Fitch Ratings, the international rating agency, has today assigned the Republic of Uganda Long-term foreign and local currency ratings of 'B', putting it on a par with Benin, Mozambique, Papua New Guinea and Suriname. At the same time, the agency has assigned a Short-term foreign currency rating and Country Ceiling of 'B'. All the Long-term rating Outlooks are Stable.
"These ratings seek to balance a long track record of relative political and economic stability against more deep-seated policy challenges, including weak public finances and high levels of external indebtedness," says Paul Rawkins, Senior Director in Fitch's Sovereign team.
Fitch says any assessment of Uganda's sovereign creditworthiness has to take account of the country's tumultuous political past that had set economic development back many decades. Yoweri Museveni, the current president, seized power in 1986 and set Uganda on a course of economic liberalisation. Today, the Ugandan authorities can point to a long period of macroeconomic stability characterised by strong growth and low inflation, a small, but well-regulated financial sector, a flexible exchange rate and an open capital account. Market-friendly economic policies have attracted modest, but steady, inflows of foreign direct investment and one of the highest levels of aid per capita in Sub Saharan Africa.
These strengths have to be viewed in the broader context of more deep-seated structural rating constraints. In a country where subsistence agriculture is still the norm, vulnerability to shocks is high and income per head remains low at less USD300 at market exchange rates. Moreover, even by Sub Saharan African standards, public finances are weak while aid dependence has spawned policy challenges that often appear to conflict with longer term development goals.
Grant aid now accounts for 10% of GDP and 40% of government expenditure; without it, Uganda would sustain twin fiscal and current account deficits of 10-12% of GDP, unless it scales back development expenditure dramatically. Relative to other Fitch-rated Sub Saharan African sovereigns, these deficits are worse than Ghana's, but not quite on a par with Mozambique or Mali. However, Fitch says Uganda's domestic revenue base is seriously deficient, amounting to barely 12% of GDP (compared to 23% in Ghana), while central government debt/revenue (including grants) is well over 300%.
"Donor inflows have been both a blessing and a curse,' says Mr. Rawkins. "They have enabled Uganda to address a host of human development shortcomings; on the other hand they have bred a culture of aid dependence, which has complicated macroeconomic policy management." While it is arguable that large aid inflows have slowed the depreciation of the exchange rate, they have certainly necessitated expensive sterilisation operations that, in turn, have driven up the stock of domestic public debt and limited the private sector's access to credit. Fitch believes this chain of events goes some way towards explaining why Uganda has found it difficult to make the structural leap to private sector and export-led growth of 7-8% that the authorities would like to see.
Some political uncertainty cannot be ruled out ahead of presidential and parliamentary elections in 2006, as Uganda contemplates constitutional change that would allow president Museveni to stand for a third term. While the chances of this amendment succeeding are high, Fitch stresses the importance of putting in place a more robust institutional structure that will ultimately ensure a smooth transition to a more plural polity. Progress towards resolving a longstanding armed insurgency in the north also remains slow, stunting growth and development in one of the most productive areas of the country.
Fitch notes that aid donors remain well-disposed to Uganda and that their continuing support will be key to maintaining sovereign creditworthiness, in the light of an annual external financing requirement of more than USD1 billion. However, the agency says that donors will need to be mindful of external debt sustainability when dispensing further aid. Uganda was the first country to qualify for external debt relief under the Heavily Indebted Poor Countries initiative, yet its external solvency ratios show little sign of converging to 'B' medians in the way that Ghana's have for example, and arrears continue to accrue to some non-Paris Club creditors. Nevertheless, Fitch draws some comfort from a low debt service ratio and a comfortable international liquidity ratio in excess of 400%.