Moody's downgrades Uganda’s rating to B3 from B2

Global rating agency Moody's has downgraded Uganda's credit rating to B3 from B2, signaling challenges ahead for the East African nation. The downgrade was driven by diminished debt affordability and limited financing options, particularly after a suspension of funding from the World Bank last year. This forced Uganda to rely heavily on domestic borrowing, leading to higher borrowing costs. Economist Christopher Legilisho from Standard Bank Group, speaking from Nairobi, noted that despite the concerning debt-to-GDP ratio of around 49%, Uganda's debt levels are still sustainable. The expectation is that investments in the oil sector will help moderate the debt trajectory over the near to medium term. However, the downgrade will likely result in higher borrowing costs for both the government and the private sector. In response, Uganda is exploring alternative concessional borrowing options and looking at strategies like private placements to raise revenue. Additionally, the government aims to increase tax revenue to GDP from the current 14% to 16% levels, focusing on expanding revenue collection to improve the debt to revenue ratio. The effectiveness of these strategies in mitigating the negative impacts on the country's financial markets and overall economic stability remains to be seen. Shifting to Kenya, the focus turns to the country's finance bill reforms and the Medium-Term Revenue Strategy (MTRS) seeking to increase tax revenue from 16% to 20% of GDP. Legilisho commented on the punitive nature of the finance bill, noting that while necessary to address unsustainable debt levels and fiscal distress labeled by the IMF, the short-term pain from measures like increased taxes on motor vehicles and financial services may pave the way for long-term fiscal sustainability. Despite the immediate challenges for businesses and consumers, the reforms could lead to a better fiscal position for the government, allowing for investments in other sectors of the economy. The key question remains whether the finance bill can balance revenue-raising goals with enhancing the ease of doing business. Legilisho acknowledged the optimistic revenue targets set by the bill, emphasizing the need for a sustainable fiscal position before focusing on business-friendly policies. While the immediate impact may not align with ease of doing business goals, the long-term outcome could pave the way for a more sustainable economic environment. As the East African region navigates these financial challenges, the road ahead will require a delicate balance between fiscal responsibility and economic growth.