Tuesday, December 16, 2008

Uganda’s credit rating improves

Uganda now qualifies to access credit from the international capital markets after Standard&Poor improved its rating to B+ with stable economic outlook.

Standard&Poor, an international renowned rating agency, improved Uganda’s sovereign rating based on strong fiscal and external balance sheets following multilateral debt relief, a good fiscal and monetary policy coupled with strong government relations with donors. Uganda was also hailed for its growth prospects of 6 per cent GDP and for the new investment in infrastructure such as the Bujagali hydroelectric power station.

Sovereign rating has been done twice in Uganda this year; the first one was done in May by Fitch Ratings Agency and it gave Uganda a B, which is lower than the B+. It is the first time Uganda has attained B+ rating. Uganda’s rating puts it in the same bracket with Kenya, which attained the same rating.

South Africa has one of the highest ratings in Africa with AAA-, three ranks ahead of Uganda. Sovereign ratings are a crucial assessment tool for investors and businesses seeking information about the financial risks in developed and emerging markets worldwide.

Countries with high sovereign credit ratings stand higher chances of attracting more Foreign Direct Investments as well as enjoying the privileges of borrowing at low cost in the international capital markets and also issuing sovereign bonds in the international credit market. While sovereign credit rating has been going on in Uganda for the last two years, the grades were generally low.

Bank of Uganda (BoU) and Ministry of Finance officials have described Uganda’s B+ rating as a big break through for the national economy because it puts Uganda among the top countries in sub-Saharan Africa with strong economic fundamentals.

Officially releasing the results at a news conference held at Bank of Uganda on December 12, the BoU Executive Director of Operations, Mr Elisa Kasozi, said: “This is a Christmas gift for us; it is pretty good in all aspects of investments”. He added: “Uganda can now easily access credit from the international credit market or alternative credit market at lower cost if it so wishes to borrow internationally.” Mr Kasozi said the result shows that Uganda is paying back its debt well.

They have looked at our balance of payment, fiscal and monetary policies, inflation, prospects for economic growth in the coming years, investments and the financial markets, all of which are sound,” he said. He said in the short-term Uganda is well placed to maintain real GDP growth rates above 6 per cent in spite of the global economic down turn, which is projected to risk back to high single digits by 2011 on the back of good infrastructure investments and oil production.

Standard&Poor’s Ratings Services currently rates 121 sovereign governments and has established transfer and convertibility assessments for each country with a rated sovereign.

Economic reforms have ushered in strong economic growth in sub-Saharan Africa. Many countries are implementing structural reforms to improve the business environment by making their countries attractive to outside investors.

One of such measures is sovereigns’ credit rating, which Uganda has undertaken to be at the same level with its peers. At a single B+, Mr Kasozi says Uganda is now at the same level with include Ghana, Mozambique and Gabon.

However, on the other hand, it has been discovered that Uganda’s continuous dependency on donor funds, some governance challenges and rapid population growth of 3.2 per cent per annum poses risks to policy formulation and implementation.

Mr Kasozi said that going by the national budget of 2008/09, the government has reduced its dependence on donor funds, from 50 per cent in 2005/06 to 30 per cent in the current fiscal year.

Capital spending budgets are rising, financed by debt service savings, traditional multilateral borrowing and Millennium Challenge Corporation money for those countries that qualify. However, this funding is insufficient, and governments are looking at other sources of financing such as issuing international bonds.

Uganda had, at one time, considered issuing some international bonds to raise money for infrastructure funding. However Mr Kasozi said the environment is not right because of global financial turmoil and recession.