Fitch Affirms Uganda at 'B'; Outlook Positive

Fri Feb 21, 2014 12:07am EST

LONDON, February 21 (Fitch) Fitch Ratings has affirmed Uganda's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B' with Positive Outlooks. Fitch has also affirmed Uganda's Short-term rating at 'B' and Country Ceiling at 'B'. KEY RATING DRIVERS The affirmation reflects the following factors: Prudent macroeconomic policies combined with a renewed focus on infrastructure investment have enabled Uganda to outpace 'B' peer growth of 4.2% over the past five years, with the economy expanding on average 5.6%. Fitch expects accelerated infrastructure investment and renewed foreign investment into the oil sector to lift growth to 7% by 2015. Despite impressive growth, per capita income remains low - less than one-third of the 'B' median - due in part to high population growth of 3.2%. The decision to move ahead on the long-delayed 600MW Karuma and Isimba hydropower dams, costing USD2.3bn, is positive for long-term growth potential. Weak infrastructure investment, even compared with regional peers, is one of the factors curtailing the country's growth potential. In a further sign of infrastructure investment gaining momentum, the commercialisation of oil production has moved one step closer with the signing of a memorandum of understanding between oil companies and the government. Fitch highlights the risk to government finances if project and public financial management is weak. The development of the hydropower projects has resulted in an upward revision of the budget deficit for FY13/14 to 7.1% of GDP from 5.3%. The underlying balance strips out the impact of the new loan (net lending), which should ultimately be repaid from the project's cash flow, providing a more accurate assessment of the government's fiscal stance with the deficit increasing slightly to 3.6% of GDP in FY14 from 3.4% of GDP in FY13. Total government debt as a percentage of GDP has risen steadily since Uganda received debt relief in 2006, rising to 33.9% in FY13 from 21%, but remains well below the 'B' median of 39.4%. Debt issuance to fund infrastructure investment is expected to lead to debt as a percentage of GDP rising to 35.1% in FY14. Government deposits are high at 20% of GDP, due to past issuance of debt for monetary policy purposes. Consequently, net debt as a percentage of GDP is a modest 14.1%. The current account deficit is forecast to increase to 12.9% of GDP in 2014, up from 10.4% in 2013 driven by a sharp increase in capital imports for the two large hydropower dams. The import-intensive phase of these projects is expected to last for two years, with about 75% of the USD2.3bn value of the project being imported. The rating remains constrained by weak governance and a weak business environment, both below the 'B' median. RATING SENSITIVITIES The main factors that could lead to an upgrade are: - A continued recovery in economic growth supported by further investment in infrastructure and a continued track record of prudent economic policy. - An increase in the ratio of government tax revenue to GDP in FY2013/14 combined with further reforms to improve the tax take. The current rating Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a downgrade. However, any sustained deterioration in fiscal discipline, macroeconomic stability and/or political stability would have adverse consequences for the rating, as would an extended slowdown in growth given the fast population growth. KEY ASSUMPTIONS Fitch assumes that growth will recover to 7% by 2015 supported by rising infrastructure investment and the development of the oil sector. Oil production will start outside of the forecast horizon. No drought is assumed. Fitch assumes that the pace of structural reform will continue, in addition to the authorities' commitment to prudent economic policies. Political stability is maintained. Contact: Primary Analyst Carmen Altenkirch Director +44 20 3530 1511 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Paul Gamble Director +44 20 3530 1623 Committee Chairperson Douglas Renwick Senior Director +44 20 3530 1045 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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