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
