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Rating Action:

Moody's assigns B2 first-time issuer ratings to the Republic of Rwanda and stable outlook

12 Aug 2016

New York, August 12, 2016 -- Moody's Investors Service ("Moody's") has today assigned first-time local and foreign-currency issuer ratings of B2 to the Government of Rwanda. The outlook is stable.

The rating assignment is based on the following key drivers:

1. Low (-) economic strength balancing strong growth prospects at over 6.5% over the next five years against low wealth levels, a relatively undiversified export base, and infrastructure bottlenecks that constrain competitiveness.

2. Rwanda is among the strongest performers with respect to institutional strength in Sub-Saharan Africa with a track record of sound policy implementation. Moody's assesses the country's institutional strength at moderate.

3. Moderate (-) fiscal strength: although increasing, Rwanda's debt burden will remain below the median of B-rated sovereigns of about 50% of GDP over the forecast horizon. Debt servicing also remains affordable due to ample access to concessional funding sources.

4. Susceptibility to event risk is assessed at high, primarily reflecting domestic political risk and its potential repercussions for donor support. It also captures increasing balance of payments risks associated with declining foreign exchange reserves and a high current account deficit, mitigated by access to the IMF's $204 million 18-month Stand-by Credit Facility (SCF) starting June 2016.

Concurrent with the first-time rating assignment, Moody's has also assigned a Ba2 ceiling for local currency debt and bank deposits as well as a B1 foreign currency debt ceiling and a B3 foreign currency bank deposit ceiling. The local-currency country ceiling reflects the maximum credit rating achievable in local currency for a debt issuer domiciled in Rwanda (similarly for a bank deposit). The ceilings on foreign-currency bonds and bank deposits capture foreign-currency transfer and convertibility risks.

RATINGS RATIONALE

--LOW (-) ECONOMIC STRENGTH BALANCES LOW WEALTH AND LACK OF DIVERSIFICATION AGAINST STRONG GROWTH PROSPECTS

One key factor supporting Moody's decision to assign a B2 issuer rating to the Republic of Rwanda is the country's low (-) economic strength, constrained by its small size and very low GDP per capita (PPP) where Rwanda ranks at the fourth lowest level in Moody's rated universe. Compared to its larger neighbor countries, Rwanda has more limited natural resource endowments. Its narrow export base, the landlocked geographic location and prevalent infrastructure bottlenecks in the electricity and transportation sectors constrain Rwanda's competitive potential. Nonetheless, Moody's notes that the country ranks favorably in the World Economic Forum's Global Competitiveness Index, relative to other countries in Sub-Saharan Africa, coming in third place after Mauritius and South Africa. Furthermore, economic growth prospects remain strong, with the continued improvement in Rwanda's business environment and the country's strategy to develop the services sector as the main engine of medium to long-term growth.

--MODERATE INSTITUTIONAL STRENGTH SUPPORTED BY STRONG POLICY IMPLEMENTATION TRACK RECORD

While the strength of Rwanda's institutions are assessed as moderate on a global scale, Rwanda is among the strongest performers with respect to institutional strength in Sub-Saharan Africa as measured by worldwide governance indicators, with a positive track record of policy implementation and reforms. Rwanda has also built a reputation of efficient utilization of concessional funding sources from official lenders to achieve sustainable and inclusive growth, as measured by the World Bank's Country Policy and Institutional Assessment (CPIA) score.

Rwanda also scores moderate on account of policy credibility and effectiveness. Average inflation has remained below the 5% medium-term target over the past two years, which has allowed the Bank of Rwanda to ease monetary policy to support growth. That said, consumer price developments remain susceptible to weather-related domestic food price pressures and Moody's expects average inflation to converge to the 5% level over the medium term.

--MODERATE (-) FISCAL STRENGTH REFLECTING RISING BUT AFFORDABLE DEBT BURDEN

Although increasing, Rwanda's debt/GDP ratio will remain below the B-rated median over the forecast horizon, and remains highly affordable due to ample access to concessional funding sources. In particular, Moody's expects Rwanda's debt/GDP ratio to reach 43.9% of GDP in 2017, up from 35.3% in 2015, compared to a B-rated median debt burden of 50.5% by 2017. The fiscal adjustment program agreed under the $204 million 18-month IMF Standby Credit Facility (SCF) approved on June 8 underscores the country's commitment to preserve fiscal sustainability and maintain a low risk of debt distress.

In line with the SCF program targets, Moody's expects the fiscal balance to improve over the forecast horizon, mostly driven by capital expenditure cuts in order to reduce import demand by a cumulative $330 million (about 4% of GDP) in 2016-2017 and thereby ease pressure on the external accounts. The government is also expected to continue its efforts to broaden domestic revenues (tax and non-tax revenues) in order to compensate for the steadily declining contribution of grants to total revenues as donor contributions shift increasingly to budgetary and project loans.

In light of Rwanda's track record of policy implementation, Moody's expects Rwanda to meet the agreed fiscal and structural targets, although a slightly slower growth in the next two years could challenge the government's ability to deliver on its fiscal adjustment objectives.

--HIGH SUSCEPTIBILITY TO EVENT RISK IS DRIVEN BY POLITICAL RISK WITH POTENTIAL REPERCUSSIONS FOR DONOR RELATIONS

The combination of subdued performance on voice and accountability under the worldwide governance indicators and very low GDP per capita offers elements of high domestic political risk. While Moody's does not expect domestic political tensions to erupt in the near term as observed in neighboring countries at times of presidential term extensions, the lack of visibility about a political alternative to the incumbent president raises succession risk concerns in the future. Moreover, persistent tensions with neighboring countries and volatile international relations carry the potential to impact donor relations.

The high event risk assessment also captures increasing balance of payments risks associated with declining foreign exchange reserves and the spike in the current account deficit to around 16.5% of GDP this year, resulting from the combined terms of trade and investment-driven shock the country is experiencing. The 18-month SCF balance of payments support is a mitigating factor that should keep reserves levels near three months of import cover. The completion of two major investment projects this year — namely the purchase of two aircraft for the national airline and the completion of the Kigali Convention Center — should ease the current account deficit starting next year, although the external imbalance is expected to remain large and in the double digits over the forecast horizon.

Government liquidity risk assessed at moderate (-) takes into account the tight external funding conditions. The small banking sector limits the potential for contingent liabilities accruing to the government. Despite the concentrated exposure to the mortgage and hotel sectors, overall non-performing loans have remained close to 6% of total loans as of December 2015.

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

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, the rated entity or its agent(s) is considered to be a nonparticipating entity. The rated entity or its agent(s) generally does not provide Moody's with information for the purposes of its ratings process.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook takes into account the balance of payments backstop afforded by the $204 million (about 2.5% of GDP) 18-month SCF agreed with the IMF to support foreign exchange reserves while the country undergoes the necessary fiscal and monetary policy adjustments. The stable outlook also reflects the government's strong policy implementation track record and our expectation that the country will improve its fiscal and external position over the medium term.

WHAT COULD MOVE THE RATING UP/DOWN

Upward rating pressure would develop with the continued upgrade in basic infrastructure and human capital which will allow the country to fully leverage its competitiveness and business environment edge as compared to regional peers. A larger share of FDI as funding source for the country's large external funding needs would also be credit positive.

Negative rating pressure would arise if the external headwinds proved more persistent and led to a more significant than forecast deterioration in the balance of payments, with a corresponding depletion of foreign exchange reserves to below prudent thresholds, or in case the country underperforms targets under the SCF by a significant margin. An intensification of domestic political risk or of lingering political tensions with neighboring Burundi or Democratic Republic of the Congo would also be credit negative, especially if accompanied by donor funding cutbacks.

GDP per capita (PPP basis, US$): 1,807 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.9% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.5% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -5.4% (2015 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -13,6% (2015 Estimate) (also known as External Balance)

External debt/GDP: 29.9% (2015 Estimate)

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.

On 10 August 2016, a rating committee was called to discuss the rating of the Government of Rwanda. The main points raised during the discussion were: the issuer's economic fundamentals, including its economic strength, institutional strength/framework; fiscal or financial strength, including its debt profile and susceptibility to event risk. This rating level was also considered relative to its peers.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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.

Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

No Related Data.
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