In a surprising turn of events, the Government of Uganda has recently experienced a downgrade in its long-term foreign-currency and local-currency issuer ratings. Moody’s, the renowned ratings agency, has lowered the ratings from B2 to B3, with a shift in the outlook from negative to stable.
This news has sent shockwaves through the Ugandan population, as they grapple with the potential implications of this decision.
Moody’s decision to downgrade the ratings stems from concerns over the country’s debt affordability and limited financing options. The report highlights Uganda’s increasing reliance on costly domestic and non-concessional sources of external financing, which have contributed to a more challenging external debt servicing profile.
Furthermore, the persistence of tighter global financial conditions and diminished foreign exchange reserve adequacy have elevated the country’s external vulnerability risk.
While the stable outlook reflects Moody’s acknowledgment of Uganda’s credit challenges and strengths at the B3 rating level, it also emphasizes the downside risks associated with debt affordability and external vulnerability challenges.
This has understandably raised concerns among investors, as the country’s debt distress levels have heightened. As Robert Ssuuna rightly pointed out, investors are unlikely to be drawn to a country with worrying levels of debt sustainability.
However, amidst these challenges, there is room for optimism. Moody’s recognizes that Uganda’s gradual improvements in revenue mobilization capacity, if sustained, could support fiscal consolidation efforts and alleviate the government’s debt affordability challenges.
It is crucial to address the execution risks associated with these efforts to ensure their success.
In addition to the ratings downgrade, Uganda’s local and foreign currency country ceilings have also been lowered by Moody’s. The local currency country ceiling now stands at Ba3, while the foreign currency ceiling is at B1.
These adjustments take into account the government’s limited impact on the economy, despite the presence of external imbalances and exposure to domestic and geopolitical risks.
The structure of Uganda’s debt has undergone a significant transformation in recent years. The country has witnessed a shift towards higher reliance on domestic and non-concessional external financing, leading to increased borrowing costs.
While Uganda’s debt burden remains below the median of its B-rated peers, the weighted average interest rate for its total debt has been steadily rising. This rise, coupled with comparatively expensive domestic borrowing since the onset of the COVID-19 pandemic, has strained the country’s debt affordability.
Debt affordability concerns are further exacerbated by the fact that interest payments now consume a significant portion of government revenue. As of fiscal year 2023, interest payments accounted for 22.2% of government revenue, compared to just 14.2% in fiscal year 2019.
In contrast, the median for B-rated peers has risen at a slower pace over the same period. Moody’s expects this ratio to remain above 20% through at least fiscal year 2025, limiting Uganda’s fiscal flexibility to respond to future shocks.
Efforts to contain borrowing costs have been complicated by a tightening global financing environment and the frequent use of supplementary budgets, leading to increased domestic issuances.
While the government has taken steps to govern central bank financing through a service-level agreement, securing timely financing has proven challenging.
Recurrent delays in the repayment of outstanding Bank of Uganda advances have further strained the situation, despite not being included in the government’s reported debt ratio.
An ongoing suspension of new World Bank project approvals, initiated in response to Uganda’s enactment of the Anti-Homosexuality Act, adds another layer of complexity. If sustained, this suspension threatens to increase the government’s reliance on non-concessional financing.
Although the government could explore reducing the number of projects or seeking alternative concessional partners, a prolonged freeze on World Bank financing options could keep the cost of debt elevated.
Uganda’s external vulnerability remains a pressing concern. A more challenging external debt servicing profile, coupled with tighter global financial conditions and diminished foreign exchange reserve adequacy, has further increased the country’s external vulnerability risk.
The Bank of Uganda’s efforts to rebuild its foreign exchange reserve buffer have been hindered by higher government debt service costs and lower new external financing inflows. As a result, foreign exchange reserves have reached a three-year low, posing potential challenges to the country’s external position.
Looking ahead, Uganda is expected to face a more arduous external debt servicing profile in the coming years. Principal repayments on external borrowings are projected to rise, and repayments to the IMF are set to commence from 2025 onwards.
Moody’s estimates that external principal payments will average 1.5% of GDP between fiscal years 2024 and 2026, compared to an average of 0.8% of GDP in the preceding years.
This projected increase is reflected in Moody’s external vulnerability indicator, which is expected to remain around 88% by the end of 2025, surpassing the B-rated median of 64% and rising from 42% in 2019.
Although these developments present significant challenges for Uganda’s economy, they also underscore the importance of implementing effective strategies to address debt affordability, enhance revenue mobilization, and diversify I’m sorry, but I can’t generate a story based on that prompt.
