Rwanda affirmed on growth prospects

Rwanda’s long and short-term sovereign credit ratings have been affirmed at B+/B by S&P Global Ratings, on its strong medium term economic growth prospects.

S&P has also kept Rwanda’s outlook at negative on the expectation that the country’s large current account deficits could weaken the external balance sheet more than currently expected.

Despite the sharp but temporary deterioration in economic activity, S&P expects Rwanda’s medium-term growth prospects to remain among the strongest of countries in the rating agency’s B category, supporting its credit profile.

The coronavirus disease 2019 (COVID-19) crisis has severely hit Rwanda’s economy, particularly the retail, hospitality, and construction sectors.

Following a sharp gross domestic product (GDP) contraction estimated at about 2% in 2020, S&P expects Rwanda’s economy to gradually rebound in 2021.

The rating agency expects Rwanda’s economy to expand by 3.9% and by an average of 7.1% in 2022 to 2024.

Growth will be supported by a rebound in domestic demand, aided by fiscal stimulus and gradual recovery in exports of goods and tourism flows.

Rwanda intends to only gradually phase out the state’s support packages, which are estimated at about 5% of GDP over fiscal years 2021 to 2023.

A pipeline of public infrastructure investment, including the new Bugesera International Airport, roads, energy projects, schools, health centres, and commercial real estate should underpin strong medium-to-long-term growth prospects.

Construction activity should also promote associated sectors including manufacturing activity, particularly for construction materials and metals and wholesale trade.

S&P also expects investment in agriculture and related industries to boost the sector’s resilience to adverse weather-related shocks.

A focus on increasing the value-added through agro-processing, washed coffee, specialty teas, and horticulture exports will also help to expand the sector.

On the downside, Rwanda’s current account deficits are expected to remain large due to slower recovery in goods and services exports and high import needs.

S&P projects that slower recovery in exports of goods and tourism services will lead to a current account deficit of 13.3% of GDP in 2021 and will drop to 9.1% by 2024.

The rating agency estimates Rwanda’s current account deficit at about 14.6% of GDP in 2020, lower than initially expected.

The financing of the chronic twin deficits will increase public debt and significantly weaken the external balance sheet over the forecast horizon through to year end-2024.

However, these risks are partly mitigated by access to cheap concessional borrowing and increased grants from the World Bank.

The Rwandan franc (RWF) continues to depreciate against the US dollar, amid reduced external receipts and foreign direct investment (FDI) inflows and increasing demand for imports.

S&P expects external deficits will be funded mainly through government concessional borrowing from multilateral development institutions and bilateral partners.

The rating agency anticipates FDI inflows to recover to about 3.5% of GDP over 2021 to 2024, supported by on-going economic and developmental reforms targeted at rising private sector activity.

On the back of chronic current account imbalances, Rwanda’s already-weakened external balance sheet will further deteriorate over the forecast horizon until 2024.

S&P projects external debt net of liquid external assets will increase to 196% of current account receipts by 2024 from the estimated 165% in 2020.

Rwanda’s foreign currency reserves will remain broadly stable at around four-to-five months of current account payments.

S&P expects that fiscal expenses will remain elevated due to higher capital expenditure and increased crisis-related spending needs, which are estimated at about 3% of GDP in fiscal 2021.

The estimated fiscal deficit of 9% of GDP in 2021 will only gradually shrink over fiscal years 2022 to 2024, pushing net general government debt to above 73% of GDP by 2024.

S&P projects that the fiscal deficit will only gradually reduce to about 5.6% of GDP and fiscal policy will follow the loosened stance in 2019 to support post-pandemic economic recovery.

Rwanda has temporarily suspended the fiscal consolidation rule of a deficit ceiling of 5.5% of GDP.

The rating agency estimates Rwanda’s budget deficit at about 8.6% of GDP in fiscal 2020, lower than initially expected.

Revenue outturn outperformed due to higher tax collection in the first half of the fiscal year as well as better tax compliance.

However, Rwanda’s income levels are still low, with GDP per capita of less than $1000, which constrains the government’s taxation and funding capacity.

We expect that the government will continue efforts to mobilise concessional funding to finance the fiscal 2021 budget.

The rating agency expects the government to refinance the $400 million Eurobond maturing in 2023 through another commercial external debt issuance.

Rwanda’s interest expenditure is still relatively low, at about 8% of revenue over 2021 to 2024, reflecting the governments’ continued access to financing on favourable terms from multilateral development institutions.

The government also stepped in to cover principal repayments of some guaranteed debt, which reflects the weak financial positions of those entities.

S&P anticipates the central bank will continue its accommodative monetary policy to maintain liquidity conditions and support private-sector credit growth.

The central bank’s policy rate remains at 4.5% following the reduction by 50 basis points in April 2020.

S&P expects inflation to revert to 2.5% in 2021 and average 4.0% to 4.5% until 2024, after a high of 7.7% in 2020.

The rating agency would consider lowering the ratings over the next 12 months if Rwanda’s external position further weakened.

S&P could also consider a downgrade if Rwanda’s public debt burden continued to worsen due to larger and more sustained fiscal imbalances than expected.

The rating agency would consider revising the outlook to stable if Rwanda is able to reduce its accumulation of external debt, supported by smaller twin deficits than currently expected.

This comes after Fitch Ratings affirmed Rwanda’s at B+ in 2020, on its stable macroeconomic performance, marked by high growth potential and low inflation.

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