Tuesday, November 29, 2016

WHAT THE MOODY’S DOWNGRADE MEANS FOR UGANDA

A few day’s ago credit rating agency Moody’s downgraded long term issuer rating of the Uganda government to B2 from B1, which means the country has been judged more risk to lend to and will be more expensive for us to borrow on the open market.

The downgrade came as a result of our increased borrowing which has worsened our debt to GDP and revenue levels.

However the agency said upgraded the country’s outlook to stable from negative based on continued economic growth, improved financial management and the shift towards development from recurrent expenditure.

To understand this use yourself as the analogy. In determining whether to lend to you or not a bank first looks at your income. In principle the higher the income the more you can borrow. For countries they consider GDP – the economic output, the higher this number is the more you can borrow. Uganda’s GDP stands at about $20b (sh70trillion).

But the bank would go further to determine how much of your income is actually available for debt repayments. They try not to take more than half of your take home pay. If you have little or no debt the more they can lend you. So for Uganda because we have been on a borrowing spree lately, and mostly of non-concessional loans, our ability to borrow more is less.

On an individual level the more money is going towards repaying debt the more at risk you are too any shocks in your personal life – accidents, medical emergencies or other unforeseen expenses. 

"Similarly as a country we have left ourselves little room for manoeuvre in case of any nasty surprises like depreciating shilling or lower than anticipated growth...

So a banker looking at your personal statement would worry about you more, the more indebted you are. Same as a country.

It helps of course if year on year your income is growing. This means less of your money will goes towards debt repayment, not only allowing you more money for you to spend yourself but also making you a prime candidate for more loans in future. Moody’s notes that our economy is growing slower than in the past --  about 4.3 percent on average 2012-2014 compared to 7 percent 2009-2011. 
As if that is not enough we are not collecting enough revenue – 13.4 percent compared to our peers who collect about 23 percent of GDP.

Also your banker would worry if you are not in formal employment, where incomes are predictable. 

Moody raises this concern in questioning the soundness of Uganda’s institutional strength, noting that the greater institutional strength a country has the more likely it is to take on more debt since the mechanism for raising money to repay the loans are in place.

However the banker maybe more optimistic of you long term, if your debt has not been frittered on high living and frivolous expenditure but on building up a viable business or your asset base. Moody’s says just as much of Uganda noting that the shift towards infrastructure development and away from recurrent expenditure – salaries, allowances and official perks, may lead to greater economic growth and hence improve our credit worthiness.

So one had our ability is borrow is reducing but the prospects for our economic growth are improving.

Uganda is not unlike the child in class who though is stuck nearer the bottom of the class than the top, is promising if only he could focus more in class and exercise more diligence in his homework. 

Under the current circumstances for the kid to make it to University a lot of things outside the kid’s control have to line up -- the weather, the seating arrangement and the degree of difficulty of the exam.

This is as opposed to the brightest kid in the class for whom none of those factors will matter on the day. He will thunder the exams or pass at worst. The possibility of failure is slim to none.

"Moody’s thinks that if the infrastructure developments generates economic growth and the country begins oil production an upgrade in the future is likely....

They also warn that further dramatic depreciation of the shilling could make debt repayments onerous -- already 16 percent of the budget, and affect economic growth.

Debt is a double edged sword it can be used to boost consumption -- bad debt or for investment -- good debt.

But an investment is only that when it shows a return if not it can become a white elephant.

But it can also turn into a bad investment if you pay too much for it, meaning for one that you will be servicing the debt longer than necessary tying down crucial funds which could have been deployed elsewhere.

It's clear our development momentum has not attained irreversibility. Just because we have access to more funds should not mean we throw discipline out the window.


We are still at the bottom of the class. We need to focus and work harder than the brighter students if we are to keep up or even catch up.

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