects supported by an increase in infrastructure investment.
The ratings agency kept Uganda’s long-term issuer ratings at B2 – five levels below investment grade and on par with Kenya, Nigeria, Rwanda, and Tunisia. Debt “obligations rated B are considered speculative and are subject to high credit risk”, according to Moody’s reference guide for its ratings.
Moody’s outlook on Uganda also stayed stable. This reflects the country’s balanced credit risks; infrastructure investment and continued structural reforms will support Uganda’s growth outlook, while medium-term fiscal strength remains vulnerable to revenue underperformance, economic growth volatility and potential shocks.
“The decision to affirm Uganda’s ratings balances the sovereign’s credit strengths and challenges,” Moody’s said in a statement. “In particular, while higher investment will help bolster economic strength, relatively weak institutions point to downside risks related to challenges in efficient resource allocation and in the management of the resulting debt burden for the government.”
It added that the ratings “also take into account elevated susceptibility to event risks”.
“Uganda’s medium-term economic prospects are favourable, underpinned by the increase in infrastructure investment driven by an ambitious national development strategy,” Moody’s said. It adds that economic growth will exceed 5% in 2018, driven by “solid growth in services and improvements in industry and the agricultural sector as more normal weather conditions persist.”
That momentum will be maintained in the medium-term, as real GDP growth hits a projected 6% in 2019-20. Activities in the petroleum sector as Uganda moves towards oil production could support even higher growth rates, the ratings agency said.
Moody’s added that Uganda has experienced a “sustained erosion of fiscal strength in recent years” due to a “sustained pace of debt accumulation”. The rise in debt has been driven by the need to finance major infrastructure investment projects.
“The government’s debt burden has risen to around 38% of GDP in 2017 from about 28% of GDP in 2013 when the first rating was assigned, but still remains below the B-median (around 57% of GDP),” Moody’s said. Uganda’s debt has also become more expensive as it has shifted torwards non-concessional borrowing, particularly from domestic banks. “Interest on domestic debt makes up more than 80% of interest payments as of June 2017,” the statement said.
Additionally, Uganda’s revenue collection is still low compared to its regional peers. “The revenue-to-GDP ratio of about 15% compared to the median of around 22% of GDP for B-rated sovereigns,” Moody’s said. This is due to “the large size of the informal economy, low tax compliance, and several tax exemptions.”
It places little confidence in the government’s aim to increase the revenue collection-to-GDP ratio by 0.5 percentage point annually given its failure to meet past targets. “Achieving a target of 16% of GDP in FY2019/20 will be challenging, particularly if parliament continues to reject revenue measures as occurred in FY2017/18,” it adds.
However, the agency said risks to fiscal strength should stay tempered so long as government borrowing is used to finance infrasturucture investment as planned, pressures on recurrent expenditure – the government’s wage bill, for example – are contained, and public investments focus on infrastructure projects that will fuel long-term growth. Oil revenues will also boost public finances, although this is likely to happen in 2021 and beyond.
Uganda also remains very susceptible to event risk, Moody’s said. This includes domestic political threats – such as the lack of a succession plan for its president, mass discontent, and an increasingly fragmented political landscape. Regionally, the instability in South Sudan and other countries also present threats to economic growth.
The absence of a diversified funding structure for the government means its liquidity risk remains elevated, according to Moody’s. It is increasingly “reliant on domestic debt, whose structure carries higher refinancing risk compared with the external debt due to its shorter-term nature.”
Additionally, “the high reliance on the banking system, which holds more than 40% of government securities in 2017, and uncertainty surrounding the financing strategy created by the use of supplementary budgets also weighs on Moody’s assessment of the liquidity risk.”