Rwanda: Fitch Rating Lifts Rwanda’s Standing Among Lenders

Greece’s current financial crisis has its roots in the country’s inability to pay back its debts, a development that makes this European Union member a very risky country to lend money to.

So, among potential lenders, the country is not credit worth. When an economy is in that state, it cannot even borrow by selling government securities like bonds and treasury bills, because lenders don’t trust its ability to pay. The solution is a bailout package.

Rwanda is far from that situation. Last week, Fitch Ratings, one of the two most respected rating agencies in the world affirmed Rwanda’s long-term foreign and local currency Issuer default rating (IDR) at ‘B’.

This means that Rwanda’s credit worthiness is good with almost no risk of failure to repay borrowed funds.

“It’s a vote of confidence in our economic status further made significant by the fact that an independent agency tells the world who we are and reassuring people who thought Rwanda was in a crisis,” says finance minister John Rwangombwa.

The rating is timely as Rwanda prepares to sell more Eurobonds in the next two to three years.

According to Rwangombwa, the new rating from B- two years ago is a result of solid economic policies, good structural reforms, macroeconomic stability and low government debt which is placed at 22.8% of GDP.

However, the rating is constrained by structural weaknesses including a low GDP per capita which as of 2011 was put at $1,300 and limited economic diversification. The economy is still largely dependent on agriculture with just a small manufacturing base and a young (but growing) service sector.

Rwanda relies on external aid that takes care of nearly half of the national budget.

For this reason, the new credit rating is very significant to Rwanda’s borrowing plans as it will boost the confidence of potential lenders.

The country plans to issue a Diaspora bond before the end of the year which the central bank governor Claver Gatete says will bring in needed capital.

The B-rating also comes at the a time when some donors have either delayed or threatened to delay aid disbursements following allegations that Rwanda supports a DR Congo rebel group, M23.

Of course until Rwanda’s rebuttal submitted a fortnight ago is reviewed and a final report expected later this year is released, the action of some donors will remain uncertain.

However, in actual terms, the amount at stake which is about $40m is an equivalent of 0.5% of Rwanda’s GDP. This seems manageable as authorities are looking at adjusting public spending and possibly increasing domestic debt issuance to cover any gap.

Last week, a new development fund, Agaciro, in which Rwandans contribute money for the development of the country, was launched. Within just two hours, Frw 1.2 billion was collected at the function presided over by President Paul Kagame.

“This doesn’t mean that we are going to change the way we closely work with donor-partners, but we are adding more value,” he said. “A good way to cohabitate with others implies upholding your dignity,” he said.

This means that even though Rwandans are willing to fill any gaps, donors are still important to Rwanda’s growth hence the significance of the ‘B’ ratings.

Rwanda’s current spending is mostly covered by tax revenues while capital spending is budgeted at 13.5% of GDP for fiscal year 2012/13 and Fitch’s central belief is that Rwanda will continue to attract significant budget support flows in clear reflection of its strong track record in poverty reduction and control of corruption.

But even when Fitch is confident of Rwanda’s economic health, it makes several observations that might hurt future stability.

For instance, potential further aid delays or cuts increase downside risks and although Fitch expects real GDP growth to remain robust the rating firm warns that this will decelerate to around 7% in the coming years, from 8.6% in 2011.

It also calls for urgent efforts to accelerate the newly launched export diversification strategy which is expected to add value to traditional exports whose value and volume has been projected to decelerate.

However, the threats to Rwanda’s stability and growth are not due to poor internal policies but rather the global uncertainties that could affect Rwanda through its exports of goods estimated to be 26% of current account receipts essentially tea, coffee and minerals).

Others include tourism at 14%, remittances from the Diaspora 7% and foreign direct investment which constituted at least 1.7% of GDP in 2011.

On a flip side, Rwanda, the agency advises should do its part by maintaining sound economic policies and let those that are beyond their control to their own discourse.

One such area is inflation levels which Fitch believes will remain around 6% to 7% at the two years rating horizon, in line with the central bank’s target.

For now, Rwanda can make the most of the ‘B’ rating.

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