Uganda’s external payment position weakens: Moody's - CNBC Africa

Uganda’s external payment position weakens: Moody's

East Africa

by Elayne Wangalwa 0

Moody’s has termed Uganda’s central bank intervention to prop up the shilling as a credit negative for the country’s B1 stable outlook.

Moody’s has termed Uganda’s central bank intervention to prop up the shilling as a credit negative for the country’s B1 stable outlook.

According to the international rating agency’s latest report, the intervention by the Bank of Uganda (BoU), “Reduces reserves available to pay foreign-currency debt and reflects difficulties financing the nation’s large current account deficit.”

The Ugandan shilling is reported to have lost 5.1 per cent since the beginning of the year against the US dollar. Much of the recent depreciation of the currency has been fuelled by a strengthening dollar and increased demand for the greenback by the corporate sector as they release their results.

“Besides the US dollar’s recent strengthening against most currencies, Uganda’s exchange-rate volatility reflects growing external imbalances related to accelerated investment in infrastructure and mining,” author and analyst at Moody’s, Mathias Angonin noted.

Nonetheless, Moody’s recommends that the country should consider financing its large widening current account deficit that is estimated at 9.0 per cent for 2015 and stood at 5.3 per cent in 2014, a 69.8 per cent increase. The ratings agency also notes an accelerated depreciation of the shilling will have credit negative effects for the government’s debt servicing costs.

“The current account deficit is only partially balanced by foreign direct investments, which we expect will reach 4.6 per cent of GDP this year, leaving a large external borrowing requirement,” Angonin said.

According to a Ugandan local daily, BoU has sold about 226.32 million US dollars since the beginning of the year for the umpteenth time to smooth excessive volatility. Moody’s notes this excessive intervention may be futile ‘against a backdrop of intractable external imbalances and market sentiment and merely weakens external buffers’.

“Although how much of its reserves the Bank of Uganda used in its market intervention is unknown, efforts to stabilise the currency will reduce its foreign exchange reserves and accelerate the erosion in Uganda’ external position. The Bank of Uganda benefits from a strong but weakening reserve buffer,” Angonin explained.

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