Africa: Uganda’s outlook suffers as banking and currency risks rise

By:
Jeremy Weltman
Published on:

The borrower is on shakier ground as its ability to refinance debt is questioned.

ECR Uganda crcocodile-600
The risks lurking behind the Ugandan currency, its sovereign debt and its
banking sector are unsettling investors

Uganda’s risk score has fallen since the third quarter of 2016, Euromoney’s country risk survey indicates.

The latest estimates for the fourth quarter provide an early glimpse into the full quarterly results that are due for release in early January.

Presently it means the sovereign borrower is firmly rooted in the lowest of Euromoney’s five categories, sliding to 111th  out of 189 countries

At that level, Uganda is a high credit risk, with a credit rating that should be lower than B-/B3.

Moody’s lowered its sovereign rating last month, but from B1 to B2 in line with the rating from Standard & Poor's. Fitch is even less cautious, with the B+ rating it has adhered to since 2015.

Uganda is riskier than Zambia and Ecuador in Euromoney’s survey, both of which are rated lower:

ECR_Uganda-600


Vulnerabilities come to the fore

Uganda's economy had been improving earlier in the year once the uncertainty surrounding the elections in February had passed.

Economic activity picked up, fuelled by infrastructure spending, leading the IMF to predict 5% GDP growth for the fiscal year 2016-17 (to end June), compared with 4.8% in 2015-16.

However, inflation is rising again because bad weather has impaired food production, and is expected to rise above the 4.6% year-on-year increase in November, to more than 5% in the first half of next year.

The country has a twin deficit problem that the government is trying to address through budget cuts, but medium-term debt sustainability is still at risk.

The debt burden has increased by nine percentage points of GDP to 33% in the past four years, corruption is rife, and almost a fifth of budget revenue will be consumed by interest payments in a few years’ time, with the debt burden projected to climb above 40% of GDP.

Both inflation and debt servicing capability will worsen, too, thanks to the Uganda shilling depreciating in response to capital outflows since the election of Donald Trump as US president, and in response to vulnerabilities in the financial system.

"There have been jitters in the banking sector," says Joseph Mawejje, a research analyst at EPRC, a Uganda-based consultancy. "The third-largest bank was taken over by the central bank. Sovereign credit ratings have plummeted. This has obviously affected market and investor sentiment owing to the high perceived risk involved."

Liquidity has tightened, making it difficult to access bank financing.

A monetary policy/currency stability score of just 3.3 out of 10 (downgraded since the third quarter) highlights depreciation risk. The bank stability score has similarly fallen, to 4.5.

Although the government continues to talk up Uganda’s prospects, risk experts are taking a more cautious view.

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