Fitch Ratings has affirmed Rwanda’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a Stable Outlook.
KEY RATING DRIVERS
Rwanda’s ‘B+’ rating reflects its twin fiscal and current account deficits, high and growing public and external indebtedness (albeit on highly favourable terms) and low income per head. These weaknesses are tempered by a stable macroeconomic performance, marked by high potential growth and relatively low inflation prior to the coronavirus shock and underpinned by strong governance and a conducive business environment.
Fitch’s base case is that a return to strong GDP growth and fiscal consolidation consistent with stabilising government debt/GDP will enable Rwanda to absorb the adverse impact of the coronavirus pandemic on its creditworthiness at the ‘B+’ level. Nevertheless, risks are currently to the downside.
Rwanda’s fiscal deficit widened to over 10% of GDP in the fiscal year ending June 2020 (FYE20), from about 5% in FYE19. This is well above current and historical ‘B’ category medians. Broad-based growth in spending was led by development spending and support to government related entities and was partly related to the pandemic shock Meanwhile, tax revenue fell short of target, although it remained steady as a share of GDP. The fiscal support measures in the government’s Economic Recovery Plan are estimated to have an incremental cost of over 3% of GDP in 2020-2021 and include support for vulnerable households, subsidised loans and credit guarantees for hard-hit sectors and tax leniency measures.
We expect the deficit to remain elevated at over 9% of GDP in FYE21 and to only start to narrow in earnest in FYE22 (to a still high level of nearly 7% of GDP). This reflects the government’s intention to prioritise economic recovery for the time being. The government is exploring options for growth-friendly fiscal consolidation for when the economy recovers and for a sustainable fiscal rule after the breach of the previous rule to limit rolling five-year average deficits to 5.5% of GDP.
We expect the government to be able to comfortably cover the fiscal deficit primarily through foreign borrowing mostly on concessional terms, as has been the case in the past. More than 80% of Rwanda’s debt was owed to multilateral and bilateral creditors at end-2019, chiefly to the World Bank, and as a result government interest/revenue and maturities/GDP are much lower than the current ‘B’ median. Rwanda’s performance on previous IMF programmes and its commitment to a three-year Policy Coordination Instrument prior to the pandemic shock would be conducive to agreement on a disbursing IMF facility, should the authorities decide to pursue it. Rwanda has already received USD220 million from the IMF’s Rapid Credit Facility. The government has one outstanding Eurobond of USD400 million, maturing in 2023.
We estimate that government gross debt (at face value) rose to about 63% of GDP in FYE20, up from about 55% in FYE19, including state-owned entity (SOE) debt of about 6% of GDP, much of it guaranteed. We expect the debt ratio to exceed 70% of GDP in FYE21, which is above forecast and historical ‘B’ category medians and approaches the government’s previous debt ceiling of 50% of GDP in present value (PV) terms. The PV of government debt is currently estimated at about 15% of GDP below face value due to concessionality. Rwanda has moved to moderate from low risk of debt distress according to the IMF, related to a deterioration in the PV of the debt/exports ratio.
The broader public sector is a source of fiscal risks, given the government’s active role in driving economic development. Transparency on the operational performance of SOEs is limited, and the need for larger government transfers to cover operational losses in SOEs is a downside risk, despite the fact that all SOE debt included in headline government debt. Budget figures already include support of around 1.2% of GDP to Rwandair in the form of net lending and transfers, and a similar amount to the electricity sector in the form of transfers and capital spending. Support to the electricity sector could rise if demand fails to keep pace with new generation capacity contracted under power purchase agreements. The government has recently assumed the servicing of a sizeable guaranteed loan and in our view there is a risk that it might have to do so for key SOEs, for example Rwandair or the Kigali Convention Centre.
Rwanda’s current account deficit widened to over 9% of GDP in 2019 and we expect a further deterioration to 14% in 2020 amid a sharp downturn in remittances and tourism receipts (partly compensated by compression in imports). This will largely be financed by government project-linked external concessional borrowing and (at a somewhat reduced level) foreign direct investment, pushing net external debt further above ‘B’ medians, from an estimated 40% of GDP in 2019. Recovery of imports in 2H20 will likely put pressure on reserves (which rose to nearly USD1.8 billion or more than six months of external payments in June, from nearly USD1.5 billion in December).
Rwanda’s GDP per head of around USD800 remains significantly below the current ‘B’ category median (around USD2,900 per head), despite strong macroeconomic performance and significant development gains over the past few decades. Development needs will create persistent pressure on the public finances over the medium term. The government’s National Strategy for Transformation aims to more than double GDP per head by 2030.
We expect GDP growth to slow sharply as a result of coronavirus-related disruptions to economic activity. Economic activity could still expand by 1% in 2020 (from over 9% in 2019) reflecting high trend growth, although risks are skewed to the downside. Real GDP grew 3.6% yoy in 1Q2020, with agriculture and industry slowing markedly. Despite a relatively low number of confirmed cases or deaths, the economy will still suffer from a period of sweeping containment measures, which began to be eased in early May, with commercial flights resuming in August. Rwanda has been unaffected by the locust swarms affecting its northern neighbours, but agricultural production has suffered from heavy rainfall.
Rwanda’s medium-term GDP growth outlook of 7%-8% is well above that of ‘B’ and ‘BB’ peers, reflecting population growth, public investment, and growth-oriented policies promoting import substitution and tourism. However, risks are tilted to the downside, in our view. The country’s historical development strategy may deliver significantly lower growth than expected if the coronavirus pandemic brings about a structural shift in global trade, travel and tourism. The coronavirus shock has narrowed the government’s future fiscal space, and in the absence of a positive fiscal impulse sustaining high levels of growth will depend on the economy’s ability to harness domestic and foreign private investment.
Rwanda’s record of relative macroeconomic stability is underpinned by a moderate degree of exchange rate flexibility and a developing monetary policy framework. The Rwandan franc/US dollar exchange rate depreciated by 2% this year and 14% in 2017-2019. All-Rwanda consumer price inflation is running high at over 11% yoy as of July on the back of soaring food prices, but the National Bank of Rwanda expects it to decline in 2H amid a drop in aggregate demand and has cut the policy rate by 50bp to 4.5% (on top of other monetary stimulus measures).
Rwanda scores better than 53% of all countries on World Bank Governance Indicators, despite weak performance on the Voice and Accountability pillar. This compares favourably with the current ‘B’ category median of 38%, 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 38th 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.
ESG – Governance: Rwanda has an ESG Relevance Score of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Rwanda has a medium WBGI ranking in the 53rd percentile.