Uganda: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Public investment and private consumption continue to drive growth
Infrastructure projects, in particular in transport and energy (hydroelectric projects associated with the Karuma and Isimba dams), as well as those relating to the opening of oil and gas fields will bolster the construction sector. Increased social spending, with elections upcoming in February 2016, will help boost household demand. Public sector salaries are also likely to continue rising, again boosting consumption. The services sector (retail, financial services, transport), which accounts for around 50% of GDP, will remain very dynamic. Private sector investment could however be held back by high interest rates.
A further drop in oil prices could also call into question the investment decisions of oil and gas companies concerning the extraction of the Lake Albert reserves discovered in 2006. Growth forecasts would have to be revised downwards, bearing in mind that the relative diversification of the economic structure would enable the country to maintain a rate of growth of around 4.5% to 5%.The positive impact of lower imported oil prices on inflation in 2015 was more than offset by the repercussions of the depreciation of the currency. Growing demand, combined with the expected rise in food prices and the stabilization of oil prices, could renew upwards pressure on prices in 2016. Inflation is however likely to remain under control given the restrictive monetary policy: the central bank raised its reference rate in October 2015, for the fifth time this year, to 17%.
The public account deficit set to worsen and current account balance to stabilize
Expenditure associated with the construction of hydroelectric facilities, initially included in the 2014-2015 budget, has been carried over because of the delay in setting up the funding. These investments, as well as the increases in wages and social spending scheduled during the July 2015-June 2016 fiscal year, will only be partly covered by tax receipts. The measures taken to extend the tax base and improve collection are not going to have any immediate impact on public revenues. The budget deficit is therefore likely to increase.
There is a danger that exports could suffer because of the continuing political instability in South Sudan, a major trading partner for Uganda. On top of this, the price of coffee (15% of export earnings in 2014) is unlikely to increase significantly in the short term. Imports however will remain at a high level, in particular energy and foodstuffs. Until its own oil production starts (operational launch is forecast for 2018 at the earliest), Uganda is totally dependent on external sources for its oil needs. The continuation of the relatively low prices for crude should help alleviate the growth in import costs. The country’s growing needs in terms of capital goods and consumer goods cannot however be satisfied by its own national industries. In addition, the downwards pressures on the Ugandan shilling, which are set to persist, even if less marked than in 2015 (the currency lost 25% of its value between January and September 2015), will make imports more expensive.
The overall stable political and social situation remains fragile with persistent failures in governance
There are continuing tensions around the borders with the DRC and South Sudan. Y. Museveni, in power for almost 30 years, is expected to be re-elected for a fifth term of office in February 2016. His party (NRM) is likely to retain its parliamentary majority, despite internal dissent. The coalition (Democratic Alliance) of nine opposition parties has a degree of support among the young and urban populations, but has failed to select a joint candidate. Although it does not represent a realistic threat to the presidential party, it has connected with the growing discontent within the population concerning the slowness of improvements in living standards and in implementing reforms, a potential source of a degree of instability.
The country’s performances in terms of governance remain mediocre. Despite the measures taken to control corruption, Uganda’s position in the World Bank’s rankings is constantly getting worse (184th out of 215 countries in 2013 compared with 171st in 2011).