What the upgraded Fitch rating means for Rwanda’s economy

Recently, Fitch upgraded Rwanda’s rating from B to B+ with a stable outlook for its long-term/short term foreign /local currency Issuer Default Ratings (IDR’s). The key ratings drivers cited by Fitch are; firstly, strong prospects for economic growth with GDP growth averaging 6.9 per cent in 2009-2014 in a stable macro environment, supported by structural reforms. This growth is likely to continue due to East African Community (EAC) integration and investments in agriculture, services and mining. Secondly, Rwanda has adopted and maintained sensible and coherent fiscal and monetary policy management. This is evident in moderate inflation (average 4.6 per cent in 2010-2013), limited depreciation in the exchange rate and success in steering the economy through the donor crisis in 2012/13 when aid disbursements were frozen. This second point has recently been confirmed by Rwanda’s Policy and Institutional Assessment (CPIA) ‘upgrade’ to the joint highest score in Africa. This new rating puts Rwanda on the same level as Kenya – which had its B+ re-affirmed, Nigeria and Mozambique. The rating illustrates to lenders and investors how reliable a government is at meeting its debt obligations. In the case of Rwanda, a “B+” rate indicates a low risk of defaulting to the repayment of loans that the government may incur. This makes Rwanda more attractive to investors (especially non-concessional ones) who are ready to finance projects which are part of the country’s development programme. However, it is important to note that while the country may contract more loans in the near future, it also follows a clear borrowing strategy which does not jeopardise its debt sustainability. Total government debt in 2013 equalled 27.4 per cent of GDP, with the majority of this being foreign debt (21.1 per cent of GDP). Currently, Rwanda has the lowest debt to GDP ratio in the EAC. Foreign debt is mainly in the form of concessional loans from development partners while domestic debt is mainly treasury bonds and treasury bills. Up to now, domestic debt has been issued to finance budget deficits but, going forward, the government wants to develop local capital markets, so it will be issuing more domestic bonds for this purpose. The debt profile is projected to rise gradually over the EDPRS 2 period, to 33.2 per cent of GDP by 2018, as the government continues to invest in key development areas. Rwanda has an ambitious development agenda. There are key national and regional infrastructural projects that the Government deems essential to boost growth and enhance trade links with the region and therefore help economic transformation, a key pillar of EDPRS 2. These include the Kenya-Uganda-Rwanda Standard Gauge Railway, Bugesera International Airport, Uganda-Rwanda oil Pipeline and oil Refinery. If the Government begins investing in these projects over the next five years, then the debt to GDP ratio would rise to 48.2 per cent of GDP in 2018. Even with this large investment, Rwanda’s debt to GDP ratio would still be below the EAC’s debt threshold which applies to all member states under the Monetary Protocol. After 2018, the ratio is projected to decline as the economy grows faster thanks to these key infrastructural projects. One of the key factors to further improve Rwanda’s creditworthiness and rating will be the country’s capacity to increase and diversify its exports base. As such, it comes as no surprise that the budget presented by the Minister for Finance earlier this year was insisting on infrastructure for exports. More to that, Rwanda will need to become less dependent on foreign aid by increasing foreign investments and the share of the Government’s budget financed with its own resources. The writer is a communications specialist at the Ministry of Finance and Economic Planning