New York, October 13, 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook on the Government of Rwanda's to negative
from stable and affirmed the B2 long-term issuer rating.
The negative outlook reflects the risks the coronavirus pandemic may durably
impair certain sectors of the economy, such as transportation and
tourism, potentially lowering the returns on past government investment.
Lower growth in turn would make fiscal consolidation more challenging,
raising the credit risks associated with Rwanda's relatively high
debt burden, which had been rising before the coronavirus shock
and is being exacerbated by it.
The affirmation of the B2 rating is supported by limited financing risks
despite the increase in borrowing requirements. External financing
provided by multilateral institutions and other development partners will
help meet the government's larger financing needs and limit immediate
liquidity pressure. The B2 rating is also supported by the government's
track record of effective policymaking and macroeconomic management,
leveraging support from international financial institutions. These
credit strengths are set against Rwanda's small size and low income
levels, which severely constrain the sovereign's shock absorption
capacity despite its historically very high growth rates. The rating
affirmation also takes into account Rwanda's elevated susceptibility
to event risk, mainly driven by political risks and external vulnerability
risk.
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 NEGATIVE OUTLOOK
RWANDA'S DEBT-FINANCED DEVELOPMENT STRATEGY AT RISK GIVEN
POTENTIAL LONG-LASTING CORONAVIRUS IMPACT ON REVENUE GENERATION
The coronavirus shock calls into question Rwanda's largely debt-financed
development model which focused on increasing trade and promoting Meetings,
International Conferences, and Events (MICE) activities.
Prior government investment has driven strong growth of exports,
such as tourism and transport services, while Rwanda has increasingly
positioned itself as a transit hub and re-exports of goods from
East Africa's ports and Democratic Republic of the Congo.
The associated large upfront capital costs, which have been reflected
in a growing debt burden before the pandemic, were to be absorbed
by persistent high growth, foreign currency earnings and government
revenue in the future.
Risks to Rwanda's medium-term growth prospects are now tilted
to the downside. Rwanda is vulnerable to persistently weak demand
and changes in behavioral patterns in the aftermath of the pandemic.
Rwanda's investment in the transport and tourism sectors may see
lower future returns should travel demand and international trade remain
below pre-coronavirus expectations for a significant period of
time. Should these downside risks materialize, Rwanda will
be left with a higher debt burden without realizing the higher value-added
growth necessary to generate foreign exchange earnings and tax revenue
to service the associated higher debt load.
CORONAVIRUS SHOCK WILL WIDEN ALREADY LARGE FISCAL IMBALANCES, WHICH
IF NOT REVERSED, WILL REDUCE RWANDA'S DEBT SERVICE CAPACITY
The coronavirus shock has exacerbated a trend of weakening fiscal strength,
which was underway prior to the crisis. Lower growth together with
fiscal stimulus in response to the crisis will widen the fiscal deficit,
resulting in Rwanda's debt burden rising to over 70% of GDP
by fiscal 2021 (fiscal year ending June 30, 2021) compared with
52% of GDP in fiscal 2019.
The higher debt burden leaves the sovereign with less fiscal space to
absorb future shocks. Unless the deterioration in the fiscal balance
is reversed, Rwanda's liquidity risks will increase given
its limited financing options. Immediate liquidity risks are contained
as Rwanda's larger financing needs will be met through concessional
loans from international financial institutions. Given Rwanda's
limited financing options, larger financing needs would put pressure
on the sovereign's debt servicing capacity.
A high share of foreign-currency-denominated debt (over
three-quarters of total debt), which exposes the government's
fiscal strength to a marked depreciation of the currency. Additionally,
the stock of government guarantees represents a contingent liability to
the government. Government guarantees stood at 4.5%
of GDP at the end of 2019. Some of these guarantees were provided
to key state-owned enterprises (SOEs) like Rwandair, the
Kigali Convention Center, and the Bugesera Airport, which
are being severely negatively affected by the coronavirus shock.
Given the strategic importance of these SOEs, Moody's expects
the government to provide support if necessary.
RATIONALE FOR THE RATING AFFIRMATION
The rating affirmation reflects Rwanda's limited financing risks
given its reliance on concessional external borrowing. Rwanda's
heavy reliance on concessional financing helps to mitigate some of the
credit risks associated with a rising debt burden, as interest affordability
remains high. Rwanda has a track record of effective policy implementation
and reform, leveraging support from international financial institutions,
which support the formulation and implementation of sound macroeconomic
policies. This increases the likelihood the government will be
able to enact corrective policies to stabilize the debt burden when the
economy recovers from the coronavirus shock, ultimately preserving
debt service capacity.
These credit strengths are set against Rwanda's small size and low
income levels, which limit diversification and severely constrain
the sovereign's shock absorption capacity. Rwanda's
favorable debt structure and high debt affordability will help to mitigate
the risks associated with a higher debt burden. The large share
of concessional debt limits the interest burden. Even taking into
account lower revenue, Rwanda's interest burden will increase
to just 7% of revenue in 2020, which compares favorably to
the B-rated median of 10%.
Persistently large current account deficits expose Rwanda to event risk.
The immediate risks are limited by ample foreign exchange reserves,
which while expected to decline in 2020, remain adequate to cover
upcoming external debt servicing needs. International financial
institutions will provide financing to meet Rwanda's larger external
financing needs created by the coronavirus shock. Furthermore,
Moody's expects Rwanda's current account deficit to narrow
based on a recovery in exports of goods and services. Uncertainty
over the succession to President Paul Kagame and long-standing
frictions with neighboring countries point to high 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.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental considerations weigh on Rwanda's economic strength and credit
profile. Given the importance of agriculture in GDP, employment
and income, recurring droughts can have a significant negative impact
on the agriculture sector and overall economic output. The low
wealth levels limit the ability of households to buffer the impact of
lost earnings because of weather-related events. That is
why Moody's identified Rwanda as one of those countries whose credit
profile is most susceptible to climate change.
Social considerations are also material to Rwanda's credit profile.
Credit challenges include low income levels and high poverty rates.
Moody's regards the coronavirus outbreak as a social risk under
its ESG framework, given the substantial implications for public
health and safety. For Rwanda, the potential long-term
impact of the pandemic on transport and tourism threatens the government's
capacity to stabilize and reverse a relatively high debt burden.
In terms of governance, Rwanda performs relatively strongly compared
to Sub-Saharan African neighbors on institutional factors that
are captured in Moody's assessment of institutions and governance
strength, and are important considerations in the government's ability
to advance its reform agenda and allow the country to develop an institutional
framework conducive to economic development and macroeconomic stability.
GDP per capita (PPP basis, US$): 2,452 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 9.4% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5% (2019
Actual)
Gen. Gov. Financial Balance/GDP: -6%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -8.9% (2019 Actual)
(also known as External Balance)
External debt/GDP: 42.0
Economic resiliency: ba3
Default history: At least one default event (on bonds or loans)
has been recorded since 1983.
On 08 October 2020, 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 institutions and governance
strength, have materially decreased. The issuer's fiscal
or financial strength, including its debt profile, has materially
decreased. The issuer has become increasingly susceptible to event
risks.
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. The outlook would likely return to stable on signs the
government is able to implement a faster and sustained fiscal consolidation
that would reduce debt over the medium term. Moody's would
also return the outlook to stable if it were to determine the coronavirus
shock would not have a lasting impact on key growth and foreign exchange
generating sectors such as tourism and transportation, which would
result in a faster improvement in fiscal and external imbalances.
Moody's would lower the rating if it became increasingly clear that
Rwanda's growth prospects had materially diminished compared to
pre-crisis projections, lowering the expected return on publicly-financed
capital projects. As a result, debt would rise faster and
further than currently expected by Moody's to high levels that would
over time weaken the government's liquidity position. Furthermore,
a downgrade is likely if Rwanda's external position fails to improve
in the foreseeable future, with additional pressure on reserves
that raises external vulnerability risk.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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
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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
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For any affected securities or rated entities receiving direct credit
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and whose ratings may change as a result of this credit rating action,
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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
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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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
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for additional regulatory disclosures for each credit rating.
David Rogovic
Vice President - Senior 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: 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
