Fitch Ratings last week affirmed Rwanda’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘B+’. The Outlooks are Stable. The issue rating on Rwanda’s senior unsecured Foreign-Currency bonds is also affirmed at ‘B+’. The Country Ceiling is affirmed at ‘B+’ and the Short-Term Foreign- and Local-Currency IDRs at ‘B’.
Rwanda’s ‘B+’ IDRs and Stable Outlook balances its strong governance metrics, low public debt/GDP, and high growth potential against low income per capita, persistent current account deficits and rising net external debt.
Depressed commodity prices in 2016 have increased balance of payments pressures for Rwanda. The current account deficit worsened to 14.3% of GDP (2015: 13.4%) as coffee, tea, minerals and metal ore prices continued to perform poorly in 2016.
However, a stabilisation of some commodity prices in 2016 and some early signs of success in the government’s import compression measures have resulted in a narrower deficit compared to Fitch’s forecast (16.9% of GDP) at the time of November 2016 review.
Fitch expects the government’s initiative to support export diversification up the value-chain and the import substitution strategy to lead to a narrowing of the current account deficit in 2017-18 to 11.1% of GDP. A faster recovery in oil prices could add to the external pressures, while a faster than expected recovery of non-oil commodity prices or delays in the planned construction of the Bugesera airport would support the external adjustment.
Large government infrastructure projects in recent years resulted in a persistent current account deficit and consequently a gradual depreciation of the Rwandan franc (Frw). Falling commodity prices led to a 9.7% depreciation of the Frw against the USD in 2016, but the Frw stabilised in 2017 as external pressures eased. Fitch estimates that official reserves will be 4.2 months of external payments at end-2017, supported by the IMF’s USD 200m Standby Credit Facility loans (USD100m was disbursed in 2016, the remaining USD100m should be disbursed by end-2017), and are expected to be resilient at 4.1 months in 2018.
The G20’s ‘Compact with Africa’ and the government’s industrial parks projects could further stem depreciation pressures on the Frw if successful in activating stronger FDI inflows.
The current account deficit is financed mainly through sovereign external borrowing, donor flows and, to a lesser extent, through FDI inflows. Net external debt has risen to 17.5% of GDP in 2016, from 3.6% in 2012, primarily driven by sovereign external borrowing, and is increasing Rwanda’s vulnerability to external shocks.
High and stable growth relative to ‘B’-rated peers is a key rating strength. Rwanda’s real GDP growth has averaged 7.2% over the last five years, against 3.9% for the ‘B’ median. Growth slowed in 2016 to 5.9% owing to the drought and tightening fiscal and monetary conditions, and as construction for the Kigali Conference Centre, Marriott and Radisson Blu hotels completed. Fitch forecasts growth to pick-up slightly to 6.2% in 2017 and 6.6% in 2018 as construction of the Bugesera airport commences and the impact of the drought on agriculture fades.
Inflation accelerated in 2016 due to the drought’s impact on food prices and the depreciation of the RWF. Headline inflation was 13.0% in March 2017Fitch forecasts inflation to moderate to an annual average of 6.0% in 2018, from 9.2% in 2017.