How Moody’s Ratings will affect Uganda

Summary:

• Moody’s Ratings downgraded Uganda’s government issuer ratings from B2 to B3 due to concerns over its diminishing debt affordability and fiscal challenges stemming from expensive borrowing sources.

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In a new development that holds significant implications for investors in Treasury Bonds, Moody’s Ratings has revised Uganda’s government issuer ratings downward from B2 to B3.

This adjustment reflects concerns over Uganda’s diminishing debt affordability and a constrained fiscal landscape, primarily due to a reliance on expensive domestic and non-concessional external borrowing sources.

For treasury bond investors, this recalibration of Uganda’s creditworthiness is indicative of an elevated risk profile of the country especially as we enter into the upcoming fiscal year.

The cost of borrowing for the Ugandan government is likely to increase, translating into potentially higher yields for treasury bonds. However, this comes with a risk of debt servicing difficulties in the long run.

The reasons behind the downgrade are due to the increased borrowing costs due to a higher reliance on domestic debt (both the Treasury Bonds Debt and Local Bank commercial Borrowings), which constitutes a substantial portion of public debt and interest payments.

Fiscal governance is further challenged by the government’s tendency towards elevated supplementary budgets and reliance on provisional central bank financing especially as seen in the last 3 months when the Government did a Private Issuance to raise over 1 Trillion UGX from institutional Investors and the recent abrupt increase of the FY 2024/2025 fiscal budget from the earlier 54 Trillion UGX Budget to the current UGX 72 Tillion UGX Budget with UGX 28 Trillion of it estimated to be Domestic Borrowing.

In essence, the B3 credit rating downgrade underscores Uganda’s deteriorating debt affordability, financing constraints, and external vulnerability.

Mr Kakande is a financial analyst based in Bermuda

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