Fitch Ratings has affirmed Rwanda's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+' with a Stable Outlook. The issue ratings on Rwanda's senior unsecured foreign- and local-currency bonds have also been affirmed at 'B+'. The Country Ceiling has been affirmed at 'B+' and the Short-term foreign currency IDR at 'B'.
KEY RATING DRIVERS
Rwanda's 'B+' IDR and Stable Outlook reflect the following key rating drivers:
The authorities continue to put prudent fiscal policies in place to deal with a shift in the structure of foreign aid from grants to loans. Grants accounted for an estimated 7.2% of GDP in the fiscal year 2014/15 (FY15, from July 2014 to June 2015), the lowest level in 11 years. This has forced the government to rationalise current expenditure and improve the efficiency of infrastructure spending, with relative success. Efforts to increase tax revenues are also underway but have yielded only modest results, reflecting implementation challenges and lower income from international trade.
Fitch expects Rwanda will maintain a cautious fiscal stance over the medium term, focusing on priority and capital spending while strengthening tax compliance and implementing new structural fiscal reforms. The budget deficit is expected to narrow gradually in FY16-FY17, from 5.2% of GDP in FY15, even as grants continue to fall. This should help moderate the rise in general government debt, which at an estimated 31.5% of GDP at end-FY15, remains well below the 'B' median of 51%. Rwanda's debt profile also benefits from a high level of concessionality, with the country deemed at a low level of external debt distress by the IMF.
The country's growth performance remains strong and is a key rating strength. GDP growth reached 7% in 2014 and accelerated to 7.6% in 1Q15, backed by rising agricultural output and a strong performance across most tertiary sectors. Continued efforts to improve the business environment, along with greater regional integration, should help lock in private investment and sustain growth momentum. Fitch expects the economy to expand by 7.3% in 2015 (above the authority's 6.5% forecast) and GDP growth to remain above 7% in 2016-17. A sharp fall in external demand or commodity prices constitutes a key risk to the outlook.
Rwanda's vulnerability to macroeconomic shocks is mitigated by coherent macroeconomic policies, including maintaining moderate inflation (2.8% in June 2015) and an improving supervisory framework. Unlike other countries in the region, Rwanda has avoided excessive exchange rate volatility, helped in part by limited portfolio inflows. The performance of the banking sector has strengthened over the past 18 months, with profitability rising and the ratio of non-performing loans falling to 6.3% by March 2015. On the downside, efforts to develop domestic financial markets and improve liquidity conditions have made limited progress.
The external sector has come under pressure from strong import growth (underpinned by large infrastructure projects and rising consumer demand) and falling grants. The current account deficit is estimated to have widened to a record 12% of GDP in 2014 and Fitch expects it to remain at double digits in 2015-17. Boosting export performance remains a priority, but volatile external commodity prices and Rwanda's limited attractiveness as a manufacturing base will act as key limitations.
The country has had more success in lifting foreign direct investment inflows, mainly into the energy, telecommunication and financial sectors, with net FDI reaching 3.4% of GDP in 2014 (from 0.8% in 2010). Along with a projected increase in external borrowing (primarily from multilateral institutions), this should help maintain a comfortable foreign reserve coverage and prevent a sharper rise in net external debt, which stood at 7.7% at end-2014.
Rwanda's ratings are also supported by relative high governance indicators and the best business environment in the 'B' rating category. However, income per capital and human development indicators still compare weakly with peers, there is a large skills gap and the country is struggling to absorb new entrants to the labour market, fuelling informality.
Moreover, uncertainty regarding the 2017 presidential elections persists. In mid-July 2015 the Rwandan parliament voted in favour to support a constitutional change (which is likely to be decided by a referendum) that would allow President Paul Kagame to run for a third term. Fitch considers that this increases political risk in term of long-term governance and potentially adverse reaction from donors.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger a rating action are:
Positive:
- Strengthening of the fiscal position, for example, by narrowing the budget deficit, raising the country's tax base and increasing financial flexibility.
- A narrowing of the current account deficit over time, supported, for example, by export growth and greater regional integration.
- Continued strong GDP growth supporting income convergence towards 'B' peers.
Negative:
- A sharper than-expected contraction in donor aid, which would lead to weaker fiscal and external positions and increase macroeconomic instability.
- Failure to attract long-term capital inflows to offset a wide current-account balance, leading to a marked weakening of foreign reserve coverage.
- A material threat to political stability.
KEY ASSUMPTIONS
Fitch assumes that broad social and political stability will prevail ahead of 2017 elections
Fitch assumes Rwanda will continue to successfully implement structural reforms and prudent economic policies with support of the IMF.
Fitch assumes a gradual recovery in the world economy, supporting demand for Rwanda's key exports and sustaining foreign direct investment inflows into the country.
