Overview
• Despite slowing economic growth in 2016, Uganda’s GDP growth will
accelerate in 2017-2020, owing to continued infrastructure investments by both the
public and private sectors.
• Uganda’s ongoing fiscal consolidation efforts will improve its fiscal performance in the same period, despite rising debt service costs.
• The outlook is stable. The country’s ratings are good enough for take off.
A Global economic rating firm S&P Global (Standard & Poor’s Financial Services LLC) has rated Uganda’s economic outlook for 2018 as “stable” and praised the current leadership for the impressive stability.
S&P is an American financial services company. It is a division of S&P Global that publishes financial research and analysis on stocks, bonds and commodities. S&P is known for its stock market indices such as the U.S.-based S&P 500.
Uganda is Economically stable
On Dec. 15, 2017, S&P Global Ratings affirmed its ‘B/B’ foreign and local currency
long- and short-term sovereign credit ratings on the Republic of Uganda.
Their recently released report on the economic outlook of the country has affirmed that the economic rating of the country is stable.
The stable outlook reflects expectation that in the next 12 months, Uganda’s fiscal and external metrics will remain broadly in line with projected forecasts.
In the stable outlook, other factors considered included the expectation that the Ugandan government will stay generally on track with its Policy Support Instrument with the International Monetary Fund (IMF) and with its wider relations with official creditors.
GDP is slowing down
The report from S & P Global however points to slowed GDP.
“We could lower our ratings on Uganda if per-capita growth was lower than we
currently forecast or fiscal or external metrics deteriorated significantly.
We could raise the ratings if economic benefits from Uganda’s oil-related and other
infrastructure projects became larger than we currently expect, and if growth,
fiscal, and external metrics improved significantly”. Stated the report
The ratings on Uganda are constrained by low per-capita GDP, and still large, albeit
falling, fiscal deficits. At the same time, the ratings are supported by Uganda’s
still-moderate government debt and improving monetary policy credibility
Government faulted on slow pace of project implementation
Uganda has barely grown on a per-capita basis over the past two years. We think the sluggish growth is linked to onetime factors, such as the effects of drought on agricultural output,and the slower pace of implementation of government capital projects.
“Looking ahead,we estimate that in 2017-2020, Uganda’s real GDP growth will accelerate to 5%-6% per year on average. Wealth levels, measured by GDP per capita, are likely to remain below US$1,000 in the same period”. The report added
Low wealth levels require the government to provide more resources to reduce the shortfalls in basic services and infrastructure, placing already limited fiscal revenues under pressure. Still, in our view, public-sector-led hydro-power projects will boost power supply in the next few years, helping growth prospects.
Inflation will decline
Headline inflation remained contained at 5.5% through 2016 and 2017.
In 2018,We expect inflation will stabilize at this level over our forecast horizon, assuming no sharp fluctuations in local currency.
Owing to the stable inflation since April 2016, the Bank of Uganda (the central bank) has entered an easing cycle to boost private sectorcredit growth and to strengthen economic growth momentum.
Owing to the stable inflation since April 2016, The central bank lowered its key interest rate to 9.5% in October 2017 from 17% in March 2016.
The Ugandan shilling’s depreciation in recent years has triggered an increase in the
banking sector’s foreign currency exposure. It is therefore estimated that across the whole
banking system, foreign currency-denominated loans increased to more than 40% in
2016 from around 25% in 2010, while foreign currency-denominated deposits expanded
to 40% from 30% over the same period.
The heightened foreign currency-denominated exposures may reduce the transmission of monetary policy into the banking sector and the real economy.
The report concludes “Institutional and Economic Profile: Relative political stability continues under the current leadership,while per-capita GDP remains low”
