Fitch Affirms Uganda at ‘B+’; Outlook Stable

HONG KONG/LONDON, August 03 (Fitch) Fitch Ratings has affirmed Uganda’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘B+’. The Outlooks are Stable.

The Country Ceiling has been affirmed at ‘B+’. The Short-Term Foreign Currency and Local Currency IDRs have been affirmed at ‘B’. KEY RATING DRIVERS Uganda’s ‘B+’ IDRs reflect the following key rating drivers:
Fitch forecasts real GDP growth to accelerate to 5.7% in FY16/17 from an estimated 4.6% in the previous fiscal year.

The medium-term growth outlook remains positive, driven by high levels of infrastructure spending; projects include the ongoing construction of the Karuma and Isimba hydro-electric power plants, which are scheduled for completion in 2017 and 2018 respectively; the development of the oil sector, which will bring first oil in 2020 or 2021; and railway construction, for which feasibility studies are ongoing.

A complementary increase in private sector development would further improve growth potential. Uganda’s economic outlook will be helped by continued sound macroeconomic policymaking.
The Bank of Uganda (BOU) has lowered interest rates by 200bps since March 2016, after tightening monetary policy in the previous year to contain the inflationary pressures of a depreciating exchange rate.

There was an uptick in the May inflation rate, to 5.9% from 5.4% in April, but at 5.1% in July, inflation is close to the BOU’s medium-term inflation target of 5%.
Despite lower policy rates, bank lending rates remain high in Uganda and slowing credit to the private sector presents a downside risk to growth.

The FY16/17 budget, announced on 8 June, envisages a slight widening of the fiscal deficit of 6.8% of GDP, higher than the ‘B’ median of 4.1%, but the deficit is largely driven by investment.

The Ministry of Finance’s medium-term expenditure framework calls for elevated levels of capital spending, which rose to 8% of GDP in FY15/16, from an average of 6% over FY10/11 to FY14/15, and are expected to average just below 10% in the next two years.
However, this will likely be offset by containing current expenditure and increasing tax revenues.
Uganda’s fiscal reforms will continue to be supported by an IMF Policy Support Instrument and economic programme focused on revenue mobilisation and public financial management reforms. Uganda’s general government debt/GDP ratio is rising, but at 34% of GDP it remains well below the ‘B’ median of 52%.
Approximately two-thirds of Uganda’s outstanding public debt is external, but most is at concessional or near-concessional rates.

Uganda has no outstanding placements in international capital markets and external debt servicing is low. Infrastructure development has driven up imports and raised the current account deficit.

Fitch forecasts the current account deficit will narrow slightly in 2016, but at 8.9% of GDP it is higher than the 6.2% ‘B’ median.

However, Uganda’s flexible exchange rate and the BOU’s willingness to tighten monetary policy mitigate external imbalances. Additionally, the BOU has rebuilt reserves over the past year to USD2.9bn, 3.8 months of CXP, and the external liquidity ratio is high.

Rapid economic growth has helped to reduce the incidence of extreme poverty over the past decade, from 53% to 33%, but Uganda’s sovereign rating is constrained by low GDP per capita – less than one-quarter of the ‘B’ median – due in part to high population growth of over 3%.

The ratings also remain constrained by weak governance and a weak business environment, both below the ‘B’ median.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch’s proprietary SRM assigns Uganda a score equivalent to a rating of ‘B’ on the Long-Term FC IDR scale.

Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

– Macro: +1 notch, to reflect Uganda’s robust medium-term growth potential, which is supported by sound economic policy making.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR.

Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the ratings are currently well-balanced.

The main factors that could, individually, or collectively, trigger negative rating action include: – A substantial weakening in public finances and debt sustainability relative to peers.

– A sharp widening of the current account deficit, not matched by an increase in long-term financing, which would increase external vulnerability.

– A weakening of the macroeconomic policy-making framework and a reduction in medium-term growth potential. The main factors that could, individually, or collectively, trigger positive rating action include:

-A narrowing in the current account deficit, as a result of improved export performance, supporting a further build-up in reserves. -Strengthening of public finances, focusing on improved tax revenue generation.

-Regulatory reforms to foster an improved business environment and increased private sector development.

KEY ASSUMPTIONS Fitch assumes that GDP growth will recover to 6% by 2019 supported by rising infrastructure investment and the development of the oil sector.

Oil production will start beyond 2018. We assume political stability is maintained.

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