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Rating Action:

Moody's affirms Rwanda's B2 rating, maintains stable outlook

25 May 2018

New York, May 25, 2018 -- Moody's Investors Service (Moody's) has today affirmed the Government of Rwanda's B2 long-term issuer ratings and maintained the stable outlook.

The affirmation reflects the following factors:

1) Institutional strengths that limit the risks associated with a higher debt burden.

2) Elevated susceptibility to event risk, mainly related to political risks.

3) Structural economic challenges despite high growth rates.

The stable outlook captures Moody's expectations that public infrastructure investment will continue to support the economy's growth potential. Strong growth and sound fiscal policy management will contribute to a stable debt burden, although constraints to revenue generation posed by very low incomes will likely prevent a marked decline in government debt.

Rwanda's local-currency bond and deposit ceilings remain unchanged at Ba2. The foreign-currency bond and deposit ceilings also remain unchanged at B1 and B3, respectively.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION

FIRST DRIVER -- INSTITUTIONAL STRENGTHS THAT LIMIT RISKS FROM HIGHER DEBT BURDEN

While Rwanda's government debt burden has risen in recent years and is unlikely to decline in the next few years, Moody's considers that the country's demonstrated institutional strength will allow the government to maintain macroeconomic and financial stability and manage this higher debt burden.

At 43% of GDP in 2017, Rwanda's government debt burden has risen by 21 percentage points since 2011, limiting fiscal space and putting pressure on fiscal metrics. The rise is similar to the increase in debt for other B-rated sovereigns over the same time period, where the median debt ratio increased to 57.5% of GDP at the end of 2017, from 36.6% of GDP at the end of 2011.

Fiscal deficits averaging 3.9% of GDP between 2011 and 2017 have contributed to the rise in debt, and are largely due to development spending (mostly infrastructure investment). Deficits are comparable to other B-rated sovereigns at similar levels of development. While spending on infrastructure can lead to higher future growth, Rwanda's significant investment outlays have not yet generated sufficient growth, and foreign exchange earnings, to mitigate the rise in indebtedness.

Moody's expects the fiscal deficit to average around 4.5% of GDP over the next two years, with tax revenue relatively stable at around 15.5% of GDP. Development spending will remain around 10% of GDP. The primary deficit excluding grants, or the part of the budget the government has greater control over, will remain around 8.0% of GDP. Moody's expects the fiscal deficits to be financed by external concessional borrowing, with only a small amount funded via the domestic market.

Assuming a gradual and limited weakening of the exchange rate and based on Moody's expectations for real GDP growth and inflation, this path for fiscal deficits will maintain a broadly stable debt burden, with government debt projected to rise to 44% of GDP in 2019 from 43% of GDP in 2017.

Although a high share of foreign-currency-denominated debt (over three-quarters of total debt) exposes the government's fiscal strength to a marked depreciation of the currency, the concessional nature of most external debt means that debt affordability is very high, with interest absorbing less than 5% of revenue at the end of 2017.

The quality of Rwanda's institutions supports the government's ability to manage the risks associated with a higher burden. In particular, Rwanda has a track record of effective policy implementation and reform. For instance, budget projections have typically been broadly met, the government efficiently utilizes concessional funding sources rather than relying on commercial sources, and the government has shown an ability to mobilize domestic revenue. In the rating agency's view, the comparatively strong legal and regulatory environment supports a greater capacity for the government to effectively formulate and implement sound policies, including managing a higher debt burden.

SECOND DRIVER -- ELEVATED SUSCEPTIBILITY TO EVENT RISK MAINLY RELATED TO POLITICAL RISKS

Rwanda's susceptibility to event risk remains elevated, particularly related to political risk. A rise in political risk could reduce foreign investment, delay donor funding, pressure the country's balance of payments and increase liquidity pressures.

Domestic political risks relate to uncertainty about the succession to President Paul Kagame, whilst long-standing frictions with neighboring countries like the Democratic Republic of the Congo (B3 negative) and Burundi (not rated) point to high geopolitical risks.

In 2012/13, foreign donors cut support to Rwanda due to the government's perceived support for the now disbanded M23 rebel group in the Democratic Republic of the Congo. Grants now represent less than 20% of total government revenue, compared with over 40% in 2012/13, highlighting their still important, albeit reduced, contributions to the government's budget.

Rwanda's large current account deficit and associated risks to the balance of payments and international reserves also inform the rating agency's view of elevated event risk. The current account deficit is one of the largest in the B-rated universe, averaging over 10% of GDP between 2011 and 2017. Moody's expects the current account deficit to remain wide, rising to 9.3% of GDP in 2018, from 6.8% of GDP in 2017 as capital imports related to construction of the Bugesera airport rise. While Moody's assumes that financing for these current account deficits will be forthcoming as has been the case in the past, such a large reliance on external financing for imports exposes the sovereign's credit profile to a sudden shift in investor interest in Rwandan assets.

Government liquidity risk is moderate given broadly stable gross funding needs at around 10% of GDP, driven mostly by the government's capital spending plans, interest payments, and the need to rollover domestic debt. Domestic financing needs are related to Treasury bills, with the domestic debt market relatively underdeveloped. The government aims to deepen the domestic market, issuing a seven-year bond in November 2017 and a five-year bond in February 2018, although Moody's expects that efforts to deepen market development will only reduce government liquidity risk over the medium- to long-term.

THIRD DRIVER -- STRUCTURAL ECONOMIC CHALLENGES DESPITE HIGH GROWTH RATES

The very small size of Rwanda's economy and very low income levels pose significant structural constraints to Rwanda's economic strength despite very high rates of real GDP growth.

In general, Rwanda's economy is smaller and its citizens less wealthy than the median B-rated sovereign. Nominal GDP was $8.5 billion in 2016, and its per capita income ($1,757 GDP per capita at purchasing power parity at end-2016) is the third-lowest among the sovereigns Moody's rates. Its export base is one of the narrowest in the world, while its landlocked geographic position, within a region characterized by low-incomes, poor infrastructure and relatively high political risk, increases transportation costs, hampering export competitiveness.

The economy's small size, along with low purchasing power and limited natural resources, also constrain the country's ability to attract foreign investment, hampering prospects of a shift towards higher value-added activities.

Rwanda's credit profile is also susceptible to climate change risk. The economy's heavy reliance on subsistence agriculture (75% of value added and 33% of employment) exposes households' incomes and consumption to weather-related external shocks.

The structural constraints to Rwanda's economic strength are only partly offset by very high real GDP growth rates. Between 2011 and 2017, Rwanda's real GDP growth has averaged 7.1%, the fourth-highest rate of growth among B-rated sovereigns. Following a slowdown to 6.1% year-over-year in 2016, Moody's expects growth to rebound to 7.5% over the next three years, supported by a recovery in the agricultural sector in 2018 and strong construction activity related to the Bugesera international airport and other investment. Moreover, the government's "Made in Rwanda" campaign, which is designed to support domestic production in sectors of the economy like cement, textiles, and rice, has started to pay dividends via export growth and Moody's expects this to support growth as well, albeit from a very low base.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook captures Moody's expectations that the economy's growth potential will continue to be supported by public infrastructure investment. Strong growth and sound fiscal policy management will contribute to a stable debt burden, although constraints to revenue generation posed by very low incomes will prevent a marked decline in government debt.

WHAT COULD CHANGE THE RATING UP/DOWN

Lower deficits resulting from increased revenue generation efforts or higher growth supporting fiscal consolidation would reduce the government's reliance on external borrowing and set government debt levels on a sustainable downward trajectory, increasing the probability of an upgrade.

A continued rise in government debt levels, without evidence of stronger government revenue to service that debt and/or stronger capacity of the economy to absorb shocks would likely prompt a downgrade. The re-emergence of balance of payments pressure, with a corresponding depletion of international reserves, would indicate higher event risk and lower policy effectiveness, and would also likely prompt Moody's to downgrade the rating.

GDP per capita (PPP basis, US$): 1,757 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.3% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -3.5% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -15.8% (2016 Actual) (also known as External Balance)

External debt/GDP: 36.1% (actual)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

This rating was initiated by Moody's and was not requested by the rated entity.

On 22 May 2018, a rating committee was called to discuss the rating of Government of Rwanda. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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