Uganda’s Credit Rating Cut by S&P as Budget Gap Set to Widen

Standard & Poor’s cut Uganda’s credit rating on concern that the East African nation’s budget deficit will widen as spending increases and after donors withdrew financial support in 2012 because of corruption.

The country’s current-account shortfall will probably also remain “large” and gross external financing requirements will rise, the New York-based company said in a statement today.

S&P lowered its long-term rating to B, five levels below investment grade and on a par with countries including Ecuador, Albania and Ghana, from B+. The outlook remains stable, reflecting the benefits of political stability, investment in infrastructure and “solid” medium-term growth prospects that will offset the risks from fiscal and external imbalances over the next two years, S&P said.

Donors including the World Bank, the U.K., Ireland, and Norway, which provide about a quarter of Uganda’s annual budget, suspended their support in 2012 after government officials were accused of stealing aid money. The country last year agreed to refund 38.3 billion shillings ($15.3 million) to donors.

Uganda’s Finance Ministry said S&P’s announcement failed to reflect efforts to widen the tax base, which is helping reduce reliance on donor funding to support the budget. The nation is funding at least 80 percent of its budget domestically, spokesman Jim Mugunga said in a phone interview from the capital, Kampala.

‘Positive Indicators’

“The position given is not a reflection of the improvements” made by the government, he said. “The positive indicators on the ground show that we are locally depending on our revenue.”

The central bank said the rating downgrade was “incongruous” with improvements in the Ugandan economy over the past 18 months.

Uganda’s economy is forecast to grow more than 6 percent in the current fiscal year through June, while inflation is “close” to the central bank’s medium-term policy target of 5 percent, Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said in an e-mailed statement. The country posted balance of payments surpluses over the past two years and while public debt is rising, it remains within internationally recognized thresholds, he said.

“This lowering of the credit rating is not warranted by an objective analysis of the Ugandan economy,” Tumusiime-Mutebile said.

Currency Gains

The Ugandan shilling weakened as much as 0.7 percent today, before closing less than 0.1 percent stronger at 2,496.25 per dollar in Kampala. The currency has gained 1.5 percent this year, the best performer among 24 African currencies monitored by Bloomberg after the Somali shilling.

“The Ugandan shilling will get some pressure and any new debt market issues will have to be priced higher because of that lower rating,” Vimal Parmar, head of sub-Saharan Africa research at Burbidge Capital in Nairobi, said in an interview.

Economic growth in Uganda, Africa’s biggest coffee exporter, is forecast to accelerate to 6.5 percent this year, from an estimated 5.6 percent in 2013 and 2.8 percent a year earlier, according to the International Monetary Fund.

Uganda is expected to begin producing oil in 2018, according to the government, after London-based Tullow Oil Plc, discovered crude in the country in 2006. Tullow, China National Offshore Oil Corp. and France’s Total SA are developing finds estimated at 3.5 billion barrels.

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