Fitch Ratings Upgrades Rwanda to ‘B+’; Outlook Stable

Fitch Ratings has upgraded Rwanda’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘B+’ from’B’.

The Outlooks are Stable. The issue ratings on Rwanda’s senior unsecured foreign and local currency bonds have also been upgraded to ‘B+’ from ‘B’. The Country Ceiling has been upgraded to ‘B+’ from ‘B’ and the Short-term foreigncurrency IDR affirmed at ‘B’.

KEY RATING DRIVERS

The upgrade of Rwanda’s IDRs reflects the following key rating drivers and their relative weights: High Economic growth prospects are strong. GDP growth averaged 6.9%in 2009-2014 in a stable macro environment, supported by structural reforms.

In 2014, Fitch expects real GDP growth to be 6.5% and to increase to 7%-8% in the medium term, in line with performance during the past decade. Growth will benefit from stronger regional integration within the East African Community and rapid gains in agriculture, mines, tourism and services.

The business environment is the second best in Africa according to the World Bank. Rwanda has a track record of prudent and coherent fiscal and monetary policy management evident in moderate inflation (average 4.6% in2010-2013) and limited depreciation of the exchange rate (-2% in 2012 against the US dollar and -5% in 2013) and successfully steering the economy through the testing donor crisis in 2012/13 when aid disbursements were frozen.

Medium Prudent fiscal policy following external debt cancellation under the Heavily Indebted Poor Countries initiative has ensured public debtremains moderate (at 30% of GDP vs. 43% for the ‘B’ peers median). Fitch expects the budget deficit to narrow from 5.1% of GDP in fiscal year 2013/14 (FY14) to 3.5%by FY16 thanks to lower net lending (after the proceeds of the 2023 Eurobond have been lent on to public companies) and capital spending, control of current expenditure and higher taxes. Lessons have been learnt from the donor crisis in 2012/13 to minimise the risk of cuts in aid.

The main focus of the new Policy Support Instrument with the IMF is to raise government revenues. Tax receipts were 13.7% of GDP in FY12, 15.2% in FY14 and Fitch expects it could be 15.9% in FY16, thanks to efficiency gains, reforms (notably in agriculture) and GDP growth. The structure of aid inflows is also changing with less general budget support and more project/sectoral loans, which are less sensitive to political pressure.

Rwanda’s ‘B+’ IDRs also reflect the following key rating drivers:The current account deficit (CAD) is structurally high at anexpected 9.5% of GDP in 2014, reflecting the large trade imbalance. It will remain high in the medium term given continuing high imports for building infrastructure.

The CAD will be financed by aid inflows and FDI (about 3% of GDP every year). Fitch expects the rebuilding of foreign reserves, after the depletion related to the donor crisis, will be slow as a result. Reserves are expected to cover 3.8 months of current account payments in 2015 (from 3.7 in 2014).

Dependence on international aid is high albeit declining. Grants accounted for 44% of budget revenues in FY11, 35% in FY14 and are forecast tobe 29% of budget revenues in FY16. Rwanda’s GDP per capita (USD693) and Human Development Index are low.

Political uncertainty is the main risk to stability. The key political date is the 2017 presidential election. It is uncertain whether President Kagame will stand down or change the constitution to enable him to run for a third term. Although that event would likely trigger an adverse reaction from parts of the international community, we do not believe it would necessarily precipitate a permanent halt to donor inflows or major domestic upheaval.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating a recurrently well-balanced. The main factors that could lead topositive rating action are:

- Strong GDP growth leading to an increase in GDP per capita over time, closer to peer medians.

- Continued expansion and diversification of the limited export base that would support the narrowing of the CAD and help accumulation offoreign reserves.

- A significant rise in the tax take, reduction in dependence on international donor support and increased financing flexibility.

The main factors that could lead to negative rating action are:

- A material threat to political stability.

- A material cut in donor aid that would affect foreign exchange inflows and trigger macro instability.

- A sharp drop in Rwanda’s export receipts (including mining, tea and coffee exports).

KEY ASSUMPTIONS

Although there may well be some increase in political uncertainty around the 2017 presidential elections, Fitch assumes no major domestic unrest and that broad political stability will prevail. Fitch assumes Rwanda will continue to successfully implement structural reforms and prudent economic policies with the support of the International Monetary Fund.

Fitch expects Rwanda will continue to benefit from high aid inflows to support its development. Fitch forecasts demand for Rwanda’s exports (including minerals, tea and coffee) will benefit from a gradual recovery in the global economy, with world GDP growth forecast to increase to 2.9% in 2014 and 3.2% in 2015 from 2.4% in 2013.

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