What Uganda’s credit rating downgrade means

Global ratings agency Moody’s on Friday downgraded Uganda’s rating to B3 from B2, citing lower debt affordability and increasingly limited financing options, forcing commercial banks to buy hard currency, thereby weakening the shilling. Ugandan.
On Monday afternoon, commercial banks quoted the shilling at 3,782/3,792, up from Friday’s close of 3,775/3,785.

In a statement issued by the global rating agency, the downgrade is largely due to concerns over the affordability of Uganda’s debt and limited financing options.
As a result of the ratings, the Ugandan government may face problems in accessing global credit markets or attracting investors to the country, as Moody’s indicated that the problem was Uganda’s continued dependence on costly non-concessional internal and external financing, which has affected the affordability of interest-bearing debt. Payments will increase from 14.2 percent in 2019 to 22.2 percent in 2023.

Moody’s report predicts that the ratio of interest payments to government revenue will remain high.
According to Moody’s, increased domestic borrowing and other methods of covering revenue shortfalls point to reduced access to credit.
Uganda’s debt has increased in the last five years from Sh42.20 trillion in 2019 to Sh93.38 in December 2023. The Ministry of Finance plans to reduce external borrowing and increase domestic borrowing by a ratio of 40: 60 in the year 2024/25 fiscal year.

However, the global rating agency said it changed the outlook for Uganda from negative to stable.
“The ratings downgrade reflects lower debt affordability and increasingly limited financing options, amid greater reliance than in the past on comparatively expensive internal and non-concessional external financing sources,” Moody’s said.

Adding: “The risk of external vulnerability also remains elevated, a reflection of a more challenging external debt servicing profile, the persistence of tighter global financial conditions and lower adequacy of foreign exchange reserves.”
The stable outlook reflects Moody’s assessment that the B3 rating level incorporates Uganda’s credit challenges and strengths. Downside risks relate to the debt affordability and external vulnerability challenges mentioned above.

In another positive development, Moody’s explained that gradual improvements in revenue mobilization capacity, if sustained, would support fiscal consolidation efforts and could eventually provide relief to the debt affordability challenges facing the government, but face risks. of execution.
The Ugandan government has intensified its efforts to increase domestic revenue by attempting to broaden its revenue base and improving tax administration.

Moody’s said that under its medium-term revenue strategy, the government remains committed to increasing the ratio of domestic revenue collection to GDP by 0.5 percentage points a year, including through rationalization of exemptions and better tax administration. . Moody’s base case builds in further improvements in the government’s revenue ratio to around 15.6 percent of GDP by fiscal 2025, although higher interest expenses will offset the impact on debt affordability.

“These improvements are subject to execution risks related to weaknesses in public financial management, highlighted by the poor performance of budget targets in the current fiscal year to date,” Moody’s said.

Moody’s expects Uganda’s record of macroeconomic stability to be maintained. Uganda’s growth has been above its B-rated peers over the past decade, with real GDP growth averaging 4.7 percent, compared to an average of 3.8 percent for countries with grade B.

In a related development, Moody’s expects growth to accelerate to a rate of 6 to 7 percent over the medium-term horizon, thanks to developments in the oil sector, ongoing investments in transportation infrastructure and power generation for address structural constraints, and favorable demographic trends. These dynamics are balanced by the small size of the economy, vulnerability to climate-related shocks, and low levels of wealth, which limits the capacity to absorb shocks.

In this regard, he stated that the sector could strengthen growth, tax revenues and external position, which would strengthen Uganda’s creditworthiness and provide prudent management of oil wealth. Despite progress, the completion of oil infrastructure projects remains vulnerable to implementation risks, as indicated by past delays.

However, he said further delays in the start of oil production would lead to wider external deficits in the long term if the debt – taken out mainly to finance oil-related projects – was not offset by greater foreign exchange earnings and capacity. income generation.

In the aspects of environmental, social and governance considerations, Moody’s said Uganda’s ESG Credit Impact Score (CIS-4) reflects high environmental risk exposure, very high social risk and very low resilience, reflecting a weak governance profile and a low level of wealth. , and weaken fiscal metrics that exacerbate E&S exposure.

Looking ahead, Moody’s said upward pressure on the rating would arise from sustained progress in strengthening income-generating capacity and access to financing at moderate costs, reversing deterioration in debt affordability.

“A significant and lasting strengthening of Uganda’s external position that would restore and preserve external reserves would also support a higher rating. Over the long term, increased oil production would also support solvency by promoting growth and tax revenue, provided oil wealth is managed prudently,” Moody’s said.