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Improved Uganda Fitch Ratings favour oil sector

By Kayvan Farzaneh

Growing interest in the oil sector has helped boost general confidence in Uganda’s wider economic prospects. The improved outlook rating could help Uganda access funds from international financial markets more cheaply.

Last week, the international credit-ratings firm Fitch Ratings, for the first time, upgraded its opinion on Uganda’s overall financial outlook from ‘stable’to ‘positive’. The Fitch rating has been ‘stable’since 2005.

Fitch’s outlook ratings reflect the direction a country’s long-term credit rating is likely to move in the next year or two. Fitch Ratings cited Uganda’s responsible economic policies, single-digit inflation until 2008 and an average growth rate of 7.2% over the past decade as important factors in its decision to upgrade the rating.

In addition, Uganda also continues to do well in the face of the global recession and has outperformed countries in its peer group. Finally, rising demand for its food exports should help keep growth at a high level over the next few years. The ratings firm also stressed that Uganda’s recent hydrocarbon discoveries and fledgling oil industry ‘would significantly lift’future potential for economic growth.

Fitch Ratings, however, continues to categorise Ugandan long-term credit at a single-B ‘junk-bond’ value” a credit rating about midway on a 10-tier scale between the AAA, for the best quality investment grade and D for the worst non-investment grade. It describes Uganda’s financial situation as unstable.

President Museveni has been in power for 23 years and concerns persist over the probability of a peaceful transition of power when he inevitably leaves office. A peaceful presidential election in 2011 will go a long way in the credit ratings themselves being upgraded.

The upgrade could help Uganda attain better terms of trade in the global marketplace. Such developments demonstrate the potential economic boost Uganda’s oil production may give. If managed correctly, Uganda’s budding oil industry may be just what the country needs to jumpstart greater economic development and foreign direct investment. If not, oil may merely represent Uganda’s latest missed opportunity.

The Fitch Ratings upgrade came just a day after the Energy and Minerals Development ministry announced that it had issued international bids for a series of feasibility studies on the construction of the country’s planned oil refinery. The refinery will take at least three to four years to construct and is slated to have a 150,000 barrel-a-day capacity. Uganda’s oil reserves are currently estimated to be between one billion and two billion barrels.

The Ugandan government has made it an explicit goal to refine its oil domestically. Naturally, its aim is to extract the most value out of the oil”a resource that could represent a large revenue boost for the country. Locally processing its oil would enable Uganda to directly supply itself and its regional neighbours with ready-to-use fuel and adds market value prior to its export. Therefore, determining whether it is viable for Uganda to construct such a refinery is an important step in building Uganda’s oil production industry.

The feasibility study would last for six months and begin on October 20. The study would look at oil production potential on the Ugandan side of the Albertine Rift, determine the viability of the refinery, its location as well as the regional oil-product market.

Building the infrastructure for processing and exporting oil is an expensive endeavour and financial backing is a necessary requirement for Uganda’s bold plans. In addition to building a refinery, Uganda’s landlocked status means that it must also construct a 750-mile pipeline through Kenya in order to export oil to the global market. Such a project adds at least $1.5 billion to the price tag.

So far, things are progressing in line with the government’s plans. Following a series of successful drilling projects by Tullow Oil PLC and Heritage Oil Ltd. earlier this year, interest in Uganda’s oil sector has increased markedly. Large international oil companies have been trying to lure Uganda into exporting the crude oil in an unrefined state. Just last week, in talks with President Museveni, the chief executive of the Italian energy company Eni S.p.A. expressed a desire to restart its oil exploration in the country. However, in an example of the political tug-of-war for influence in the region, both China and Iran have attempted to one-up Western oil companies. Both countries have been expressing their interest in helping Uganda to domestically process and export its oil. After a trip to Iran by President Museveni in mid-May, Iran agreed to help partly fund the planned refinery. Hopefully, the improved Fitch Ratings should make it easier for the government to secure other funds.

 

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