Uganda has been given a ‘B/B’ stable credit rating by Standard and Poor’s (S&P) Ratings Services.
“Once again, the external credit rating agencies share my confidence in the strong prospects for the economy over the medium term and in particular the prospects for robust economic growth and low inflation,” Prof. Emmanuel Tumusiime Mutebile, Governor, Bank of Uganda said last week in a statement.
The projected stable credit outlook for Uganda, covers the next six months and reflects the present public works which will boost Uganda’s growth and improve the country’s fiscal and external metrics over time.
The Director Communications, Bank of Uganda, Christine B Alupo, said the most salient factor coming out of S&P’s analysis is the role of public investment in infrastructure in boosting growth.
The stable outlook reflects that Uganda’s infrastructure investments will yield higher growth over the next year and, in turn, this growth will moderate the country’s fiscal and external positions over time.
S&P’s stable outlook means that there is less than a one-in-three probability of an upgrade or downgrade in the coming six months.
In the ratings and outlook on Uganda, it is factored in that the government will broadly stay on track with its Policy Support Instrument (PSI) with the IMF and with its broader relations with official creditors.
The PSI offers low-income countries that do not want—or need—Fund financial assistance a flexible tool that enables them to secure IMF advice and support without a borrowing arrangement.
The PSI is designed to promote a close policy dialogue between the IMF and a member country, normally through semiannual Fund assessments of the member’s economic and financial policies. This support from the IMF also delivers clear signals to donors, creditors, and the general public about the strength of the country’s economic policies.
Projections for Uganda’s fiscal deficit for 2015/2016 fiscal year (ending June 30, 2016) were reduced to 6.5% of GDP from 7% because the government has slowed the pace of its infrastructure investments while accommodating some election-related spending.
S&P highlights public finances was helped by the passage of the public finance management bill, which creates a single treasury account, tightens public financial management, and closes the loopholes that led to the misappropriation of donor funds three years ago.
It is projected that the fiscal deficit will gradually decline to 4.6% of GDP by 2018 as some of the projects near completion.
Uganda’s ratio of interest to revenues will rise to 14% by 2018 from 11% currently as the high cost of domestic debt feeds through and because the government has a narrow revenue base. During 2015, for example, Treasury bill rates had risen to more than 20% by Dec. 31, 2015, from about 13% on June 30, 2015, in tandem with central bank policy rates.
It is forecast that Uganda’s gross external financing requirements will average about 120% of current account receipts and usable reserves in 2015-2018, compared with 106% in 2011-2014.
Export performance remains weak because of low commodity prices, while volatile weather may negatively affect output in the agricultural sector.
Although lower oil prices have provided temporary relief to Uganda’s import bill, we think the trade balance will remain weak, owing to capital imports related to the oil sector’s development and to infrastructure improvement.
Consequently, we project that the current account deficit will likely remain at about 10% of GDP over 2015- 2018.
That said, the size of the current account deficit could be overstated by as much as 2% of GDP due to under-reporting of trade and services with some neighboring countries, which are captured by positive errors and omissions in the external accounts over the past few years.
East African Business Week