There has been an unusual buzz in economic and financial circles following an announcement by the international ratings agency Fitch that it had revised Uganda's credit rating outlook from 'stable' to 'positive' and affirmed the long-term foreign and local currency Issuer Default Ratings (IDR) and short-term foreign currency IDR at 'B.'
Fitch, the third-largest rating agency in the world, based its decision on the improved power supply, a "prudent" fiscal policy framework and the commitment by the government to a flexible exchange rate and an open capital account, which it said had enabled the economy to adjust to disruptions more quickly than its peers.
According to analysts, Ugandans have a reason to be optimistic about the future following the development. Credit ratings provide an opinion on the relative ability of an entity to meet its financial commitments, such as loans, interest, preferred dividends and insurance claims. Worldwide, credit ratings are used by investors as indications of the credit and investment worthiness of a country.
Locally, commercial banks and other lenders use a similar method to assess the 'credit worthiness' of potential borrowers - their ability to pay back their loans with interest in the stipulated time frame. The better the credit rating, the easier it is to get the full amount of the money they ask for and the better the terms at which they get it in terms of a lower interest rate.
Kenneth Kitariko, the CEO of African Alliance, an international investment and financial advisory company, said this was an important development as a positive credit rating reduces the cost of borrowing with decreasing risk of default. "In theory, cheaper financing should increase investment and drive economic growth. In addition, sentiment should also improve further re-enforcing the cycle," he said.
Indeed, Prof. Tumusiime-Mutebile, the Central Bank governor, was equally optimistic, describing the decision by Fitch to revise Uganda's credit rating outlook upwards as "a vote of confidence" in the quality of Uganda's macroeconomic management and the prospects for our economy.
He agreed with the ratings company in regard to the recognition of the "essential link" between the credible macroeconomic management in Uganda and economic growth. "It is only because we have been able to control inflation and maintain fiscal discipline that Uganda has a long track record of robust economic growth," said Mutebile.
The Fitch rating for Uganda is a notch lower than that of its rival Standard & Poor's (S&P) - at B+ - the same rate as Kenya, though Kenya is also at the same level on the Fitch.
Rwanda's rate is also at B on the Fitch and at B+ on the S&P. At BBB on both ratings, South Africa is the continent's highest-rated economy.
In a press release, Fitch said the revision of Uganda's outlook to 'positive' reflected several key rating drivers including the robust growth above African peers - which has helped to lift two thirds of the population out of abject poverty.
It has also been buoyed by strong export performance, with exports rising from 10% of GDP in 2002 to 22% in 2012 - supported by rising volumes and diversification into non-traditional exports.
Also, the completion of the 250 MW Bujagali Power dam was a significant boost to the economy, helping to lift growth to 5.1% in 2012 by improving power supply. Furthermore, a commitment to a flexible exchange rate and an open capital account has enabled the economy to adjust to disruptions more quickly than its peers.
But Fitch said medium prospects are based on the renewed commitment by the government to address weak revenue mobilisation through tax reforms, as revenue as a percentage of GDP has remained little changed at 13% of GDP for much of the past decade.
Uganda's 'B' rating on Issuer Default Ratings (IDRs) - the relative vulnerability to default on financial obligations - reflect the fact that "structural weaknesses" are key constraint on the ratings, including low GDP per capita (of $633), human development levels, and "a weak business environment."
It said the rating also reflects "poor governance standards" as highlighted by a corruption scandal in late 2012 which saw several donors cut direct budget support to the country.
Kitariko appeared to agree with this assessment, suggesting that in theory a corporate domiciled in a country can't have a better credit rating than the government. In addition, the credit rating also provides what he described as "a bell-weather of the government's fiscal position." "Countries with weaker fiscal positions could increase corporate tax take etc, which could potentially be bad news for investors," he added.
In general terms however, Kitariko also appeared to concur with Mutebile that the future was bright for Uganda's economy. He suggested that Uganda could ride the wave of the positive rating by ensuring that borrowing is structured to minimise costs. Additionally, the government should encourage investment on the back of lower financing costs.
Going forward, Fitch said they expect growth to rise above 7% by 2015, boosted by a reduction in infrastructure bottlenecks and the development of the oil sector. It was positive that a further upgrade for Uganda was feasible going forward as their sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a rating downgrade.
"However, any sustained deterioration in fiscal discipline, macroeconomic stability and/or political stability would have adverse consequences for the rating, as would an extended slowdown in growth given the fast population growth," it warned.
Credit Ratings for selected ountries:
Country Fitch Standard & Poor's
Uganda B B+
Kenya B+ B+
Rwanda B B+
Ghana B+ B
South Africa BBB BBB
UAS AAA AA+