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Fitch Affirms Rwanda at 'B+'; Outlook Stable
May 12, 2017 / 8:14 PM / 4 months ago

Fitch Affirms Rwanda at 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 12 (Fitch) Fitch Ratings has 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 has also been affirmed at 'B+'. The Country Ceiling has been affirmed at 'B+' and the Short-Term Foreign- and Local-Currency IDRs at 'B'. KEY RATING DRIVERS 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 weakly in 2016. However, a stabilisation of some commodity prices in 2H16 and some early signs of success in the government's import compression measures have resulted in a narrower deficit compared with Fitch's forecast (16.9% of GDP) at the time of our 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 (RWF). Falling commodity prices led to a 9.7% depreciation of the RWF against the USD in 2016, but the RWF stabilised in 1Q17 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 200 million standby credit facility loans (USD100 million was disbursed in 2016, the remaining USD100 million 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 RWF 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% due 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 the 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 2017. Fitch forecasts inflation to moderate to an annual average of 6.0% in 2018, from 9.2% in 2017. Rwanda's public finances are a neutral factor relative to the 'B' category but are gradually deteriorating. The budget deficit is forecast to be 3.5% of GDP in FY16/17 (B median: 4.2%) and public debt/GDP is forecast at 41.5% (B median: 56.4%), but both are on an increasing trend. Fiscal policy tightening is aiding in the external adjustment, with capital expenditure outlays falling to 9.5% of GDP in FY16/17 (year-ending June 2017) from 11.5% in FY15/16. Structural reforms to raise tax revenues and expand the tax base to offset the long-term decline in donor grants are underway, as grants are increasingly replaced by concessionary loans, but Fitch expects overall revenues to fall modestly, highlighting the scale of the fiscal challenge. Gross general government debt/GDP is forecast to rise to 44.4% of GDP by end-FY18/19 and continue on a gradual upward trend due to the financing of the fiscal deficit, the impact of the depreciating RWF on foreign-denominated sovereign debt (78% of total debt), the IMF support loans, and the gradual replacing of donor grants with concessionary debt. Rwanda outperforms the 'B' and 'BB' medians in the World Bank governance indicators, reflecting the political stability and effective governance that underpin its strong donor support. Rwanda will hold presidential elections on 4 August 2017, in which the incumbent Paul Kagame is widely expected to win a third term. Due to the widespread popularity of Kagame and the administration's strong use of security measures, Fitch does not expect any material disruptions surrounding the upcoming elections to affect economic activity or the political process. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Rwanda a score equivalent to a rating of 'B+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that risks to the rating are currently balanced. However, the following factors could, individually or collectively, put downward pressure on the ratings: - Failure to narrow the current account deficit and slow the rise of net external debt. - Failure to attract long-term capital to finance the large current account deficit, resulting in a depletion of foreign exchange reserves. - A sharper than expected contraction or suspension of donor grants and loans, which would weaken the fiscal and external positions. - A failure to stabilise the upward trajectory of gross general government debt/GDP ratio. The main factors that could individually or collectively lead to a positive rating action are: - Continued strong GDP growth supporting income convergence towards 'B' rated peers. - Marked narrowing of the current account deficit, supported for example by strong export growth and greater regional integration. KEY ASSUMPTIONS Fitch assumes Rwanda will continue to implement structural reforms and prudent economic policies with support from the IMF. Fitch assumes that broad social and political stability will be maintained in the lead-up to and during the 2017 presidential elections. Contact: Primary Analyst Eugene Chiam Director +44 20 3530 1512 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Arnaud Louis Director +33 144 299 142 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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