Moody’s downgrades Uganda’s outlook from stable to negative

Moody'sCredit ratings agency Moody’s has downgraded the outlook on Uganda’s B1 rating from stable to negative due to expected inflation growth and a deterioration in fiscal and debt metrics and external payments position.

Moody’s has however left the local-currency bond and deposit ceilings unchanged at Ba1 and left the foreign-currency bond ceiling unchanged at Ba2 as well as the foreign-currency deposit ceiling at B2 and says the B1 rating is supported by a track record of growth above the B median, lower growth volatility, continued donor and IMF support and a mostly concessional debt structure.

The agency said the key drivers for the negative outlook are Uganda’s deteriorating fiscal and debt metrics, driven by high capital spending and rising debt-servicing expenditures; a continued weakening in Uganda’s external payments position, evident in its currency depreciation; and the expected increase in inflation and reduced growth prospects, potentially diminishing a key source of historical support to sovereign credit quality.

It noted, Uganda’s fiscal deficit is now expected to average 6 to 7 per cent of GDP for the next few years, nearly double the average since 2011, which coupled with the sharp weakening of the exchange rate, is expected to drive up the government’s debt burden to an estimated 39 per cent of GDP in 2015.

Higher yields on local currency securities will also impact debt servicing costs. Domestic interest rates, meanwhile, have risen sharply and yields on 365-day Treasury-bills rose to 19.1 per cent in October 2015, up from 12.1 per cent in December 2014.

Moody’s said about 3 per cent of GDP will be used in financing two hydropower plants and additional expenditure is expected in the country’s build up to elections.

On Uganda’s weakening external payments position, Moody’s said about 22 per cent of currency value had been lost against the Dollar, driven by repatriation of profits by foreign companies and outflows of non-resident investment in government securities and an increase in the current account deficit.

“Trade disruption in neighbouring countries and the high import content of projects are likely to maintain the current account deficit above 10 per cent of GDP going forward. The current account deficit is only partially balanced by foreign direct investments, which we expect will equal 4.6 per cent of GDP this year, leaving a large external borrowing requirement”, the agency said.

Additionally, Moody’s says risk from political uncertainty in the build up to the country’s elections has accelerated capital outflows and the stress on Uganda’s balance of payments has weakened its reserve buffers.

“At around $2.7 billion in September, foreign exchange reserves have fallen below the threshold of four months of imports for the first time since 2011.”

Another main driver of the negative outlook is the expected effect of currency depreciation and monetary tightening, on inflation and growth prospects, diminishing one of the main sources of support that has historically underwritten Uganda’s credit profile.

Monetary tightening is said to be constraining Uganda’s growth projects as the central bank has raised its policy rate by 600 basis points since April, to 17 per cent and lowered in October, its real GDP forecast for 2016 fiscal, to 5.0 per cent.

“The effect on inflation has begun to take hold, with CPI core inflation moving up to 6.3 per cent in October from 2.7 per cent in December 2014, above the Bank of Uganda’s target of 5 per cent. We expect headline inflation to peak above 10% in 2016”, Moody’s said

By Emmanuel Odonkor

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