January 31, 2014 / 5:10 AM / in 4 years

Fitch Affirms Rwanda at 'B'; Outlook Positive

LONDON, January 31 (Fitch) Fitch Ratings has affirmed Rwanda’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B’ with Positive Outlooks. The issue ratings on Rwanda’s senior unsecured foreign and local currency bonds have also been affirmed at ‘B’. The Country Ceiling has been affirmed at ‘B’ and the Short-term foreign currency IDR at ‘B’. KEY RATING DRIVERS Rwanda’s rating is supported by rapid real GDP growth, averaging 8% over the past decade, in a context of macro and political stability. Large foreign capital inflows have been attracted by high standards of economic governance and successful implementation of structural reforms. Government debt has remained low (29% of GDP in 2013) and half of it is owed to official donors, ensuring debt service remains moderate. The rating is constrained by structural indicators, including low GDP per capita (USD642), an undiversified economy with a narrow export base, political risk and high dependence on international aid. Rwanda’s ‘B’ IDRs and Positive Outlook also reflect the following key rating drivers: Fitch expects large aid inflows will continue to support Rwanda’s development in the long term. Donors resumed grant disbursements in mid-2013 after a temporary freeze in 2012/13 as they sanctioned Rwanda for its perceived role in the crisis in Eastern Democratic Republic of Congo. The shortfall in aid prompted a sharp fiscal and monetary tightening and in turn, affected GDP growth, highlighting the risks of aid dependence. In future, support could increasingly take the form of concessional loans, rather than budgetary grants, and benefit from diversification in donors’ origin with a growing role of non-western countries like China. Fitch expects GDP growth to remain above peers at 7.5% in 2014 and 2015 after a slowdown to 6.6% in 2013 (from 8% in 2012) when it suffered from the donors’ crisis. Growth will continue to be driven by investment and expansion of the private sector from a low base. In the longer term, growth will benefit from the authorities’ Economic Development and Poverty Reduction Strategy, which focuses on regional integration within the East African Community and economic diversification, and reforms in the context of a new Policy Support Instrument with the IMF after the previous one ended in December 2013. Fitch expects the authorities’ focus on tax policy will lead to an increase in the tax take to 17.1% of GDP by FY16 (fiscal year ending in June 2016) from 14.2% in FY13. Key measures include broadening the VAT base, reducing current exemptions on mining and agriculture and higher tax compliance. The increase in tax could gradually lessen dependence on aid (which has accounted for about 40% of government receipts since 2008). Raising tax in a still largely informal economy is a significant policy challenge, but Rwanda has demonstrated a strong capacity for implementing reform. Fitch expects central government debt to stabilise at 28% of GDP by FY16, well below the ‘B’ rated peers’ median (41%). Stabilisation will be supported by a reduction in the budget deficit, to 2.9% of GDP by FY16 from 5.1% in FY13, primarily driven by lower net lending after the government on-lent the proceeds of its debut USD400m (equivalent to 5% of GDP) Eurobond in 2013. Higher tax and strong control on public spending will also support the tightening. The structure of public debt means that external debt service is low. Fitch expects the current account deficit (10.4% of GDP in 2013) to remain high because of continuing investment in infrastructure and high GDP growth. An increase in FX reserves will remain gradual as a result, at 3.8 months of current account payments by 2015. RATING SENSITIVITIES The main factors that could lead to an upgrade are: - Continuing evidence of macroeconomic stability, resilience to shocks and high GDP growth. - Reduction of the twin deficits broadly consistent with the baseline agreed with the IMF in the context of the new Policy Support Instrument. - Continued expansion and diversification of the limited export base that would support the narrowing of the current account deficit and help accumulation of foreign exchange reserves. - An increase in the tax take, broadly in line with the authorities’ targets agreed with the IMF, which would lessen dependence on international donors. The current rating Outlook is Positive. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to a downgrade. However, the following factors could lead to negative rating action: - A material threat to political stability, especially in the run up to the 2017 presidential election. - Renewed tensions with official donors that would affect FX inflows and trigger macro instability. - A sharp drop in Rwanda’s export receipts (including mining, tea and coffee exports). - Inability to reduce the twin deficits and/or deliver on the planned increase in the tax take. KEY ASSUMPTIONS Fitch assumes no major domestic unrest and that broad political stability will prevail. President Kagame's lengthy rule and the stability it has brought highlight the importance of an orderly succession after 2017. Fitch assumes Rwanda will continue to successfully implement structural reforms and prudent economic policies with the support of a new IMF Policy Support Instrument in 2014. Fitch expects the budget deficit to be 2.9% of GDP by FY16 (from 5.1% in FY13) and the current account deficit to reduce to 9.7% of GDP (from 11.4% in 2012) Fitch expects the relationship with the international community will remain strong and that Rwanda will continue to benefit from high aid inflows to support its development. Fitch forecasts demand for Rwanda's exports (including tea, coffee and minerals) will benefit from the gradual recovery in the global economy, with world GDP growth forecast to increase to 2.9% in 2014 and 3.2% in 2015 from 2.3% in 2013. Contact: Primary Analyst Arnaud Louis Associate Director +44 20 3530 1539 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Michele Napolitano Director +44 20 3530 1536 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Applicable criteria, ‘Sovereign Rating Criteria' dated 13 August 2012 and ‘Country Ceilings’ dated 09 August 2013, are available at www.fitchratings.com. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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