London, November 18, 2022 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Uganda to negative from stable and affirmed the B2 long-term foreign and local-currency issuer ratings.
The negative outlook reflects Moody's view that amidst increasing external debt-service payments, a more challenging external environment marked by tightening global financial conditions, and an erosion of the foreign exchange buffer, Uganda's external vulnerability risks are increasing. Debt affordability is also deteriorating at a more rapid pace than the median of B2-rated peers, and the shift towards a tighter monetary policy stance as well as tighter global financial conditions imply a sustained rise in financing costs that risks limiting Uganda's fiscal space and shock-absorption capacity.
The affirmation of the B2 rating reflects Uganda's credit constraints, in particular structural economic and institutional challenges, a sustained erosion in fiscal strength, and elevated susceptibility to event risk, including political risk. At the same time, the B2 rating takes into account credit support from favourable medium-term growth prospects notwithstanding the immediate risks presented by an ongoing Ebola outbreak, a track record of macroeconomic stability, and the continued support of international financial institutions, including through the current IMF programme.
Uganda's local and foreign currency country ceilings remain unchanged at Ba2 and Ba3, respectively. The local currency country ceiling is three notches above the sovereign rating to take into account the low footprint of the government in the economy, notwithstanding relatively high external imbalances and exposure to domestic and geopolitical risk. The foreign currency ceiling maintains a one-notch gap to the local currency ceiling to reflect Moody's assessment of limited transfer and convertibility risks in view of Uganda's open capital account and moderate level of external debt, notwithstanding constraints to policy effectiveness.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
DETERIORATING DEBT AFFORDABILITY DUE TO GROWING DEPENDENCE ON NON-CONCESSIONAL FINANCING
Uganda's debt burden has increased, reaching 48.6% of GDP in 2021/22 (fiscal year ending June 30, 2022) in Moody's estimate, from 35.1% of GDP in 2018/19. While the debt ratio remains in line with the median of B-rated peers, and Moody's projects the government's fiscal consolidation efforts to narrow the fiscal deficit to 5.4% of GDP in 2022/23 from 7.4% of GDP in 2021/22, two key deteriorating trends weigh on the credit profile. Firstly, the debt trajectory is vulnerable to lower-than-expected economic growth and currency depreciation pressure, with external debt accounting for 62% of public debt in December 2021 and mainly denominated in either US dollars or euros. Secondly, the structure of Uganda's debt is becoming less favourable than that of other post-completion heavily indebted poor countries (HIPC). Shorter-term and more expensive domestic borrowing has been key in financing the fiscal deficit in recent years; domestic debt accounted for 38% of public debt as of December 2021 but 83% of interest payments. The share of non-concessional external debt has also increased.
The weighted average interest rate for Uganda's total debt has risen to 6.1% as of December 2021, from 5.6% in June 2019. The average interest rate on external debt remains very low at 1.6%, a reflection of Uganda's external debt being still predominantly the result of debt-relief initiatives and concessional loans from bilateral and multilateral lenders. By contrast, the weighted average interest rate on domestic debt is much higher at 13.6%. Although this rate has remained relatively stable over the last three years, tighter global financial conditions, and the shift towards a tighter monetary policy stance by the Central Bank of Uganda (BoU) in response to higher inflation, imply a sustained rise in financing costs. Moreover, 21.7% of the external debt stock was contracted at variable rate as of December 2021, increasing exposure to interest rate risk.
Debt affordability has consistently deteriorated in recent years. Interest payments accounted for 21.6% of government revenue in fiscal 2022, up from 14.2% of revenue in fiscal 2019. The ratio compares unfavourably with the median of both B-rated and B2-rated peers (8.8% and 16.1% projected respectively for end-2022), and the gap has widened since the pandemic. Moody's projects this ratio to rise further, with interest payments absorbing around 23% of government revenue in fiscal 2023. A stabilisation thereafter is contingent on the uncertain results of IMF-backed efforts to strengthen revenue through the removal of tax exemptions and tax administration improvements, as well as sustained access to concessional financing. A continued erosion of debt affordability that further widens the gap with rating peers would limit Uganda's fiscal space to increase social spending and respond to future shocks.
INCREASING EXTERNAL VULNERABILITY RISKS, DUE TO HIGHER EXTERNAL DEBT SERVICING, A TIGHTER GLOBAL LIQUIDITY ENVIRONMENT, AND A WEAKENING FOREIGN EXCHANGE RESERVE BUFFER
Uganda's external vulnerability risks are increasing, driven by tightening global liquidity conditions, higher external debt servicing requirements due over the coming years, and a weakening foreign exchange buffer. Portfolio outflows and increased exchange rate volatility have led to a drawdown in foreign exchange reserves over the course of 2022. Reserves declined to $3.7 billion in September 2022 from a peak of $4.5 billion in March, amounting to around 4.1 months of import cover of goods and services according to BoU estimates. Moody's expects the erosion in reserves to continue over 2023, driving the import cover below the 4 months recommended by the BoU's own target. A driver of the erosion in reserves has been the reversal in flows of holdings of domestic debt - mostly in long-term bonds – by non-resident investors.
Moreover, Uganda faces a more challenging external debt servicing profile over the next few years, as principal repayments rise – driven in large part by payments to The Export-Import Bank of China and non-concessional creditors - and repayments to the IMF begin from 2025 onward. The external vulnerability indicator (the ratio between the sum of external debt payments due over the next year and non-resident deposits, and foreign exchange reserves) under Moody's projections will increase to around 81% by end-2023 from 42% in end-2019, although it remains in line with the median of B2-rated peers.
Moody's also expects the current account deficit to remain large, averaging more than 9% of GDP between 2022 and 2024, reflecting a higher import bill related to food and energy as well as capital investment in oil projects. Uganda runs a large structural current account deficit, that has averaged around 7% of GDP over the past five years. The deficit has widened since the pandemic, reflecting a flattening in exports, lower tourism receipts and remittances, and increasing imports.
The current account deficit has historically been mainly financed by budget and project support loan disbursements and net FDI inflows. Net FDI has averaged 2.8% of GDP over the last five years, and Moody's expect rising investments in oil-related projects to drive higher inflows through to the middle of the decade. However, the role of both budget and project support grants in revenue is likely to decline in the medium term, notwithstanding increased financial assistance from the international community during the pandemic. While a favourable external debt structure and the BoU's commitment to a flexible exchange rate partly mitigate the risks, any shortfall in official financing could further weaken the country's external position and reduce reserve adequacy.
RATIONALE FOR AFFIRMING THE B2 RATING
The affirmation of the B2 rating reflects Uganda's credit constraints, in particular structural economic and institutional challenges, the sustained erosion in fiscal strength, and elevated susceptibility to event risk, including political risk. The small size of the economy, low wealth levels and significant reliance on the agricultural sector limit shock-absorption capacity and increase vulnerability to increasingly frequent climate-related shocks. Low institutional strength poses challenges in managing a rising debt burden and scaling up public infrastructure investment.
At the same time, the B2 rating takes into account credit support provided by favourable medium-term growth prospects and a track record of macroeconomic stability, notwithstanding the challenges presented by the global implications of the Russia-Ukraine military conflict and the immediate risks posed by an ongoing Ebola outbreak. Despite a more volatile performance that in part reflects the large role of the agricultural sector in the economy, Uganda's growth performance has been close to B-rated peers over the past decade, with real GDP growth of 4.6% on average compared with a median of 3.6% for B-rated countries. Moody's expects real GDP growth to rise to 5% in fiscal 2023 and 6% in fiscal 2024, supported by increased oil-related infrastructure investment. The continued support of international financial institutions is another credit strength: the current IMF programme will remain key in supporting government financing and fiscal consolidation efforts, and driving continued reforms in the areas of revenue mobilisation and spending rationalisation, governance and budget transparency.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Uganda's ESG Credit Impact Score is highly negative (CIS-4), reflecting high exposure to environmental risk, very high social risk and very low resilience, reflecting a weak governance profile, low wealth levels, and weakening fiscal metrics that exacerbate the exposure to environmental and social risks.
Uganda's credit profile is highly exposed to environmental risks as reflected in its E-4 issuer profile score. The country relies significantly on the agricultural sector (accounting for about a quarter of GDP and employing two-thirds of the population) which is characterized by low productivity and vulnerability to increasingly frequent climate-related shocks that contributes to economic volatility and affects export receipts.
Exposure to social risks is very highly negative (S-5 issuer profile score), driven by poor access to basic services, low education standards, and high levels of poverty. Although progress was made on reducing poverty between 1992 and 2013, when the national poverty rate declined to around 20% from 56%, some of these gains have since reversed and the poverty rate has been recently on the rise.
Uganda has a weak governance profile score (G-4 issuer profile score). Uganda receives low scores on the Worldwide Governance Indicators. Uganda's policy framework has been strengthened by the cooperation with international financial institutions but public service effectiveness and policy implementation have lagged behind the improvements of the policy framework. Institutional capacity remains limited, particularly due to shortcomings in budget planning and implementation and weaknesses related to public financial management.
GDP per capita (PPP basis, US$): 2,780 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 3.5% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.9% (2021)
Gen. Gov. Financial Balance/GDP: -9.2% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -8.3% (2021) (also known as External Balance)
External debt/GDP: 44.5% (2020)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 15 November 2022, 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 institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook signals that a rating upgrade is unlikely over the near term. Moody's would likely change the outlook to stable if an improvement of revenue mobilization capacity or progress on structural reforms supported by the cooperation of international financial institutions were able to limit the worsening in government debt indicators and lead to a more sustainable cost of funding. A significant and durable strengthening of Uganda's external position that restored and preserved external buffers would also likely lead to a stabilisation of the outlook. 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.
A downgrade of the rating would be likely if the government is not able to cover its financing needs without incurring a further material deterioration of its debt affordability metrics that further widens the gap with peers at the B2 rating level. A continued increase in external imbalances that leaves Uganda unable to stem the deterioration in foreign exchange reserve adequacy, or higher liquidity risk due to the domestic banking sector's challenges in absorbing new government issuances, could prompt a downgrade. A significant increase in domestic political instability, jeopardizing macroeconomic stability, would also be credit negative.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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a.With Rated Entity or Related Third Party Participation: YES
b.With Access to Internal Documents: YES
c.With Access to Management: YES
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Mickael Gondrand
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: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
