KAMPALA: A downgrade of Uganda's credit rating by Standard & Poor's weighed on the Ugandan shilling on Friday, with the ratings agency raising its forecast for the country's budget deficit this fiscal year.
Standard & Poor's cut Uganda's rating to B from B+ with a stable outlook. "We now forecast a higher fiscal deficit of 6.9 percent (of GDP) in the 2013-2014 fiscal year.
Revenue increases have been lower than we expected, donors have suspended general budget support, and expenditure is rising," S&P said in a statement.
The International Monetary Fund forecasts that Uganda's economy will grow 6.25 percent this fiscal year, driven by heavy public investment which is seen sharply widening the fiscal deficit.
At 1153 GMT commercial banks quoted the currency of east Africa's third-largest economy at 2,498/2,503, weaker than Thursday's close of 2,493/2,498.
"At below 2,500 I think the feeling in the market was that the shilling's recent bullish run had bottomed out and also there's some expectation of a return of corporates next week," said Robert Mpuuga, trader at Housing Finance Bank Uganda, referring to corporate demand for dollars.
"However there's also a bit of caution in the market after the country's (credit rating) downgrade."
Market analysts say the shilling's outlook is clouded by the conflict in neighbouring South Sudan, an export market. The fighting is expected to depress Uganda's hard currency earnings.
Purchases of dollars by foreign companies looking to pay 2013 dividends are expected around February and March and are seen putting pressure on the local currency.
"The outlook in the coming days indicates a sideways market however, as corporates recover from the mid-month tax obligations and dollar demand rebounds, trading momentum is expected to pick up," said Stephen Kaboyo of Alpha Capital Partners.
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