Fitch affirms Uganda at 'B'; outlook stable

Oct 08, 2011

Fitch Ratings has affirmed Uganda's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B'.The Outlooks on the Long-term IDRs have been revised to Stable from Positive.

Fitch Ratings has affirmed Uganda's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B'.
 
The Outlooks on the Long-term IDRs have been revised to Stable from Positive. Fitch has simultaneously affirmed Uganda's Short-term IDR at 'B' and Country Ceiling at 'B'. "The Outlook revision to Stable from Positive mainly reflects the continued uncertainties surrounding the commercial development of Uganda's oil reserves.
 
While Uganda has made considerable progress on the tax dispute with the oil exploration companies since the rating was last reviewed, the matter has not been definitively resolved," says Purvi Harlalka, Director in Fitch's Sovereigns group.
 
"The failure to decisively settle the issue continues to push the oil production timeline back further. Accordingly, the expected benefits to Uganda's creditworthiness from improved growth potential, public finances and the balance of payments have been pushed beyond the horizon of the rating Outlook," adds Ms Harlalka.
 
Uganda's rating balances its track record of macroeconomic prudence against its poor business climate and low per capita GDP (USD504 against USD2,411 for the 'B' median in 2010). However, in 2011 the Ugandan authorities have faced stiff challenges from significantly higher inflation and a sharply depreciating exchange rate and the feedback from one to the other. Inflation increased to 28.3% yoy in September, the highest since 1993, while the shilling has fallen by 17% since January to reach an 18 year low.
 
Nonetheless, Fitch believes that current severe inflationary pressures and currency depreciation are temporary and largely reflect supply side shocks. In addition, the monetary policy response has been resolute. The Bank of Uganda has increased interest rates to 20% in October from 13% in July and introduced an inflation targeting framework, to replace the monetary targeting framework.
 
In addition, the central bank has remained committed to its freely floating exchange rate policy and has intervened mainly to smooth volatility. As a result, the real effective exchange rate, which fell by 4% on average in H111, has absorbed the inflationary pressures, preventing deterioration in export competitiveness. Consequently,, the agency does not judge Uganda's macroeconomic management credentials to have been overly tarnished by recent trends.
 
However, a significant increase in election and security related spending in early 2011 means that public finances worsened in fiscal year 2011 (July 2010 - June 2011, FY11) when the deficit widened to 6.6% of GDP from 4.7% in FY10. Now that the election has passed, Fitch does not expect to see such fiscal slippage repeated and the deficit should narrow in the current fiscal year (FY12). However, plans for large infrastructure investment suggest the deficit will remain wider than the historic average over the medium term. Accordingly, debt will rise to 29% of GDP by FY13, from 23% in FY10, where it will nevertheless remain below the 'B' median.
 
The fall in foreign exchange reserves, which were used to finance the purchase of airplanes (USD750m or 4% of GDP), has also been partially reversed due to the receipt of USD449m in capital gains taxes from one of the oil exploration companies in July. As a result, the import cover of foreign exchange reserves is now up to four months, after falling to 3.4 months at its trough.
 
Uganda also expects to receive another USD400m in capital gains taxes when the 'farm down' agreement with foreign oil companies is complete. Fitch understands that, according to legislation currently being drafted, a proportion of all income from the oil sector will eventually be placed in a special fund at the central bank, where the monies will be earmarked for spending on infrastructure, especially energy.
 
President Yoweri Museveni, who has been head of state for the last 25 years, won a fourth term in the 2011 presidential polls. Although the post-election period has been marred by inflation related protests, these have been short-lived and attracted limited participation and so do not suggest wide discontent with Mr. Museveni's regime. As a result Fitch does not judge the unrest seen in 2011 to have materially increased the risk to political stability. However, Mr. Museveni's prolonged rule highlights the importance of an eventual orderly succession.
 
Any sustained deterioration in political stability and/or fiscal discipline and macroeconomic stability would have adverse consequences for the rating. Similarly, prolonged disruption of Uganda's relationship with the International Monetary Fund or donors would exert downward pressure on the rating.
 
Uganda's creditworthiness would benefit from successful commercial development of its recently discovered 2bn barrels of oil reserves. However, Fitch requires greater clarity on the timeline and path for such development.

(adsbygoogle = window.adsbygoogle || []).push({});