Caption for the landscape image:

What Uganda’s credit downgrade means

Scroll down to read the article

Commercial banks quoted the shilling at 3,782/3,792, compared to Friday’s close of 3,775/3,785. PHOTO/ FILE

Global rating agency Moody’s on Friday downgraded Uganda’s rating to B3 from B2, citing diminished debt affordability and increasingly constrained financing options, which forced the commercial banks to buy hard currency, hence weakening the Uganda shilling.
By Monday evening, commercial banks quoted the shilling at 3,782/3,792, compared to Friday’s close of 3,775/3,785.

In a statement issued by the global rating agency, the downgrade is mainly due to concerns on Uganda’s debt affordability and largely due to concerns over Uganda’s debt affordability and limited financing options.
As a result of the ratings, the Uganda government may face problems accessing global credit markets or attracting investors into the country as Moody’s indicated that the problem was Uganda’s continued reliance on costly domestic and non-concessional external financing, which has affected debt affordability with interest payments rising from 14.2 per cent in 2019 to 22.2 per cent in 2023.

Moody’s report predicts ratio of interest and payment and government revenue to remain high.
According to Moody’s increased domestic borrowing and other methods to cover deficiencies in revenues point to reduced access to credit.
Uganda’s debt has been rising in the last five years from sh42.20 trillion in 2019 to sh93.38 as of December 2023. The Ministry of Finance plans to reduce external borrowing and increase domestic borrowing at the ratio of 40:60 in the 2024/25 financial year.

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

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

On another positive development, Moody's explained that gradual improvements in revenue mobilization capacity would, if further sustained, support fiscal consolidation efforts and could eventually provide relief to the debt affordability challenges faced by the government, but face execution risks.
The Uganda government has stepped up its effort to increase domestic revenue by trying to expand its revenue base and improving the tax administration.

Moody’s said under its medium-term revenue strategy, the government remains committed to increasing the ratio of domestic revenue collection to GDP by 0.5 pp annually, including through the rationalization of exemptions and improved tax administration. Moody's baseline integrates further improvements in the government revenue ratio to around 15.6 percent of GDP by fiscal 2025, although higher interest expenditures will offset the impact on debt affordability.

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

Moody's expects that Uganda's track record of macroeconomic stability will be maintained. Uganda's growth performance has been above that of B-rated peers over the past decade, with real GDP growth of 4.7 percent on average, compared with a median of 3.8 per cent for B-rated countries.

In a related development, Moody's expects growth to accelerate to a rate of 6-7 percent over the medium-term horizon, on the back of the developments in the oil sector, ongoing investments in transport and energy generation infrastructure to address structural constraints, and favorable demographic trends. These dynamics are balanced by the economy's small size, vulnerability to climate-related shocks, and low wealth levels, limiting shock-absorption capacity).

In this regard, it stated that the sector could strengthen growth, fiscal revenue, and the external position, which would bolster Uganda's creditworthiness, and provide prudent management of oil wealth. Despite progress, the completion of oil infrastructure projects remains vulnerable to implementation risks, as past delays indicate.

However, it said further delays in the start of oil production would lead to wider external deficits over the longer term if debt — contracted mainly to finance oil-related projects — were not compensated by higher foreign exchange receipts and revenue generation capacity.

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

Looking into the future, Moody’s said upward pressure on the rating would arise from sustained progress in strengthening revenue generation capacity and access to funding at moderate costs, reversing the deterioration in debt affordability.

“A significant and durable strengthening of Uganda's external position that restored and preserved external buffers would also support a higher rating. Over the longer term, oil production being ramped up would also support creditworthiness by promoting growth and fiscal revenues, provided the oil wealth is managed prudently,” said Moody’s