Fitch Affirms Uganda at ‘B+’ with Negative Outlook
On an expectation that the economy will surge 5.3% in 2023, Fitch Ratings has affirmed Uganda’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’, however with a negative outlook.
According to the rating note, the negative outlook reflects Uganda’s weak external liquidity position and challenges to its access to external concessional financing and grants related to concerns about democracy, human rights and corruption, further heightened by the passing of the Anti-Homosexuality Act (AHA) in 2023.
It also stressed that the country’s high government interest payments and rising external debt service will exacerbate financing and liquidity pressures.
Uganda’s ‘B+’ ratings reflect a strong medium-term growth outlook, an IMF programme that functions as a policy anchor, and a record of relative macroeconomic stability, aided by an independent central bank, Fitch said in the rating note.
It however noted that challenges in accessing concessional external financing have increased, but a significant reduction of the primary budget balance due to spending restraints improve prospects for government debt reduction.
Fitch said Uganda rating is constrained by the country’s low GDP per capita, weak governance indicators, a large current account deficit and a narrow revenue base reducing the government’s ability to respond to shocks.
Following the enactment of the AHA, the World Bank announced that its board will not approve any new proposals for funding for Uganda until it ensures its principals of non-discrimination are satisfied.
According to the rating note, the World Bank is the single most important source of external financing, accounting for 33% of government external debt.
Fitch said the impact of the AHA on funding in the fiscal year ending June 2024 appears manageable as the majority of World Bank financing included in the government budget had already been approved by the board.
“We expect a small amount not approved by the board, will not be disbursed (4.2% of the total resources budgeted for 2024). In addition, implementation of new and ongoing projects will be delayed, as the World Bank will increase monitoring to ensure that there is no discrimination”.
It said negotiations are ongoing between the authorities and the World Bank about the potential to restart approvals and prevent a low disbursement ratio.
The AHA could still be overturned by the constitutional court or due to the authorities yielding to international pressures amid threats of financing suspension. Donors could also continue their projects in Uganda without a change in policy.
Despite significant downside risks, at this stage our baseline assumption is that the AHA itself will not lead to a substantial deterioration in financing access.
Fitch Ratings projected government external debt service at 1.9% of GDP in 2024 and 2025. The government plans to increase external financing in 2024 to 2.6% of GDP from 2.0% in 2023.
The IMF will disburse 0.6% of GDP in 2024 and the authorities are negotiating a loan of up to USD400 million, 0.8% of GDP, with commercial banks.
Although Fitch assumes external commercial borrowing will increase, the agency expects the government will rely more than budgeted on domestic borrowing, especially if the pricing on commercial loans is higher than government’s projections.
Adjustments in the budget and the financing plan might be required for 2025, which will coincide with the end of the current IMF programme (June 2024).
It said public finances remain vulnerable to high interest payments, crowding out spending in other areas. They represented 20.9% of revenue in 2023. Debt represented 331% of revenue in 2023, above Fitch’s 2023 forecast, reflecting low revenue mobilisation.
“We forecast the general government budget deficit will decline from 5.3% of GDP in 2023 to 3.8% in 2024 and 3.5% in 2024, owing to an improvement in revenue collection through reforms in tax administration and tax exemptions rationalisation.
“Nevertheless, expenditure restraint will primarily drive the fiscal adjustment. Continued underperformance in capital spending, due to financing constraints, will offset likely overspending in interest payments and non-wage recurrent spending”, Fitch stated.
The ratings agency assumed a slower pace of increase in revenue/GDP than the authorities. The government plans to assume an increase in grants by 42% in 2024 (compared with the 2023 Budget Law), but the availability of grants for Uganda could be affected by the introduction of the AHA.
“If revenue and grants underperform, we assume the government will cut non-priority spending and temporarily freeze new projects that do not receive concessional financing”, it said.
Analysts also estimate that general government debt decreased to 47.8% of GDP at the end of 2023, from 48.5% in 20. Fitch projects real GDP growth at 5.5% in 2023, down from 6.4% in 2022, driven by agriculture production and investment in the oil sector.
“We forecast real GDP growth to average 6.2%, in 2024-2025 with investments in the hydrocarbon sector a major driver”. Uganda’s oil production is expected to start at end-2025 and to peak at around 230,000 bbl/day, exported through a new oil pipeline to Tanzania.
“However, given the significant infrastructure requirement and the failure to conclude financial closure earlier in 2023, the start could be delayed. Oil production will not directly affect GDP growth or government revenues until 2026 in our forecast”.”, Fitch said