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Rating Action:

Moody's downgrades Uganda's rating to B2, outlook stable

18 Nov 2016

London, 18 November 2016 -- Moody's Investors Service has today downgraded the long-term issuer rating of the Government of Uganda to B2, from B1, and changed the outlook to stable from negative.

The key driver of today's rating action is the sustained erosion of fiscal strength that has occurred since the rating was assigned in 2013. The Government of Uganda's debt burden has risen 9 percentage points to 33% of GDP in the past four years, and is projected to continue rising towards 45% of GDP by 2020. Debt as a percentage of revenues has risen by 54pp since 2012 and is expected to exceed 250% by 2018. Deteriorating debt affordability is reflected in interest obligations expected to consume almost 16% of revenues by 2018, far exceeding the median for B-rated countries of 8%. Meanwhile, low, and in some respects eroding institutional strength will challenge the government's capacity to manage the rising debt burden.

The stable outlook reflects Moody's expectation that, despite the anticipated further deterioration in the government's fiscal metrics, Uganda's credit fundamentals will generally remain commensurate to peers at the B2 level meaning a further rating downgrade is unlikely in the near term.

Concurrently, Moody's has lowered the long-term local-currency bond and deposit ceilings to Ba2 from Ba1, and the long-term foreign-currency bond and deposit ceilings to Ba3 and B3 from Ba2 and B2, respectively.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO B2 -- DETERIORATION IN FISCAL AND INSTITUTIONAL STRENGTH

Moody's forecasts Uganda's budget deficit to average more than 6% of GDP over the next three fiscal years, leading to a sustained rise in the public debt to GDP ratio to 41% of GDP by 2018. This would represent a 50% increase in the overall debt burden since Moody's initially rated the country in 2013. Moreover, given the government's weak revenue generation capacity, with a revenue-to-GDP ratio of 13.4% of GDP compared to the median of 23% of GDP for B-rated countries, the debt burden has risen faster than the government's own resources, resulting in a debt-to-revenue ratio of 236%, one of the highest amongst B-rated sovereigns.

While Moody's anticipated at the time of the initial rating assignment in 2013 a period of larger fiscal deficits and rising public debt levels in support of public infrastructure investments in key strategic areas, debt ratios have risen faster than expected, partly due to weaker-than-expected growth in recent years, coupled with exchange rate weakness. Real GDP growth averaged 4.3% in annual terms from 2012-2014, compared to an average of 7% in the three years prior. Additionally, since end-2013, the exchange rate has depreciated cumulatively by more than 30%, and further exchange rate weakness also represents an additional threat to the debt burden given the high level of foreign currency government debt.

Debt affordability is also deteriorating, in part due to a shift in composition of the debt burden towards non-concessional borrowing. Around 80% of gross financing requirements will be contracted on a non-concessional basis, with around 45% of the gross financing requirement to be met by the domestic market. Debt affordability has been a persistent vulnerability for Uganda, and the higher debt burden combined with the shift in financing sources will lead to further deterioration. Moody's projects that debt servicing will increase from 11% of government revenues in 2015 to almost 16% of revenues by 2018, far exceeding the median for B-rated sovereigns of 8%. Although the Bank of Uganda's monetary easing cycle in 2016 has begun to help offset rising domestic debt servicing costs, like other emerging and frontier markets, Uganda remains vulnerable to renewed depreciation pressure stemming from further global financial market volatility and capital outflows.

Although the general elections held in February 2016 passed with only minor outbreaks of social unrest, aspects of the country's institutional strength of the country have eroded over the last five years. In particular, control of corruption -- as measured by the Worldwide Governance Indicators -- has deteriorated since 2011, moving from the 21st percentile in 2005 to the 12th in 2015. We assess Uganda's institutional strength at VL+, ranking it aside peers such as Honduras (B2 positive), Nicaragua (B2 stable) and Pakistan (B3 stable) which is particularly important within the context of a rising debt burden. Countries with high levels of institutional strength -- and in particular those with strong and effective institutional frameworks -- are ordinarily able to tolerate higher debt burdens than those with weaker institutions. The deterioration in Uganda's institutional strength coincides with our expectation that on conservative assumptions, government debt levels will increase 1.5x in the five year period since the rating was assigned (2013-2018), a growth rate that is excessive for a country at such a low level of institutional strength.

RATIONALE FOR THE STABLE OUTLOOK -- CREDIT FUNDAMENTALS TO REMAIN SUPPORTIVE

Despite the anticipated further deterioration in the government's fiscal metrics for the remainder of this decade, Uganda's credit fundamentals will remain commensurate compared to peers at the B2 level, meaning migration to a lower rating level is unlikely in the near term. Uganda's credit strengths include strong growth prospects supported by infrastructure spending, rising per capita GDP which has doubled across the last decade, along with robust fiscal and monetary policy frameworks supported by the IMF Policy Support Instrument. Furthermore, the expansion of the fiscal stance is being directed towards productive capital investment rather than recurrent expenditure, which should support medium-term growth prospects.

Uganda is in the early stages of developing its oil production capacity. Proven oil reserves of 2.5 billion barrels were found in the Rift Valley region in 2006 and in August 2014 hydrocarbon reserve were revised up to 6.5 billion barrels. After a protracted period of negotiations, the government granted production licenses in August 2016 to three oil companies paving the way for production to begin. The latest estimate from the government suggests that large-scale production will now begin in FY2019/2020, when a pipeline through Tanzania is completed. If the current plans are realized, real GDP growth in the 2017-2023 ramp-up period could be 2 to 4 percentage points higher than current growth forecasts.

Additionally, Uganda benefits from a credible monetary policy framework which has reined in inflationary pressures in the face of recent external and confidence shocks to the economy. Partly as a result of these policies, many of the election-related risks that previously drove the negative outlook—notably, a severe depreciation of the shilling and inflation becoming unanchored—have not materialized to the extent anticipated, justifying a stabilization of the outlook.

WHAT COULD MOVE THE RATING UP

Evidence that infrastructure investment is generating growth and a stabilization of the debt trajectory would provide a path back to B1. Clear indications that final investment decisions into the hydrocarbons sector have been concluded and the country is closer to commencing production would also lead to upwards rating pressure.

WHAT COULD MOVE THE RATING DOWN

A further downgrade is unlikely at this juncture as Uganda compares favorably to B2 peers in terms of robust growth prospects, albeit at a lower level of development, and a low level of institutional strength. However, two factors could contribute to downward pressure on the rating. First, the government is increasingly reliant on the domestic banking system for its financing needs. Although the system is well-capitalized and liquid, it is small relative to the size of the economy. Any indication that the banking sector would struggle to absorb new government bond issuance could adversely affect government liquidity. Finally, social unrest triggered by high levels of youth unemployment combined with a fractious political environment could jeopardize economic stability and reduce the country's future growth prospects.

GDP per capita (PPP basis, US$): 1,740 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5.4% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 8.5% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -4.1% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -6.7% (2015 Actual) (also known as External Balance)

External debt/GDP: 22.4% (2015 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 15 November 2016, 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 fiscal or financial strength, including its debt profile, has materially decreased. Aspects of the issuer's institutional strength/framework, have decreased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, the rated entity or its agent(s) is considered to be a participating entity. The rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process.

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.

Rita Babihuga
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
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

No Related Data.
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