Fitch affirms Rwanda ‘B’ rating; outlook stable

Aug 20 – Fitch Ratings has affirmed Rwanda’s Long-term foreign and local currency Issuer Default Rating (IDR) at ‘B’. The Outlooks are Stable. Fitch has simultaneously affirmed Rwanda’s Country Ceiling at ‘B’ and Short-term foreign currency rating at ‘B’.

Rwanda’s rating is supported by solid economic policies and a track record of structural reforms, macroeconomic stability and low government debt (22.8% of GDP). The rating is constrained by structural weaknesses including a low GDP per capita and limited economic diversification. The high dependence on international aid (grants accounted for 44% of government revenue in fiscal year 2011/12) exposes Rwanda’s budget to donors’ ability and willingness to disburse.

Some donors have delayed aid disbursements following allegations, published in a draft UN Group of Experts’ report, on Rwanda’s support to an armed group active in destabilizing eastern Democratic Republic of Congo. The government of Rwanda has submitted an official counter argument to the UN Security Council.

The final UN report will not be completed until November 2012. Until then the action of some donors is uncertain. The amount at stake, about USD40m (0.5% of GDP) so far, seems manageable for the authorities to react to through adjusting public spending and possibly increasing domestic debt issuance. Current spending is mostly covered by tax revenues while capital spending is budgeted at 13.5% of GDP for fiscal year 2012/13.

Fitch’s central scenario is that Rwanda will continue to attract significant budget support flows reflecting its strong track record in poverty reduction and control of corruption. Potential further aid delays however increase downside risks. Fitch expects real GDP growth to remain robust but to decelerate to around 7% in the coming years, after 8.6% in 2011. Output will be supported by domestic investment and external demand.

The newly launched export diversification strategy should contribute to add value to existing exports. The decelerating growth projection primarily reflects global uncertainties that could affect Rwanda through its exports of goods (26% of current account receipts (CXR), essentially tea, coffee and minerals), tourism (14% of CXR), remittances from the diaspora (7% of CXR) and foreign direct investment (1.7% of GDP in 2011).

Lower aid inflows due to deterioration in the relationships with donors’ would also affect growth, mainly through lower public spending. The agency expects inflation to remain around 6% to 7% at the two years rating horizon, in line with the central bank’s target. In 2011, inflation was 5.7% on average, significantly lower than in the East African Community (12.1%) due to monetary tightening by the National Bank of Rwanda (NBR), the relatively stable currency (-1.6% against the US dollar) and solid harvests in Rwanda.

The NBR increased its repo rate by 50 basis points in May 2012, to 7.5%, and is committed to tighten further if inflation, at 5.6% in July 2012, threatens to reach the 7.5% target at end-2012. Fitch forecasts the budget deficit will reach 2.3% of GDP by FY2014/15 (from 2.6% in FY12/13 and 0.4% in FY11/12) essentially reflecting lower capital expenditure and the increase in tax revenue owing to GDP growth and on-going reforms to increase tax compliance monitored by the Rwanda Revenue Authority.

Tax revenue was 13.6% of GDP in FY11/12, below that of regional peers, reflecting the structure of the economy with a large informal sector. Increasing the tax take is necessary to decrease reliance on international aid. Should current issues relating to the alleged role played by Rwanda in Eastern DRC lead to a permanent deterioration in relationships with the donors’ community, which is not Fitch’s central scenario, then marked fiscal adjustment would be necessary to maintain public finance sustainability and the rating at the current level.

President Kagame’s lengthy rule and the stability it has brought highlight the importance of an orderly succession after 2017. Any threat to political stability would be rating negative. Lower reliance on international aid, improved economic diversification, and a stronger export base, that would allow a decline in the current account deficit would be a rating positive, as would acceleration in per capita GDP growth.

For all of Fitch’s Eurozone Crisis commentary go to here (Caryn Trokie, New York Ratings Unit)

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