Don’t treat Moody’s grim outlook lightly

What you need to know:

The issue: 
Debt
Our view:  
Moody’s marker of how unlikely Uganda is to pay back debts can intensify the country’s financial crisis if state actors meet it with either silence or whataboutery.

The downgrade of Uganda’s debt status from stable to negative by credit rating agency Moody’s is a jolting reminder of the extent of the country’s deepening economic gloom.
Moody’s said the outlook for Uganda is gloomy due to a deterioration in debt ratios as the country’s pursuit of fiscal consolidation and growth remain slow and anaemic respectively. An economic contraction appears to be cast in stone amid shrinking foreign exchange reserves and currency depreciation.
The downgrade is a new blow to a government whose fiscal largesse has often been called into question. Moody’s put Uganda’s debt burden at 48.6 percent after her stock of public debt soared to Shs78.8 trillion in June. This is—by all measures—punchbag territory.

The challenge now is for the government to stoke activity without incurring fiscal costs that threaten to widen the deficit. The current borrowing spree it has gleefully entertained with backing from Parliament, however, hardly inspires confidence. All indications are that things will get worse before they get better, with external shocks also exerting further downward pressure. 
The government’s policy wonks have previously directed a dismissive tone at anyone who has dared to question Uganda’s economic strategy. We reckon—and strongly so—that Moody’s concerns over the country’s rising debt shouldn’t be dismissed out of hand. The commitment of the government to reduce its fiscal deficit should get renewed vitality if anything because Uganda’s public finances are spiralling out of control.

With the economy shrinking and inflation having surged past 10 percent, the current state of affairs is troubling at many levels. This means it shouldn’t be a case of business as usual. Things are not as the government’s policy wonks would want us to believe. Owing to this rather grim outlook, which Moody’s has now red-flagged, efforts to rein in credit risks have to be of the essence.
Fiscal discipline should not be an afterthought as has often and continues to be the case. The government should make clear its planned economic reforms. The aforesaid reforms should be intended as a shock absorber for the significant rise in debt. Moody’s noted in its report that the weighted average interest rate for Uganda’s total debt has spiked to 6.1 percent from 5.6 percent in June of 2019.

Rather than dismiss Moody’s assessment of its economy, we urge the government to convey clear signals to the markets. There should be clarity around what measures will be considered to bolster what is by all accounts an ailing economy. What are the tax increases and spending cuts being considered? Moody’s marker of how unlikely Uganda is to pay back debts can intensify the country’s financial crisis if state actors meet it with either silence or whataboutery.
We urge relevant authorities to ensure that such an outcome doesn’t materialise. It’s incumbent that proactivity in speech and actions becomes the order of the day. Government policy wonks should roll up their sleeves and get to work, ensuring that Moody’s sovereign downgrade doesn’t take what little of wind is left in the country’s sails.

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