Uganda: Fitch Ratings Maintains Uganda’s ‘B+’ Rating with Negative Outlook

Treasury notes Fitchs BB rating for South Africa
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Fitch Ratings has reaffirmed Uganda’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a negative outlook, driven by expectations of a 5.3% economic growth in 2023.

The negative outlook stems from Uganda’s vulnerabilities, including its weak external liquidity position and challenges accessing external concessional financing and grants due to concerns related to democracy, human rights, and corruption. The recent passage of the Anti-Homosexuality Act (AHA) in 2023 has amplified these concerns.

Additionally, high government interest payments and growing external debt service obligations are increasing financing and liquidity pressures.

Fitch acknowledges Uganda’s ‘B+’ rating reflects a promising medium-term growth outlook, an IMF program as a policy anchor, and relative macroeconomic stability supported by an independent central bank.

However, difficulties in securing concessional external financing have risen. Still, the reduction of the primary budget balance due to spending restraints offers prospects for government debt reduction.

Challenges for Uganda include low GDP per capita, weak governance indicators, a significant current account deficit, and a limited revenue base, restricting the government’s capacity to respond to economic shocks.

Following the AHA’s enactment, the World Bank announced a pause in approving new funding proposals for Uganda until non-discrimination principles are met.

Fitch expects that the impact of the AHA on funding in the fiscal year ending June 2024 seems manageable since most World Bank financing included in the government budget had already received board approval.

The AHA’s fate could hinge on the constitutional court’s decision or international pressure leading to a policy change. Donors might continue their projects in Uganda without policy alterations.

Despite risks, Fitch’s baseline assumption is that the AHA itself won’t significantly worsen financing access.

Fitch Ratings projects government external debt service at 1.9% of GDP in 2024 and 2025. The government plans to raise external financing to 2.6% of GDP in 2024 from 2.0% in 2023.

The IMF will disburse 0.6% of GDP in 2024, and authorities are negotiating a loan of up to USD400 million (0.8% of GDP) with commercial banks.

If commercial loan rates exceed government projections, Uganda may rely more on domestic borrowing. Budget and financing plan adjustments may be needed for 2025, coinciding with the end of the current IMF program (June 2024).

High interest payments are a vulnerability in Uganda’s public finances, representing 20.9% of revenue in 2023, with debt at 331% of revenue.

Fitch anticipates the general government budget deficit will decrease from 5.3% of GDP in 2023 to 3.8% in 2024 and 3.5% in 2025 due to improved revenue collection and expenditure restraint.

However, underperformance in capital spending, driven by financing limitations, may offset overspending in interest payments and recurrent spending.

Fitch assumes a slower revenue/GDP increase than the government’s targets, which could lead to spending cuts and temporary project freezes if grants and revenue fall short.

Analysts estimate Uganda’s general government debt declined to 47.8% of GDP by the end of 2023, down from 48.5% in 20. Fitch forecasts real GDP growth at 5.5% in 2023, driven by agriculture and oil sector investments.

Expectations for real GDP growth average 6.2% in 2024-2025, primarily due to investments in the hydrocarbon sector, although oil production’s direct impact on GDP and government revenues is forecasted for 2026.

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