August 15, 2014 / 8:05 PM / in 4 years

Fitch Affirms Uganda at 'B'; Outlook Positive

(The following statement was released by the rating agency) LONDON, August 15 (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 IDR at 'B' and Country Ceiling at 'B'. KEY RATING DRIVERS The affirmation reflects the following factors: Uganda has outpaced 'B' category median growth of 4.2% over the past five years, with the economy expanding on average 5.5%, supported by sound macroeconomic policies. Weak credit growth, construction delays at the two large hydropower dams (HPP) during 2013 as well as the escalating conflict in South Sudan pushed growth below expectations to 4.7% in FY14. Fitch expects accelerated infrastructure investment and renewed foreign investment into the oil sector to lift growth back above 6% in FY15. 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 fiscal impact of the construction of the 600MW Karuma and Isimba HPPs, which was expected to fall in FY14 has been moved into FY15, due to delays signing the financing contract. Low levels of infrastructure investment, in comparison with peers and weak implementation capacity have been highlighted among the factors limiting Uganda's long-term growth potential. Therefore, despite the adverse impact on the budget, the decision to move ahead with the HPPs, at an estimated cost of USD2.3bn is positive for Uganda's growth prospects. The budget for FY2014/15, announced in July 2014, saw the projected deficit for FY15 rise to 7.2% of GDP from 5% in FY14, due to the inclusion of the HPPs and the recapitalisation of the Bank of Uganda. Stripping out the impact of the loan (net lending) to fund the project, the projected deficit for FY15 is 3.7% of GDP, down from an equivalent 4.8% of GDP in FY14. Efforts to boost revenue collection remain a challenge. Revenue underperformance contributed towards increased domestic government borrowing, which has contributed towards crowding out the private sector. Government debt has risen steadily, increasing to 35.3% of GDP in FY14 from 24.4% in FY10, due to rising domestic and external borrowing. The majority (86%) of Uganda's debt is on concessional terms. The construction of the HPPs is expected to add an additional USD2.3bn to the external debt stock, pushing debt in excess of 40% of GDP by FY17, still below the 'B' median. The current account deficit is forecast to increase to 11% of GDP in FY15 from 9.7% of GDP in FY14 driven by a sharp increase in capital imports for the building of the two large HPPs. 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 commercial development of Uganda's oil sector, which after long delays is expected to begin in the latter half of 2014, is also expected to add to the import bill. The rating remains constrained by weak governance and business environment, which are both below the 'B' median. Uganda's relationship with donors has been challenging over the past three years due to on-going concerns about high-level corruption and uncertainty around the implementation of the anti-homosexuality bill. RATING SENSITIVITIES The main factors that could lead to an upgrade are: - A continued recovery in economic growth supported by ongoing investment in power and transport infrastructure and a continued track record of prudent economic policy. - Effective implementation of the measures to raise tax revenue to GDP in line with government targets, 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 be negative for the rating, as would an extended slowdown in growth given the fast population growth. KEY ASSUMPTIONS Fitch assumes that growth will recover to 6% 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. Fitch assumes 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 Douglas Renwick Senior Director +44 20 3530 1045 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 09 August 2013, are available at Applicable Criteria and Related Research: Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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