Rwanda growth boosts rating

Rwanda’s long-term foreign currency issuer default rating (IDR) has been affirmed at B+ by Fitch Ratings, on its stable macroeconomic performance, marked by high growth potential and low inflation.

The rating agency has also kept Rwanda’s outlook at stable due to strong governance and conducive business environment.

Rwanda’s medium-term gross domestic product (GDP) growth outlook of 7% to 8% is well above peers.

This reflects population growth, public investment, and growth-oriented policies promoting import substitution and tourism.

The spread of Ebola virus from the neighbouring Democratic Republic of the Congo could undermine Rwanda’s tourism sector, which accounts for around 4% of GDP.

All-Rwanda consumer price inflation averaged negative 0.3% year-on-year in 2018, driven by lower food prices in rural areas.

Headline urban inflation was higher at 1.4%, or 2.4% excluding food and energy, while All-Rwanda inflation picked up to 1.6% year-on-year in July 2019.

Subdued inflation allowed the National Bank of Rwanda (NBR) to lower the central bank rate to 5% from 5.5% in May 2019.

Under its new interest-based monetary policy framework, NBR is targeting inflation of 5% which Fitch expects will be reached in 2020 to 2021.

Rwanda scores better than 53% of all countries on World Bank’s governance indicators. This compares favourably with the current B category median of 32%, and reflects continuous improvements in all but two of the past 20 years.

Among other factors, this reflects exceptionally strong performance on the ease of doing business ranking, where Rwanda ranks 29th globally and 2nd in Africa.

These strengths support the outlook for foreign investment and aid inflows and increase confidence in the government’s ability to respond to macroeconomic shocks.

On the down side, Rwanda’s rating is weighed down by the country’s twin fiscal and current account deficits, high public and external indebtedness and low income per head.

Fitch estimates that Rwanda’s budget deficit widened to approximately $451.9 million (RF445 billion) or 5.2% of GDP on a cash basis in the fiscal year ending June 2019. This is up from 5% of GDP in the 2018 fiscal year.

Arrears clearance is the primary factor pushing the cash deficit to over 6% of GDP for fiscal year 2020, against the backdrop of continued high capital spending.

Net lending is also expected to pick up, reflecting higher support for export promotion activities.

Rwandese authorities intend to keep the five-year rolling average fiscal deficit below 5.5% of GDP.

Fitch expects the five-year average deficit to hit 5.5% of GDP in the 2021 fiscal year.

The broader public sector is a source of fiscal risk, given Rwanda’s active role in driving economic development.

Budget figures already include around 1.2% of GDP per year in support to Rwandair, a state-owned transportation company, in the form of net lending and transfers.

The budget figures also include 1.4% of GDP in support to the electricity sector in the form of transfers and capital spending.

Fitch estimates that government gross debt rose to around 52% of GDP in the 2019 fiscal year, up from 50% of GDP in 2018. This includes guaranteed debt of around 7% of GDP.

The rating agency expects the debt ratio to reach 55% of GDP in 2020 and continue rising over the medium term.

Rwanda has a self-imposed debt ceiling of 50% of GDP in present value terms. In practice, this is only a loose constraint as the present value of government debt is currently estimated at around 20% of GDP below face value due to concessionality.

The current account deficit is expected to widen to above 10% of GDP in 2019 to 2020, as a pick-up in domestic growth further boosts imports.

Higher deficit will largely be financed by government project-linked borrowing and foreign direct investment. This will push net external debt further above the B medians, from a forecast 44% of GDP in 2019.

The rating agency expects the reserve coverage to drop to under four months of external payments.

Rwanda’s GDP per head – forecasted at around $790 in 2019, remains significantly below the current B median of around $3200.

Fitch may consider upgrading the rating if Rwanda’s fiscal deficit is narrowed and there is a reduction in government debt to GDP after the coronavirus shock.

A marked narrowing in the current account deficit and a reduction in net external debt to GDP may also lead to an upgrade in the rating, according to Fitch.

The rating agency may consider downgrading Rwanda if there is a build-up of government and external debt beyond current forecasts.

Fitch may also consider downgrading the rating if there is a build-up of government and external debt, and worsening of Rwanda’s medium-term growth potential.

This comes after S&P dropped Rwanda’s outlook from stable to negative due to rising public debt and deteriorating external metrics, exacerbated by the COVID-19 pandemic, earlier in 2020.

See full rationale here