Fitch affirms Uganda’s credit rating at B+, outlook stable

Bank of Uganda's head office in Kampala. Photo: Uganda Business News
Bank of Uganda’s head office in Kampala. Photo: Uganda Business News

Fitch Ratings on Wednesday affirmed its B+ rating on Uganda, citing the country’s high levels of infrastructure spending and its sound macroeconomic policy framework.

The rating agency has a stable outlook on Uganda.

Fitch expects Uganda’s economy to grow by 5.7% this financial year from 4.6% in the previous year. It also foresees more gains in growth in the medium term, spurred by ongoing investment in infrastructure.

The infrastructure projects “include the ongoing construction of the Karuma and Isimba hydro-electric power plants, which are scheduled for completion in 2017 and 2018 respectively; the development of the oil sector, which will bring first oil in 2020 or 2021; and railway construction, for which feasibility studies are ongoing.”

The economic outlook is underpinned by Bank of Uganda’s sound macroeconomic policy, which has kept price and external pressures under control. “The Bank of Uganda (BOU) has lowered interest rates by 200bps since March 2016, after tightening monetary policy in the previous year to contain the inflationary pressures of a depreciating exchange rate,” Fitch said. “There was an uptick in the May inflation rate, to 5.9% from 5.4% in April, but at 5.1% in July, inflation is close to the BOU’s medium-term inflation target of 5%.”

Even though the rating agency drew attention to Uganda’s widening fiscal deficit which it says could rise to “6.8% of GDP, higher than the ‘B’ median of 4.1%” this financial year, it considers it less risky since it is largely driven by investment. An expected rise in capital spending to 10% of GDP in the next two years “will likely be offset by containing current expenditure and increasing tax revenues,” Fitch said.

“Uganda’s fiscal reforms will continue to be supported by an IMF Policy Support Instrument and economic programme focused on revenue mobilisation and public financial management reforms.”

Additionally, the increasing ratio of public debt to GDP – which currently stands at 34% of GDP – is mitigated by the fact that most of it is either external concessional loans or other soft loans.

However, Fitch added that Uganda’s “weak governance and a weak business environment” constrained the rating, and underperform the B median. Of particular concern is the high levels of recurrent expenditure, low tax revenue, and slowing credit to the private sector. Uganda’s high population growth of over 3% is responsible for a per capita income less than one quarter of the B median, it also said.