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Rating Action:

Moody's affirms Rwanda's B2 rating; outlook remains negative

13 Jun 2022

New York, June 13, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Rwanda's long-term local and foreign currency issuer ratings and foreign currency senior unsecured rating at B2. The outlook remains negative.

The decision to maintain the negative outlook reflects Moody's assessment that credit risks remain skewed to the downside, as rising global energy, fertiliser and food prices are likely to maintain pressure on government spending and increase its fiscal and debt consolidation challenge. The government's ability to respond to future shocks may be impaired should these pressures translate into further deterioration in Rwanda's already weakened fiscal and debt metrics.

The decision to affirm the B2 rating is underpinned by the country's still-solid growth prospects, its relatively credible and effective institutions compared to peers, and financial assistance from development partners that support economic resiliency and mitigate repayment and debt affordability risks. Balanced against these credit supports are Rwanda's small and low-income economy and narrow fiscal space that constrain its shock absorption capacity, while the challenging regional political environment weighs on the country's longer-term prospects.

Rwanda's local and foreign currency country ceilings remain unchanged at Ba2 and B1, respectively. The three-notch gap between the local currency ceiling and the sovereign rating balances relatively predictable and reliable institutions with a track record of policy execution, against the government's large footprint in the domestic economy, the persistent regional geopolitical challenges it faces, and the country's structural external imbalance in the form of large current account deficits. The two-notch gap between the foreign currency ceiling and local currency ceiling takes into consideration Rwanda's reliance on external debt financing, albeit from stable sources, and the limited currency flexibility that raise the risk of transfer and convertibility restrictions being imposed.

RATINGS RATIONALE

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

Rwanda's fiscal position has deteriorated and its government debt burden has increased sharply with the coronavirus pandemic, aggravating an already negative trend pre-pandemic. Although fiscal and debt consolidation is a priority for the government, higher global energy, fertiliser and food prices, given the country's reliance on these imports, will invariably exert pressure on the government to maintain higher levels of expenditure. While Moody's expects the government's fiscal deficit to narrow slightly in the coming fiscal year and continue narrowing over the next few years, its debt burden will remain around current higher levels in the absence of stronger fiscal consolidation measures. With risks skewed to the downside, continued deterioration in fiscal and debt metrics, though not in Moody's baseline assumptions, may significantly reduce the government's ability to respond to future shocks if its fiscal space continues to narrow.

Imports of energy- and food-related items accounted for around 11% and 9% of total retained imports in 2021, respectively, while fertiliser imports accounted for another 2%. Although the total share of these imports is not as high compared to regional peers, and wheat is not a common staple in Rwandan diet, Rwanda's exposure is exacerbated by the crucial role of fertilisers in its agricultural sector, which employs around 40% of its labour force and contributes to around 25% of GDP and 14% of total domestic exports of goods and services.

The rise in global prices of energy, fertiliser and food will have a significant impact on Rwanda's inflation in particular, since food- and energy-related items comprise 46% and 26% of the country's consumer price index (CPI) basket. Moody's expects CPI inflation in Rwanda to remain high over the rest of 2022 after accelerating to about 10% year-on-year in April, and average 7-8% in 2022.

Higher prices pose a challenging tradeoff between prioritising social welfare and stability, and fiscal consolidation. Social support remains a key tenet of the government's policy agenda, evident in the government's proposed budget for fiscal 2023 (year ending June 2023), with total budgeted expenditure rising 5% from already elevated budgeted levels in fiscal 2022 that included one-off project- and pandemic-related spending. This raises the risk of fiscal slippage from an already weakened starting point.

Moody's expects the government's fiscal deficit to remain wide at around 9.5-10% of GDP in fiscal 2023, compared to a likely deficit of 12-13% of GDP in fiscal 2022. Over the next few years, Moody's expects the fiscal deficit to gradually narrow to around 6-7% of GDP by fiscal 2025, as the government's medium-term projections suggest that fiscal consolidation is likely to gather pace after fiscal 2023 and it remains committed to fiscal reforms under its Policy Coordination Instrument with the International Monetary Fund. However, the deficits will still be wider than the average fiscal deficit of around 4.5% of GDP in the 5 years prior to the coronavirus outbreak, unless the government can expand its revenue base durably or has the appetite to cut expenditure more sharply than currently envisaged.

Based on Moody's fiscal projections, Rwanda's government debt burden is likely to rise to nearly 75% of GDP by the end of 2023 from just below 70% at the end of 2021, and remain at this high level through at least 2025. The debt burden is significantly higher than the pre-pandemic level of just above 50% of GDP and less than 30% a decade ago - indicating a sharp narrowing of fiscal space.

Moody's considers Rwanda's debt burden to be high for the size and development of the economy - a key credit challenge - with the risks skewed towards a higher debt burden than the rating agency currently forecasts because of the external shocks the government is facing. Moreover, the country's public investment-driven growth model will continue to pressure fiscal deficits and debt levels in the absence of a substantial crowding-in of private investment to finance longer-term economic development and social spending.

RATIONALE FOR THE RATING AFFIRMATION

Notwithstanding the negative pressures informing the outlook, Rwanda's B2 rating continues to be supported by its high economic growth rates compared to peers, its relatively credible and effective institutions compared to peers, and the strong support from development partners that keeps interest payments low.

Moody's expects Rwanda's economy to continue growing strongly at around 6-7% in 2022, compared to a high growth rate of almost 11% in 2021 after a 3.4% contraction in 2020. Despite rising global economic headwinds and cost pressures, Rwanda's growth momentum is supported by the ongoing normalisation of domestic economic activity and recovery of the services sector. In particular, the relatively high vaccination rate of more than 60% of Rwanda's population as of the end of May compared to regional peers, and the country's competitive strengths in events and business travel because of its reputation and track record of safety and efficiency will continue to underpin the recovery and longer term prospects of the tourism sector.

Likewise, Moody's expects Rwanda's balance of payments dynamics to remain stable, as the higher import bill driven by energy, fertilisers and food is partly offset by higher services exports and the continued external financing support from development partners. Moody's estimates that the current account deficit will widen slightly to around 12% of GDP from slightly below 11% last year, with the deficit fully financed by multilateral and bilateral loans and grants. Rwanda's foreign exchange reserves remain ample, sufficient to cover 4-5 months of imports as of the end of March 2022, while external repayment needs are low compared to the level of foreign exchange reserves.

Meanwhile, Rwanda's institutions provide significant support to its credit profile, aided by significant technical and financial support from development partners and as reflected in its above-peer rankings on most international governance indicators. The government's commitment to reforms and longer-term development objectives and track record of policy execution will continue to sustain the country's growth prospects and mitigate external vulnerability risk and support debt affordability by attracting low-cost external financing. Despite its high debt burden, Rwanda's debt affordability remains strong with Moody's expecting interest payments to amount to less than 7% of government revenue and 1.7% of GDP over the next two to three fiscal years.

These credit supports are balanced against Rwanda's limited shock absorption capacity. In addition to the narrow fiscal space due to high debt levels and downside risks informing the negative outlook, Rwanda's economy is among the smallest across Moody's rated sovereigns, while incomes remain very low even though they have doubled over the past decade.

These factors are magnified by the challenging regional geopolitical environment, which weighs on Rwanda's longer-term development notwithstanding the support from development partners. In particular, the longstanding domestic political instability in some neighbouring countries and sometimes unpredictable geopolitical tensions and border conflicts with neighbours such as Burundi, the Democratic Republic of Congo and Uganda pose risks to Rwanda's ambitions to develop as a services hub for the region, including providing business and transport and logistics services.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Rwanda's ESG Credit Impact Score is highly negative (CIS-4), reflecting its highly negative exposure to environmental and social risks, while the influence of governance is moderately negative.

Rwanda's exposure to environmental risks is highly negative (E-4 issuer profile score), driven mainly by its physical climate and water stress. Periods of droughts and flooding can affect the output and income earned by the sizable portion of the economy employed in the agriculture sector. The country's still developing infrastructure, particularly in the rural areas, also means that a large portion of the population does not have access to safe drinking water.

The exposure to social risks is highly negative (S-4 issuer profile score) and mainly related to high levels of poverty, as well as limited access to basic services outside of the urban areas. These challenges are exacerbated by the poor physical infrastructure in rural areas that will take a long time to develop because of the country's terrain - hence affecting around three quarters of the population - while school enrolment and completion rates remain low.

The influence of governance on Rwanda is moderately negative (G-3 issuer profile score) and captures a lengthening track record of policy implementation and reforms. Rwanda has built a reputation of efficient utilisation of concessional funding sources from the official sector to achieve sustainable and inclusive growth, albeit from low levels, as measured by the World Bank's Country Policy and Institutional Assessment score. However, institutional frameworks, including in monetary policy, are still evolving.

GDP per capita (PPP basis, US$): 2,540 (2021) (also known as Per Capita Income)

Real GDP growth (% change): 10.9% (2021) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.9% (2021)

Gen. Gov. Financial Balance/GDP: -6.6% (2021) (also known as Fiscal Balance)

Current Account Balance/GDP: -10.9% (2021) (also known as External Balance)

External debt/GDP: 73.8% (2021)

Economic resiliency: ba2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 08 June 2022, a rating committee was called to discuss the rating of the Rwanda, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The negative outlook signals that a rating upgrade is unlikely over the near term. Moody's would likely change the outlook to stable if the government's reform implementation results in sustained fiscal consolidation that provides confidence in its ability to reduce its debt burden over the medium term. A significant and durable strengthening of Rwanda's external position that reduced the country's reliance on external debt financing - for instance through stronger export growth or foreign direct investment inflows beyond Moody's expectations - would also likely lead to a stabilisation of the outlook.

A downgrade of the rating would be likely if prospects for fiscal consolidation were to weaken beyond Moody's expectation, resulting in a persistent increase in Rwanda's debt burden over the medium term and further narrowing of the government's fiscal space no longer consistent with the B2 rating level. A deterioration in the external position - potentially stemming from a slower-than-expected recovery in the tourism and transport sectors - that significantly weakens Rwanda's foreign exchange reserve adequacy would also likely prompt a downgrade of the rating. In addition, any notable reduction in financial support from international development partners over the medium term that is not accompanied by stronger standalone economic resiliency and access to private financing would exert downward pressure on the rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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.

The local market analyst for this rating is Christian Fang, +971 (423) 795-34.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: NO

b.With Access to Internal Documents: NO

c.With Access to Management: NO

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
VP-Sr Credit Officer
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: 44 20 7772 5456
Client Service: 44 20 7772 5454

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.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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