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Rating Action:

Moody's affirms Uganda's B2 ratings, maintains stable outlook

23 Mar 2018

London, 23 March 2018 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Uganda's B2 long-term issuer ratings. The outlook remains stable.

The decision to affirm the ratings reflects the following key rating factors:

(1) Uganda's favourable medium-term economic prospects, despite a small economic size and low wealth levels pointing to limited shock absorption capacity;

(2) Limited institutional capacity posing challenges in managing rising debt associated with infrastructure investment; and

(3) Elevated susceptibility to event risk.

The stable outlook reflects credit risks being broadly balanced. Infrastructure investment and continued structural reforms in cooperation with the IMF will support the growth outlook, while medium-term fiscal and debt outcomes remain vulnerable to revenue underperformance, growth volatility and potential domestic and external shocks.

Uganda's long-term foreign currency bond and deposit ceilings remain unchanged at Ba3 and B3, respectively. The local currency bond and deposit ceilings remain unchanged at Ba2.

RATINGS RATIONALE

AFFIRMATION OF B2 RATINGS

The decision to affirm Uganda's ratings balances the sovereign's credit strengths and challenges. In particular, while higher investment will help bolster economic strength, relatively weak institutions point to downside risks related to challenges in efficient resource allocation and in the management of the resulting debt burden for the government. The B2 ratings also take into account elevated susceptibility to event risks and Moody's expectation that, despite further deterioration in the fiscal metrics, Uganda's credit fundamentals will remain consistent with peers at the B2 level.

FAVOURABLE MEDIUM-TERM GROWTH PROSPECTS, DESPITE LOW SHOCK ABSORPTION CAPACITY

While remaining below the historical average growth of about 8% seen in the last decade, Uganda's medium-term economic prospects are favorable, underpinned by the increase in infrastructure investment driven by an ambitious national development strategy.

After a subdued performance in 2016, economic growth accelerated in 2017 and real GDP growth is expected to exceed 5% in 2018, driven by solid growth in services and improvements in industry and the agricultural sector as more normal weather conditions persist. The underperformance in 2016 was mostly related to the effect of the drought on the agricultural sector, and to the hostilities in South Sudan, a major export destination for Uganda. However, weak credit growth and lower than expected public investment also weighed on the economic performance. Over the medium-term, growth is expected to further accelerate, and Moody's projects real GDP to expand by 6% on average in 2019-20. Progress towards the start of the oil production, which is not expected to commence before 2021, could support even higher growth rates going forward.

Nevertheless, structural challenges including the economy's small size and its low per capita income, constrain Uganda's credit profile while the significant reliance on the agricultural sector, which is characterized by low productivity and vulnerability to unpredictable weather conditions, weighs on economic strength and constrains the sovereign's shock absorption capacity.

Uganda's policy framework has benefited from the cooperation with the IMF under the Policy Support Instrument (PSI) programmes in place since 2006. Despite some implementation delays, the PSIs have helped preserve macroeconomic stability and supported progress on structural reforms. The last PSI expired in July 2017 and the authorities have initiated discussions with the IMF for a program under the Policy Coordination Instrument (PCI). Moody's views the continued technical assistance provided by the Fund as key to support progress on structural reforms and provide an anchor for the implementation of prudent economic and fiscal policies.

LIMITED INSTITUTIONAL CAPACITY POSING CHALLENGES IN MANAGING RISING DEBT ASSOCIATED WITH INFRASTRUCTURE INVESTMENT

Uganda has experienced a sustained erosion of fiscal strength in recent years, reflecting a sustained pace of debt accumulation, albeit from a relatively low base, and deteriorating debt affordability metrics. The government has run large budget deficits over the past few years (hovering around 4% of GDP over the period 2013-17), but the fiscal expansion has been mainly driven by the financing of major infrastructure investment projects, which includes hydropower plants and road networks aimed at boosting economic growth rates in the medium- to long-term.

The government's debt burden has risen to around 38% of GDP in 2017 from about 28% of GDP in 2013 when the first rating was assigned, but still remains below the B-median (around 57% of GDP). Uganda's debt burden has risen faster than the government's revenue, resulting in a debt-to-revenue ratio of around 250% by end-2017, up from 218% in 2013. Revenue mobilization remains low, even when compared to Sub-Saharan African peers, due to the large size of the informal economy, low tax compliance and several tax exemptions, with the revenue-to-GDP ratio of about 15% compared to the median of around 22% of GDP for B-rated sovereigns. The government aims to increase the revenue collection-to-GDP ratio by 0.5 percentage point annually. However, the revenue increase has underperformed expectations in the past few years, and achieving a target of 16% of GDP in FY2019/20 will be challenging, particularly if parliament continues to reject revenue measures as occurred in FY2017/18.

Debt affordability has also deteriorated, reflecting a gradual shift in the composition of the debt burden towards non-concessional borrowing. This mainly reflects the rising share of domestic debt in the government's financing mix. Interest on domestic debt makes up more than 80% of interest payments as of June 2017, as almost all of the government's external debt consists of concessional loans at very low interest rates.

Despite recent fiscal reforms and efforts to improve data transparency, institutional capacity remains limited as reflected by weaknesses related to public financial management and shortcomings in the budget planning and implementation, including under-execution of the development budget due to challenges in project implementation and frequent use of supplementary budgets, which pose challenges in scaling-up public infrastructure investment and managing the rise in debt burden incurred to finance it.

The implementation of the current budget is facing some challenges including lower than expected revenue and higher than envisaged pressures on recurrent spending, as well as continuing weaknesses in public investment management. Moody's forecasts the deficit to average about 5.2% of GDP in 2018-19. The general government debt is expected to gradually increase, reaching 43% of GDP in 2020 but the debt trajectory remains vulnerable to lower than expected economic growth and renewed currency depreciation pressures. Moody's views fiscal risk as contained as long as large fiscal deficits are used to finance infrastructure investment as planned, pressures on current expenditure (in particular on public wages) remain contained, and investments focus on infrastructure projects that can boost long-term growth prospects. Over the long run, the sustainability of public finances may also benefit from the revenues generated by the exploitation of Uganda's hydrocarbon reserves, which nevertheless is not expected to materialize before 2021.

EVENT RISK SUSCEPTIBILITY REMAINS ELEVATED

Uganda's vulnerability to event risk remains elevated, in particular to the risks posed by the domestic political environment, which is dominated by uncertainty related to the lack of a succession plan, an increasingly fragmented political landscape and popular discontent, especially among young people. Uganda is also exposed to the geopolitical risk emanating from unstable political conditions in neighbouring countries, particularly South Sudan, that have caused mass migration in recent years. Government liquidity risk remains elevated, given the absence of a diversified funding structure. The government has become increasingly reliant on domestic debt, whose structure carries higher refinancing risk compared with the external debt due to its shorter-term nature. Furthermore, the high reliance on the banking system, which holds more than 40% of government securities in 2017, and uncertainty surrounding the financing strategy created by the use of supplementary budgets also weighs on Moody's assessment of the liquidity risk.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects balanced risks at this rating level. On the upside, a scale-up of infrastructure investment and implementation of structural reforms supported by continued cooperation with the IMF could result in higher potential growth over the medium-term. On the downside, medium-term fiscal strength could be eroded if continued fiscal expansion is not accompanied by an acceleration of capital spending as planned and measures to enhance the revenue generation capacity are not effective or if the growth benefits of investment do not materialize while debt continues to increase.

WHAT COULD MOVE THE RATING UP

Evidence that infrastructure investment is generating sustained strong growth and a stabilization of the debt trajectory would be credit positive. The start of oil production would also support creditworthiness, provided the oil wealth is managed prudently.

WHAT COULD MOVE THE RATING DOWN

Downward pressures on the rating would arise from evidence that the fiscal expansion is being directed towards recurrent expenditure rather than toward productive capital investment or the anticipated growth dividend will not materialize resulting in a further worsening of the fiscal metrics and/or in a material deterioration of the external position. Furthermore, any indication that the banking sector would struggle to absorb new government issuances would adversely affect government liquidity. Finally, a significant increase in domestic political instability, due for example to social unrest that could jeopardize economic stability and reduce the country's future growth prospects, would also be credit negative.

GDP per capita (PPP basis, US$): 2,281 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.5% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.7% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -3.9% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3% (2016 Actual) (also known as External Balance)

External debt/GDP: 39.2% (2016 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 20 March 2018, a rating committee was called to discuss the rating of the Uganda, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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