Moody’s warns Uganda credit rating under threat from fiscal deficits, low wealth levels

UPDF soldiers secure the Juba International Airport on January 24, 2014. Moody’s says any border security issues such as with South Sudan could impair Uganda’s medium-term growth prospects and exert downward pressure on the rating. Photo/DPU 

By Geoffrey Irungu Business Daily

In Summary

• Rating agency Moody’s said that despite the country’s economic weaknesses, its B1 rating also showed potential for growth and a stable outlook.
• The rating agency said other credit-positive features include Uganda’s largely concessional funding base, and foreign-exchange reserves that adequately cover a widening current account deficit.

The creditworthiness of Uganda, which imports more than 30 per cent of Kenya’s goods, is under threat from widening fiscal deficits and institutional weaknesses and reflects the country’s low wealth levels, rating agency Moody’s has said.

In a report dated January 23, the agency said that despite the country’s economic weaknesses, its B1 rating also showed potential for growth and a stable outlook.

The rating agency’s report was an update to the markets and did not constitute a new rating action.

Because of implications on the health of the region’s economy, especially Kenya’s exports, the country is likely to be closely watched in the coming months.

“In terms of credit weaknesses, Moody’s highlights the relatively small size of the economy, low per capita income and competitiveness ranking, as well as widening fiscal deficits,” said Moody’s in a statement.

It noted that the deficits were being driven by growing infrastructure investment and declining donor support.

“Moreover, creditworthiness is further constrained by institutional weaknesses and a mixed monetary policy track record, as illustrated by increased and volatile inflation since 2007,” said Moody’s.

Moody’s assistant vice-president for analysis Alexandra Mousavizadeh said in the report that any border security issues such as with South Sudan could impair Uganda’s medium-term growth prospects and exert downward pressure on the rating.

Kampala has sent troops to South Sudan following the violent political disagreements between President Salva Kiir and his former vice-president, Riek Machar.

READ: Mist over Uganda troops in Juba as body bags arrive

Moody’s also noted credit strengths arising from the foreign investment in its large hydrocarbons sector, but moderated by possible escalation in South Sudan’s security issues.

“In turn, the level of earnings from the country’s substantial mineral endowments will depend on improvements in Uganda’s security situation,” said Moody’s.

“Debt relief has helped the government keep its debt burden and related servicing costs low, and maintain favourable structuring. This performance has been due partly to IMF monitoring of Uganda’s Policy Support Instrument, which was recently renewed for three more years.”

READ: IMF approves Uganda request to raise borrowing limit

The rating agency said other credit-positive features include Uganda’s largely concessional funding base, and foreign-exchange reserves that adequately cover a widening current account deficit.