Tuesday 15, May 2018 by Matthew AmlĂ´t

Fitch affirms Rwanda at 'b+'; outlook stable

Fitch Ratings has affirmed Rwanda's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'B+' with a Stable Outlook.

The 'B+' rating reflects Rwanda's strong governance and doing business metrics, low public debt GDP and high growth potential. The rating is weighed down by its low income per capita and its persistent and large current account deficits.

External pressures eased in 2H17, resulting in the current account deficit (CAD) more than halving to 6.8 per cent of GDP in 2017 (revised down from our November 2017 forecast of 9.8 per cent) from a historical high of 14.3 per cent of GDP in 2016. Consequently, the RWF/$depreciated by just 2.9 per cent yoy in 2017 (2016: 9.7 per centyoy in 2016), and official FX reserves rose to $1,473 million or 5.3 months of 2017 external payments. Reserves were further boosted in February 2018 when the IMF disbursed the final $25 million tranche of the $203 million Standby Credit Facility programme loans.

Goods exports rose by 57.6 per centyoy bolstered by a rapid rise in exports of gemstones to the UAE. These 'other minerals' exports rose to 26.3 per cent of goods exports in 2017 (2015: 5.6 per cent), or 2.7 per cent of GDP, partly reflecting higher commodity prices and improved organisation of artisanal mining.

The weaker Rwandan franc, recovering commodity prices and the government's 'Made in Rwanda' initiative also boosted other exports, while compressing imports, which fell marginally by 0.4 per centyoy, partially due to base effects of large construction projects completed in 2016. Fitch forecasts the CAD to widen slightly to 8.5 per cent of GDP in 2018 and 8.9 per cent in 2019, due to the three-year $700 million (8.7 per cent of GDP) Bugesera airport construction project driving up capital imports. Risks of the rapid growth in 'other mineral' exports unwinding are somewhat offset by upside risks to the improving trend in other export goods, while plans to expand RwandAir's aircraft fleet to turn Rwanda into an air travel hub adds additional downside risk to the CAD forecasts in the medium term.

The CAD is financed primarily by government external borrowing, donor aid flows and to a lesser extent through FDI inflows, resulting in net external debt rising to 20.7 per cent of GDP in 2017 (2013: 4.7 per cent) and raising Rwanda's vulnerability to external shocks. A structural shift in CAD financing is underway as aid donors replace budget grants with concessionary loans and project grants.

Five year average real GDP growth at 6.7 per cent is almost double, and annual average growth more stable, than the 'B' rated peer median. Real GDP growth accelerated marginally to 6.1 per cent in 2017 (2016: 6.0 per cent) on the back of a robust recovery in 2H17. Growth slowed significantly to a low of 2.4 per cent yoy in 4Q16 and 1.7 per cent yoy in 1Q17 due to the severe drought impacting agriculture and base effects from the completion of large construction projects, but picked up to 8.0 per cent yoy in 3Q17 and 10.5 per cent yoy in 4Q17 as harvests benefited from better weather. Fitch forecasts growth to accelerate further in 2018 and 2019 to 7.2 per cent and 7.7 per cent, respectively, driven by the Bugesera airport construction and a broad-based recovery across agriculture, mining and services.

Inflation in Rwanda (inclusive of rural areas) slowed to -1.4 per cent yoy in March 2018 from its peak of 13.4 per cent yoy in February 2017 due to the improvement in agriculture harvests, with food inflation falling to -7.9 per centyoy, while imported goods and energy prices supported inflation. Urban inflation, which drives monetary policy, showed a similar trend falling to 0.9 per centyoy in March 2018, allowing the National Bank of Rwanda room to cut its policy rate to 5.5 per cent from 6.0 per cent in December 2017 to support credit growth.

Rwanda's public finances are a neutral factor for the rating, with the budget deficit forecast to average 4.2 per cent of GDP in FY17/18 (ending June 2018) to FY19/20, consistent with the 'B' median (4.1 per cent), while gross general government debt/GDP at 46.2 per cent is significantly lower than the 'B' median (60.4 per cent). The improvement in the fiscal deficit to 3.8 per cent for FY17/18 (FY16/17: 4.6 per cent) is driven by better indirect tax collection from robust economic activity, a 0.2pp one-off collection of arrears and rationalisation of current expenditure and lower capital expenditure. Fitch forecasts the deficit to widen to an average of 4.5 per cent of GDP over the medium term due to the government's stake in the Bugesera airport project, but also as the wind-down in donor grants outpaces revenue mobilisation gains. Subsidies to cover RwandAir's financial losses have averaged 1.2 per cent of GDP per year in the budget and could rise slightly with the expansion plans.

Fitch forecasts gross general government debt/GDP to rise to 46.2 per cent by end-FY17/18 (FY16/17: 45.0 per cent), gradually stabilising at 47.1 per cent by end FY20/21. The rise in public debt is expected to be driven by the fiscal deficit, the impact of Rwandan franc depreciation on foreign-currency debt, rising government guaranteed SOE debt, and donors' drive to transform grant support into concessionary loans. Despite long average maturities and a high degree of debt concessionality, significant maturities in 2021 and 2023 will increase refinancing risks in the coming years.

Adverse risks to our debt forecasts include the possible acquisition of aircraft by RwandAir from 2019, loss materialisation from other SOE or PPP deals, or a sharper than expected Rwandan franc depreciation from renewed external pressures.

Rwanda outperforms the 'B' and 'BB' medians on the World Bank governance indicators, reflecting the political stability and effective governance that underpin strong donor support. Lack of clarity regarding President Kagame's succession plans raises the risk of political fragmentation in the event that he is unable to serve in office.

Fitch's proprietary SRM assigns Rwanda a score equivalent to a rating of 'B+' on the Long-Term Foreign-Currency (LT FC) IDR scale.

Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC 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.

The Stable Outlook reflects Fitch's assessment that risks to the rating are currently balanced.

However, the following factors could, individually or collectively, put downward pressure on the ratings:

- Failure to attract long-term equity capital to finance the large CAD, resulting in a depletion of foreign exchange reserves or rising net external debt.

- A sharper than expected contraction or suspension of donor grants and loans, which would weaken the fiscal and external positions.

A failure to stabilise the upward trajectory of gross general government debt/GDP ratio, or the emergence of significant contingent liabilities (e.g. at the state-owned airline RwandAir).

The main factors that could individually or collectively lead to a positive rating action are:

- Continued strong GDP growth supporting income convergence towards 'B' rated peers.

- Marked and sustained narrowing of the current account deficit, supported for example by strong export growth and greater regional integration.

Fitch assumes Rwanda will continue to implement structural reforms and prudent economic policies with support from the IMF under successor programmes.

Fitch assumes that the ruling RPF government will be able to maintain broad social and political stability.

The full list of rating actions is as follows:

  • Long-Term Foreign-Currency IDR affirmed at 'B+'; Outlook Stable
  • Long-Term Local-Currency IDR affirmed at 'B+'; Outlook Stable
  • Short-Term Foreign-Currency IDR affirmed at 'B'
  • Short-Term Local-Currency IDR affirmed at 'B'
  • Country Ceiling affirmed at 'B+'

  

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