Friday 10 November 2017

The 12 indicators that suggest Uganda's Public Debt risks are elevated

In recent times, Bank of Uganda has been cautious about the growth in public debt - with some officials suggesting that the trend is leveraged by hope for oil revenues after 2020. The December 2016 IMF Debt Sustainability Analysis (DSA) indicates that Uganda is still assessed as to be of low debt distress but the vulnerabilities have intensified. The risks are related to the amplified non-concessional borrowing, weakness in absorption of project loans and low export performance. The debt service indicator was assessed to be above the set threshold under the standardised stress tests while the present value of the debt to exports ratio depicted a breach of the threshold between 2019 and 2021 under the extreme stress scenario of an export shock. The widening fiscal deficit is attributed to mainly low revenue performance and infrastructure oriented expenditure.
Against that backdrop, i highlight 12 indicators that suggest Uganda's debt trajectory requires an in-depth analysis.

1. Disbursed and undisbursed as at end June stood at 52% of GDP. Disbursed is now at 34.5% of GDP. On that front, fiscal deficit will remain at an average of 6% of GDP per annum, suggesting the 50% nominal threshold is in touching distance. According to latest Moody credit rating for Uganda, debt-to-revenue ratio of 236%, one of the highest amongst its eers
2. Annual growth in debt stock of 30% is unlikely to be contained in 2019 as planned on 2 fronts ( election year and 1st oil in 2020).
3. IMF notes risks have increased, the low export and volatile performance being on key risks associated also with a weakening shilling.
4. Domestic debt growth is growing exponentially and as end of October 2016, domestic debt to domestic revenue is now above 100%. This compares stocks(debt) against flows(revenue) but suggest that domestic revenue are low relative to our outstanding obligations. Also domestic debt to private sector credit above 100% contrary to public debt strategy.
Source: Bank of Uganda
5. Interest payments on debt have risen to 12.2% of budget FY 2017/18, overtaking education sector as third largest sector. They will account for 16% of domestic revenue in that year, another threshold of debt strategy violated.

6. For the 3 year running, GoU is not able to pay off maturing domestic debt but just to roll it over. In FY 2017/18, they will rollover 6.8 trillion, in FY 2016/17 ( was UGX 4.9 trillion) and UGX 4.7 trillion in 2015/16. The average time to maturity of current stock(12.3trillion) is 1.8 years. What is end game here?

7. Domestic borrowing is essentially for recurrent nature activities implying minimal investment return. In last 4 years, domestic borrowing outtrun has superceeded the approved limits in budget. Borrowing at 12% and above is going to be hard to offset. In fact combined with external debt (factoring in exchange rate risk), prudently assume the average interest on our public debt is 7% and yet return in terms of economic growth is 5%, thus hard to sustain.

8. With undisbursed debt nearly 18% of GDP, that indicates slow absorption of key projects. The committment fees paid on undisbursed loans have been rising. Double edged sword huh?

9. Tax revenue remains low at 13.4% and low compared to regional counterparts. The problem here in part is collecting little income tax. Again size of middle income comes into play. And my famous indicator of about 620,000 privately owned cars suggests a small share of 16m labour force are in middle income. This increases dependence and this suggests non oil tax revenue are likely to remain low. see my earlier views also on middle income and prospects of meeting debt obligations

10. Should the 2015 exchange rate volatility(shilling depreciation) replicate, external debt will rise sizeably. Some examples included Zambia debt rising to unsustainable levels. Note that UGX has depreciated about 8% per annum against the dollar over last 5 years and this trend equally exacerbates the numbers. Just 100 shilling depreciation of the UGX against the dollar, potentially increases our external debt of 5.5 billion dollars by UGX 550 billion (4% of the current domestic revenue).

11. The arrears are regarded as domestic debt but not usually included in debt accounting. The current numbers of arrears range between 2.3 trillion and 2.7 trillion according to GoU sources(about 12% of planned budget FY 2017/18). However same budget plans UGX 110bn to clear arrears( a drop in a ocean). Table below shows the arrears reported by Auditor General in the report for FY 2015/16
12. All these factors tend to undermine the other macro indicators.By the way in 2015/16 - it is reported that the advances from BoU were not repaid back fully in the same FY as required by law. Also domestic arrears were cited as one of the main causes of non performing loans. The second issue was high interest rates in 2015, in part these driven large issuance of domestic securities. Lets also remember that there were bloated planned issuance of securities. Private sector was low and priced some risk on GoU. All these also should constrain growth prospects.

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