Fitch Ratings has affirmed Rwanda's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'B+' with Stable Outlooks. The issue ratings on Rwanda's senior unsecured foreign-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+' IDRs and Stable Outlook balance the economy's high growth, strong governance indicators relative to peers, and strong fiscal policy reform momentum, against its low income per capita, high structural current account deficit, and continued reliance on donor flows and concessional financing.
Rwanda is facing rising balance of payments pressures due to the depressed commodity price cycle, which has affected the value of its metal minerals exports. The current account deficit widened to 13.5% of GDP in 2015 (2014: 12.0%), exacerbated by a rise in construction imports and the completion of the Kigali Conference centre. Fitch forecasts the deficit to widen to 16.5% in 2016, primarily due to the purchase of two aircraft by the national airline. Adjusting for this purchase, the deficit is forecast to narrow slightly, and to improve to 11.7% in 2017 due to monetary and fiscal policy tightening and as import substitution measures take effect.
The balance of payments pressures have led to a structural depreciation of the Rwandan franc (RWF), exacerbated by the strengthening USD and slowing capital flows to frontier emerging market economies. This has resulted in official reserves coverage falling to 4.1 months of external payments in 2015 (2014: 4.5), which we forecast to fall further to 3.5 months in 2017 before recovering to 4.0 months in 2017 primarily due to an impending IMF loan to support external financing (final details to be announced in early June upon approval by the IMF board).
Rwanda is implementing structural reforms to its fiscal framework to alleviate dependence on donor grants as they are being phased out and converted into concessionary loans over the coming years. Donor grants are expected to decrease from 33% of total revenues in FY13 to 21% in FY18. It has had some success in rationalising expenditure and is working on increasing tax compliance and widening the tax base in order to raise domestic revenues. Fiscal consolidation in FY16-FY18 will be focused on reducing capital expenditure from 12.6% of GDP to 10.5%, as the government seeks to reduce capital imports to mitigate external pressures. Fitch forecasts the overall budget deficit for FY16 (year ending June 2016) to remain flat at 5.0% of GDP, before narrowing to 3.6% in FY17 and 3.1% in FY18. Public debt/GDP is lower than the 'B' median and is forecast to rise to 44.8% in FY18, from 35.1% of GDP in FY15, primarily due to the purchase of the two aircraft, the IMF support loans, and the conversion of donor grants to concessionary loans.
Strong growth and low inflation relative to regional peers are key rating strengths. Real growth in 2014 and 2015 averaged 7.0% yoy, with private consumption and construction investments the main expenditure drivers of 2015 growth. Accommodative monetary policy in recent years has supported growth, with annual real private sector credit growth averaging 20.5% in 2014-2015. Fitch forecasts GDP growth to moderate to 6.0% for 2016 and 2017 due to a worsened global trade demand and outlook for China, and also due to the Rwandan authorities' monetary and fiscal policy tightening to mitigate external pressures.
Despite some seasonal fluctuations, annual average inflation remained low at 1.8% and 2.5% in 2014 and 2015, respectively, due to the fall in oil prices and good agriculture harvests. Fitch expects annual average inflation to pick up to 4.6% in 2016, due to increases in food and fuel prices. Pass-through of the RWF's depreciation against the USD to inflation is expected to be muted due to the RWF's slight appreciation against regional trade partners' currencies.
Rwanda's outperformance of the 'B' and 'BB' medians on several governance indicators is key to maintaining donor support. In December 2015, President Paul Kagame announced his intention to run for a third term following a referendum in which 98% of voters approved of a constitutional reform allowing him to potentially serve until 2034. Despite widespread criticism from foreign donors regarding Kagame's decision to hold on to power, Fitch believes that this issue is unlikely to translate into a significant slowdown in donor flows. However, recent allegations by the UN of the Rwandan government supporting Burundian rebels are reminiscent of the circumstances which led to foreign donors suspending aid to Rwanda in 2012. A sharp reduction in donor flows would significantly impair Rwanda's credit profile, as would weaker performance on governance indicators.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Rwanda a score equivalent to a rating of 'B+' on the Long-Term Foreign Currency IDR scale.
Fitch's sovereign rating committee did not apply any notch-adjustment from the QO to the output from the SRM to arrive at the final Long-Term Foreign Currency IDR.
Fitch's SRM is the agency's proprietary multiple regression rating model that employees 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
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 negative rating action are:
- A sharper than expected contraction or suspension of donor aid, which would weaken the fiscal and external positions, e.g. as a result of donors' potential response to allegations of the government's support for Burundi rebels.
- Failure to attract long-term capital inflows to finance the wide structural current account deficit, leading to marked weakening of foreign exchange reserve coverage.
- A material threat to political stability, for example a spill-over of the armed conflict from neighbouring Burundi or Democratic Republic of Congo.
- A failure to arrest the upward trajectory of the gross general government debt/GDP ratio.
The main risk factors that, individually or collectively, could trigger positive rating action are:
- Continued strong GDP growth supporting income convergence towards 'B' rated peers.
- Continued improvement on fiscal reforms, such as efforts to widen the tax base and increase financing flexibility.
- A narrowing of the current account deficit over time, supported, for example, by export growth and greater regional integration.
KEY ASSUMPTIONS
Fitch assumes Rwanda will continue to implement structural reforms and prudent economic policies with support from the IMF.
Fitch assumes that broad social and political stability will be maintained in the lead-up to and during the 2017 elections.
